UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
Or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _____________ to _________________
Commission File Number: 1-11454
vFinance, Inc.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 58-1974423
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3010 NORTH MILITARY TRAIL, SUITE 300,
BOCA RATON, FLORIDA 33431
(Address of Principal Executive Offices) (Zip Code)
(561) 981-1000
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ X ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of November 12, 2007: 54,679,876 shares of Common Stock $0.01 par
value per share.
VFINANCE, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Unaudited Condensed Consolidated Statements of Financial Condition
as of September 30, 2007 and December 31, 2006.................... 4
Unaudited Condensed Consolidated Statements of Operations for the Three
and Nine months Ended September 30, 2007 and 2006 ................ 5
Unaudited Condensed Consolidated Statement of Shareholders' Equity for the
Nine months ended September 30, 2007 ............................. 6
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2007 and 2006 ......................... 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 17
Item 3 - Quantitative & Qualitative Disclosures About Market Risk ....... 23
Item 4 - Controls and Procedures ........................................ 23
PART II - OTHER INFORMATION
Item 6 - Exhibits ....................................................... 24
Signatures .............................................................. 25
2
FORWARD-LOOKING STATEMENTS
The following information provides cautionary statements under the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
Reform Act). We identify important factors that could cause our actual results
to differ materially from those projected in forward-looking statements we make
in this report or in other documents that reference this report. All statements
that express or involve discussions as to: expectations, beliefs, plans,
objectives, assumptions or future events or performance (often, but not always,
identified through the use of words or phrases such as we or our management
believes, expects, anticipates or hopes and words or phrases such as will
result, are expected to, will continue, is anticipated, estimated, projection
and outlook, and words of similar import) are not statements of historical facts
and may be forward-looking. These forward-looking statements are based largely
on our expectations and are subject to a number of risks and uncertainties
including, but not limited to, economic, competitive, regulatory, growth
strategies, available financing and other factors discussed elsewhere in this
report and in the documents filed by us with the Securities and Exchange
Commission ("SEC"). Many of these factors are beyond our control. Actual results
could differ materially from the forward-looking statements we make in this
report or in other documents that reference this report. In light of these risks
and uncertainties, there can be no assurance that the results anticipated in the
forward-looking information contained in this report or other documents that
reference this report will, in fact, occur.
These forward-looking statements involve estimates, assumptions and
uncertainties, and, accordingly, actual results could differ materially from
those expressed in the forward-looking statements. These uncertainties include,
among others, the following: (i) the inability of our broker-dealer operations
to operate profitably in the face of intense competition from larger full
service and discount brokers; (ii) a general decrease in merger and acquisition
activities and our potential inability to receive success fees as a result of
transactions not being completed; (iii) increased competition from business
development portals; (iv) technological changes; (v) our potential inability to
implement our growth strategy through acquisitions or joint ventures; and (vi)
our potential inability to secure additional debt or equity financing.
Any forward-looking statement speaks only as of the date on which such
statement is made, and we undertake no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for our
management to predict all of such factors, nor can our management assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
3
PART I...FINANCIAL INFORMATION
ITEM 1. .FINANCIAL STATEMENTS
VFINANCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share and per share data)
September 30, 2007 December 31, 2006
[(Restated and Revised)]
-------------------- ---------------------
Assets:
Current assets:
Cash and cash equivalents $ 4,484.7 $ 4,205.2
Due from clearing broker 909.2 299.9
Securities owned:
Marketable, at fair value 737.5 1,024.0
Not readily marketable, at estimated fair value 295.0 400.0
Accounts receivable 114.0 123.8
Forgivable loans - employees, current portion 39.2 58.8
Notes receivable - employees 33.1 128.1
Prepaid expenses and other current assets 149.3 184.0
-------------------- ---------------------
Total current assets 6,762.0 6,423.8
-------------------- ---------------------
Property and equipment, net 702.0 661.0
Customer relationships, net 3,494.5 4,115.4
Other assets 534.9 443.0
-------------------- ---------------------
Total assets $ 11,493.4 $ 11,643.2
==================== =====================
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable $ 765.3 $ 821.7
Accrued compensation 2,776.7 2,394.6
Other accrued liabilities 562.9 800.7
Securities sold, not yet purchased 227.5 41.6
Capital lease obligations, current portion 201.3 210.8
Other 281.8 348.5
-------------------- ---------------------
Total current liabilities 4,815.5 4,617.9
-------------------- ---------------------
Capital lease obligations, long term 206.6 125.6
Shareholders' Equity:
Common stock $0.01 par value, 100,000,000 shares authorized
54,679,876 and 54,429,876 shares issued and outstanding 546.8 544.3
Additional paid-in capital 31,545.2 31,147.4
Accumulated deficit (25,620.7) (24,792.0)
-------------------- ---------------------
Total shareholders' equity 6,471.3 6,899.7
-------------------- ---------------------
Total liabilities and shareholders' equity $ 11,493.4 $ 11,643.2
==================== =====================
See accompanying notes to unaudited condensed consolidated financial statements.
4
VFINANCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
2007 2006 2007 2006
(Restated and (Restated and
Revised) Revised)
---------------- ---------------- ---------------- ----------------
Revenues:
Commissions - agency $6,014.5 $4,849.9 $18,521.8 $14,374.7
Trading profits 2,849.6 2,794.5 9,684.7 6,798.6
Success fees 648.7 1,000.2 3,092.0 3,850.8
Other brokerage related income 1,453.6 847.9 4,681.7 2,394.0
Consulting fees 13.9 44.7 50.0 347.7
Other 30.0 70.9 100.4 351.6
---------------- ---------------- ---------------- ----------------
Total revenues 11,010.3 9,608.1 36,130.6 28,117.4
---------------- ---------------- ---------------- ----------------
Compensation, commissions and benefits 9,334.6 7,641.4 29,247.3 22,197.1
Clearing and transaction costs 1,055.0 1,015.8 3,298.8 3,006.6
General and administrative costs 719.2 785.3 2,699.2 2,015.5
Occupancy and equipment costs 277.0 335.4 809.2 860.2
Depreciation and amortization 325.0 310.2 964.0 643.9
---------------- ---------------- ---------------- ----------------
Total operating costs 11,710.8 10,088.1 37,018.5 28,723.3
---------------- ---------------- ---------------- ----------------
Loss from operations (700.5) (480.0) (887.9) (605.9)
---------------- ---------------- ---------------- ----------------
Other income (expenses):
Interest income 7.4 19.4 32.6 56.6
Interest expense (26.3) (14.3) (62.5) (44.5)
Dividend income 3.0 5.6 10.2 19.4
Other income, net 75.1 37.3 78.9 58.4
---------------- ---------------- ---------------- ----------------
Total other income, net 59.2 48.0 59.2 89.9
---------------- ---------------- ---------------- ----------------
Loss before income taxes (641.3) (432.0) (828.7) (516.0)
Income tax benefit (provision) - - - -
---------------- ---------------- ---------------- ----------------
Net loss $ (641.3) $ (432.0) $ (828.7) $ (516.0)
================ ================ ================ ================
Net loss per share: basic and diluted $ (0.01) $ (0.01) $ (0.02) $ (0.01)
================ ================ ================ ================
Weighted average number of shares
outstanding: basic and diluted 54,679.9 53,126.1 54,646.9 46,912.9
================ ================ ================ ================
See accompanying notes to unaudited condensed consolidated financial statements.
5
VFINANCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Accumulated Total
Common Common Additional Deficit Share-
Stock Stock Paid-In [Restated and holders'
Shares Amount Capital Revised Equity
-------------------------------------------------------------
Balance at December 31, 2006 54,429.9 $ 544.3 $31,147.4 $ (24,792.0) $6,899.7
Net loss - - - (828.7) (828.7)
Stock-based compensation expense - - 350.3 - 350.3
Issuance of shares for
services rendered 250.0 2.5 47.5 - 50.0
---------------------- ------------ ------------- -----------
Balance at September 30, 2007 54,679.9 $ 546.8 $31,545.2 $ (25,620.7) $6,471.3
====================== ============ ============= ===========
See accompanying notes to unaudited condensed consolidated financial statements.
6
VFINANCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30,
------------------------------
2007 2006
(Restated and
Revised)
-------------- ---------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (828.7) $ (516.0)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Non-cash fees received (696.6) (1,525.4)
Non-cash compensation paid 537.1 1,060.3
Depreciation and amortization 964.0 643.9
Stock-based compensation 350.3 353.3
Provision for doubtful accounts - 10.0
Amounts forgiven under forgivable loans 54.8 17.9
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 9.8 142.1
Forgivable loans (35.2) (50.4)
Due from clearing broker (609.3) (114.7)
Notes receivable - employees 95.0 (51.9)
Investments in marketable securities 286.5 19.9
Investments in not readily marketable securities 264.5 427.7
Other current assets 84.7 11.9
Other assets and liabilities, net (158.6) (54.8)
Increase in:
Accounts payable and accrued liabilities 87.9 196.3
Securities sold, not yet purchased 185.9 164.5
-------------- --------------
Cash provided by operating activities 592.1 734.6
-------------- --------------
CASH USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (109.4) (167.0)
Investment in unconsolidated affiliate - (161.9)
-------------- --------------
Cash used in investing activities (109.4) (328.9)
-------------- --------------
CASH USED IN FINANCING ACTIVTIES:
Repayments of capital lease obligations (203.2) (150.8)
-------------- --------------
Cash used in financing activities (203.2) (150.8)
-------------- --------------
Increase in cash and cash equivalents 279.5 254.9
Cash and cash equivalents at beginning of period 4,205.2 4,427.4
-------------- --------------
Cash and cash equivalents at end of period $4,484.7 $ 4,682.3
============== ==============
See accompanying notes to unaudited condensed consolidated financial statements.
7
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
vFinance, Inc. (the "Company") is a financial services company which
specializes in high growth opportunities. The Company's proficiency in this
marketplace flows from three principal lines of business: offering full service
retail brokerage to approximately 12,000 high net worth and institutional
clients, providing investment banking and advisory services to micro, small and
mid-cap high growth companies and trading securities, including making markets
in over 3,500 micro and small cap stocks and providing liquidity in the United
States Treasury marketplace. In addition to the Company's core business, it
offers information services on its website. Due to its focus, the Company
believes it is well positioned to offer, through its 40 corporate and
independent offices in the U.S. and other parts of the world, alternative
investments, which have the potential to outperform market indices, and a full
range of traditional investment options. vFinance Investments, Inc. ("vFinance
Investments") and EquityStation, Inc. ("EquityStation"), both subsidiaries of
vFinance, Inc., are broker-dealers registered with the Securities and Exchange
Commission ("SEC"), and members of Financial Industry Regulatory Authority
("FINRA") (formerly the National Association of Securities Dealers) and
Securities Investor Protection Corporation ("SIPC"). vFinance Investments is
also a member of the National Futures Association ("NFA").
The unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts have been eliminated in consolidation.
The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the three and nine month periods
ended September 30, 2007 are not necessarily indicative of the results to be
expected for the year ended December 31, 2007. The interim financial statements
should be read in connection with the audited financial statements and notes
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2006.
Reclassifications
Certain items in the 2006 unaudited condensed consolidated financial
statements have been reclassified to conform to the presentation in the 2007
unaudited condensed consolidated financial statements. Such reclassifications
did not have a material impact on the presentation of the overall financial
statements.
8
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except per share data)
Restatement and Revision
The Company restated certain amounts in the unaudited condensed
consolidated financial statements for the three and nine months ended September
30, 2006 as a result of comments from the staff of the Securities and Exchange
Commission ("SEC") in connection with the Company's Annual Report of Form 10-KSB
for the year ended December 31, 2005. As previously described in the Company's
Annual Report on Form 10-K for the year ended December 31, 2006, the Company
recorded adjustments to reclassify marketable securities received as
compensation for investment banking services from "trading securities" to
"available-for-sale" securities, effective January 1, 2002 as part of the
aforementioned restatement. As a result of this reclassification, non-cash
unrealized gains and losses related to the securities classified as
available-for-sale were reclassified from the determination of net income (loss)
to other comprehensive income (loss), a component of stockholders' equity.
On November 12, 2007, after reconsidering the adjustments to the financial
statements described in the previous paragraph, management determined that the
reclassification suggested by the staff of the SEC should not have been made
and, as a result, the Company revised the previously restated financial
statements as of and for the years ended December 31, 2006, 2005, 2004 and 2003.
As a consequence of reverting to the financial statement presentation used by
the Company prior to the restatement, securities received as compensation for
investment banking services have been classified as "marketable securities" or
"not readily marketable securities", as appropriate, with realized and
unrealized gains and losses related to these securities included in the
determination of net income (loss) in the consolidated statements of operations.
A summary of the effects of the restatement, including the revision
described above, (i) as of December 31, 2006, March 31, 2007 and June 30, 2007,
(ii) for the three and nine months ended September 30, 2006, (iii) for the three
months ended March 31, 2007 and (iv) for the three and six months ended June 30,
2007 is as follows:
Accumulated Deficit Accumulated Other Comprehensive Loss
-------------------------------------------------------- ----------------------------------------------------
Current Cumul- Current Cumul-
period ative period ative
effect of effect of effect of effect of
restate- restate- restate- restate- Restated
ment ment Restated and As ment ment and
As reported revision revision Revised reported revision revision Revised
--------------- ---------- ------------ -------------- ---------- ----------- ------------ -------------
December 31, 2006 $ (24,149.5) $ (56.8) $ (642.5) $ (24,792.0) $ (642.5) $ 56.8 $ 642.5 $ -
March 31, 2007 $ (24,111.7) $ 1.7 $ (640.8) $ (24,752.5) $ (640.8) $ (1.7) $ 640.8 $ -
June 30, 2007 $ (24,241.6) $ (97.1) $ (737.9) $ (24,979.5) $ (737.9) $ 97.1 $ 737.9 $ -
9
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except per share data)
Effect of Restatements
---------------------------------
As Reported- Net
Three Months Amortiz- Amortiz- Effect
Ended ation of ation of of
September 30, Reclass- Intangible Transtion Restate-
2006 ifications As Asset Payment ments Restated and
Revised Revised
------------- ------------- --------- ----------- ---------- ------------- -----------------
Statement of Operations:
Total revenues $ 9,545.5 62.6 $ 9,608.1 - - - $ 9,608.1
Clearing and transaction costs $ 1,025.8 - $ 1,025.8 - (10.0) (10.0) $ 1,015.8
Depreciation and amortization $ 346.9 - $ 346.9 (36.7) - (36.7) $ 310.2
Total operating costs $ 10,009.8 125.0 $ 10,134.8 (36.7) (10.0) (46.7) $ 10,088.1
Loss from operations $ (478.7) (48.0) $ (526.7) 36.7 10.0 46.7 $ (480.0)
Net loss $ (478.7) - $ (478.7) 36.7 10.0 46.7 $ (432.0)
Net loss per share - basic
and diluted $ (0.01) $ - $ (0.01)
============ ============ =============
Wt. avg. shares outstanding - basic
and diluted 53,126.1 53,126.1
============ =============
Effect of Restatements
---------------------------------
As Reported- Net
Nine Months Amortiz- Amortiz- Effect
Ended ation of ation of of
September 30, Reclass- Intangible Transtion Restate-
2006 ifications As Asset Payment ments Restated and
Revised Revised
------------ ------------- --------- ------------- ------------ ------------- -----------
Statement of Operations:
Total revenues $ 28,126.9 (9.5) $ 28,117.4 - - - $ 28,117.4
Clearing and transaction costs $ 3,036.6 - $ 3,036.6 - (30.0) (30.0) $ 3,006.6
Depreciation and amortization $ 753.9 - $ 753.9 (110.0) - (110.0) $ 643.9
Total operating costs $ 28,738.4 124.9 $ 28,863.3 (110.0) (30.0) (140.0) $ 28,723.3
Loss from operations $ (656.0) (89.9) $ (745.9) 110.0 30.0 140.0 $ (605.9)
Net loss $ (656.0) - $ (656.0) 110.0 30.0 140.0 $ (516.0)
Net loss per share - basic
and diluted $ (0.01) $ - $ (0.01)
=============== ======== =============
Wt. avg. shares outstanding - basic
and diluted 46,912.9 46,912.9
=============== =============
As Reported- Effect of
Three Months Restate-
Ended ment Restated
March 31, 2007 Revision and
Revised
---------------- ----------- -----------
Statement of Operations:
Success fees $ 1,598.2 1.7 $ 1,599.9
Total revenues $ 12,019.2 1.7 $ 12,020.9
Income from operations $ 36.7 1.7 $ 38.4
Net income $ 37.8 1.7 $ 39.5
Net income per share - basic $ -
==============
Wt. avg. shares outstanding - basic 54,579.9
==============
Net income per share - diluted $ -
==============
Wt. avg. shares outstanding - diluted 56,125.1
==============
10
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except per share data)
Three Months Ended June 30, 2007 Six Months Ended June 30, 2007
----------------------------------------- --------------------------------------
Effect of Effect of
Restate- Restate-
ment Restated ment Restated
As Reported Revision and Revised As Reported Revision and Revised
-------------- ----------- ------------- -------------- ----------- -----------
Statement of Operations:
Success fees $ 940.5 (97.1) $ 843.4 $ 2,538.8 (95.4) $ 2,443.4
Total revenues $ 13,196.4 (97.1) $ 13,099.3 $ 25,215.7 (95.4) $ 25,120.3
Loss from operations $ (128.7) (97.1) $ (225.8) $ (92.0) (95.4) $ (187.4)
Net loss $ (129.9) (97.1) $ (227.0) $ (92.1) (95.4) $ (187.5)
Net loss per share - basic
and diluted $ - $ - $ - $ -
============== ============= ============== ===========
Wt. avg. shares outstanding
basic and diluted 54,679.9 54,679.9 54,630.2 54,630.2
============== ============= ============== ===========
Securities Owned
As of September 30, 2007 and December 31, 2006, marketable securities
consisted primarily of publicly traded unrestricted common stock, municipal
securities and corporate bonds the Company buys and sells in market-making and
trading activities. Marketable securities are stated at fair value, based on
information obtained from the Company's clearing firms and nationally recognized
exchange values.
Not readily marketable securities consist of publicly traded common stock
restricted as to resale and common stock purchase warrants, both of which are
typically received as compensation for investment banking services. Restricted
stock and stock purchase warrants may be sold to certain qualified investors
prior to the removal of the resale restrictions, as dictated by Rule 144.
Restricted stock, including restricted stock obtained as a result of exercising
common stock purchase warrants, remains classified as not readily marketable
until the removal of all resale restrictions, typically within a year of the
Company's receipt of the security unless subject to a registration statement
with a later effective date.
Market valuations of restricted stock are based on market prices, as
reported by a major exchange such as the NASDAQ Bulletin Board, NASDAQ OTC or
other similar nationally recognized exchange. These values are reduced by 25% to
reflect management's estimate of the discount attributable to the reduced
liquidity associated with the resale restrictions.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
11
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except per share data)
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles, and expands disclosures
about fair value measurements. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of SFAS No. 157 is not
expected to have a material impact on the Company's Consolidated Financial
Statements.
In December 2006, the FASB issued FASB Staff Position ("FSP") EITF 00-19-2,
"Accounting for Registration Payment Arrangements." FSP EITF 00-19-2 specifies
that the contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement should be separately
recognized and measured in accordance with SFAS No. 5, "Accounting for
Contingencies." This FSP further clarifies that a financial instrument subject
to a registration payment arrangement should be accounted for in accordance with
other applicable generally accepted accounting principles without regard to the
contingent obligation to transfer consideration pursuant to the registration
payment arrangement, and provides disclosure requirements for registration
statement arrangements. The adoption of FSP EITF 00-19-2 did not have a material
impact on the Company's Consolidated Financial Statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities - Including an Amendment of FASB Statement No.
115". SFAS No. 159 permits entities to choose to measure certain financial
assets and liabilities at fair value. Unrealized gains and losses, arising
subsequent to adoption, are reported in earnings. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact of adopting SFAS No. 159, if elected, on its Consolidated
Financial Statements.
2. PROPERTY AND EQUIPMENT
At September 30, 2007 and December 31, 2006, property and equipment, net
consisted of the following:
September 30, December 31,
2007 2006
---------------- ----------------
Furniture and fixtures $ 90.8 $ 90.8
Equipment 795.7 727.5
Capital leases - computer
equipment 979.2 704.5
Leasehold improvements 174.8 174.8
Software 256.2 214.8
--------------- ---------------
2,296.7 1,912.4
Less: accumulated depreciation (1,594.7) (1,251.4)
--------------- ---------------
Property and equipment, net $ 702.0 $ 661.0
=============== ===============
12
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except per share data)
The Company acquired $274.7 thousand of computer equipment under capital
leases in the nine months ended September 30, 2007.
The Company recorded depreciation expense of $343.1 thousand and $278.5
thousand in the nine months ended September 30, 2007 and 2006, respectively.
3. STERLING FINANCIAL ACQUISITION
On May 11, 2006, vFinance Investments purchased certain assets of Sterling
Financial Investment Group, Inc. ("SFIG") and Sterling Financial Group of
Companies, Inc. ("SFGC" and together with SFIG, "Sterling Financial"). The
assets acquired from Sterling Financial consisted primarily of client accounts
from Sterling Financial's Institutional Fixed Income and Latin American
businesses. These transactions were approved by the National Association of
Securities Dealers, Inc. on April 28, 2006.
The following unaudited Pro Forma Combined Financial Statements of Sterling
and vFinance gives effect to the acquisition of certain assets of Sterling
Financial, as though the transactions occurred as of January 1, 2006. This
unaudited pro forma information is presented for informational purposes, based
upon available data and assumptions that management believes are reasonable, and
is not necessarily indicative of future results:
Nine Months Ended September 30, 2006
---------------------------------------------------------------
vFinance Sterling Adjustments Pro Forma
(Restated
and Revised)
------------- ------------ ------------------ ---------------
Total revenue $ 28,117.4 $ 3,759.4 $ - $ 31,876.8
Income (loss) from operations (605.9) 48.0 (227.1) (785.0)
Net income (loss) (516.0) 48.0 (227.1) (695.1)
------------- ------------------ ---------------
Loss per share - basic and diluted $ (0.01) $ (0.04) $ (0.01)
============= ================== ===============
Wt. avg. shares outstanding - basic
and diluted 46,912.9 6,213.4 53,126.3
============= ================== ===============
4. CUSTOMER RELATIONSHIPS
At September 30, 2007, customer relationships totaled $3.5 million, net of
accumulated amortization of $1.4 million. At December 31, 2006 customer
relationships totaled $4.1 million, net of accumulated amortization $737.4
thousand.
Acquired customer relationships are amortized using the straight-line
method over their estimated useful lives, which coincide with their expected
revenue-generating lives, ranging from five to ten years. The Company recorded
amortization expense of $620.9 thousand and $365.5 thousand in the nine months
ended September 30, 2007 and 2006, respectively.
13
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except per share data)
5. EARNINGS (LOSS) PER SHARE
The Company calculates earnings (loss) per share in accordance with SFAS
No. 128, "Earnings per Share". In accordance with SFAS No. 128, basic earnings
(loss) per share is computed using the weighted average number of shares of
common stock outstanding and diluted earnings per share is computed using the
weighted average number of shares of common stock and the dilutive effect of
options and warrants outstanding, using the "treasury stock" method, as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2007 2006 2007 2006
-------------- -------------- -------------- -------------
Weighted average shares outstanding - basic 54,679.9 53,126.1 54,646.9 46,912.9
Effect of dilutive stock options and warrants - - - -
-------------- -------------- -------------- -------------
Weighted average shares outstanding - diluted 54,679.9 53,126.1 54,646.9 46,912.9
============== ============== ============== =============
As of September 30, 2007, the Company had 21.6 million stock options and
warrants outstanding, all of which have been excluded from the computation of
diluted earnings per share because they were anti-dilutive. As of September 30,
2006, the Company had 20.1 million stock options and warrants outstanding, all
of which have been excluded from the computation of diluted earnings per share
because they were anti-dilutive.
6. COMMITMENTS AND CONTINGENCIES
Clearing Agreements
As consideration for certain incentives received at the inception of one of
the Company's clearing agreements, the Company would be required to pay a
termination fee in the event vFinance Investments terminates the clearing
agreement. This fee is reduced annually on a pro rata basis over the five year
term of the clearing agreement. As of September 30, 2007, the contingent
obligation of the Company associated with this clearing agreement was $680.0
thousand.
In May 2007, EquityStation received notification from Merrill Lynch Pierce
Fenner & Smith, Broadcort Division ("Merrill") that effective September 22, 2007
it intended to terminate its clearing agreement with EquityStation, in
accordance with the clearing agreement. On September 4, 2007, Merrill extended
the termination date to October 23, 2007 and granted an additional extension on
October 8, 2007 until November 30, 2007. The Company does not expect this
termination to result in a material impact to its Consolidated Financial
Statements, as it signed a clearing agreement with Penson Financial Services,
Inc. ("Penson Clearing") on September 7, 2007, and simultaneously executed a
Tri-party Clearing Agreement through vFinance Investments to clear some of its
business through National Financial Services.
14
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except per share data)
Litigation
The business of vFinance Investments and EquityStation involve substantial
risks of liability, including exposure to liability under federal and state
securities laws in connection with the underwriting or distribution of
securities and claims by dissatisfied customers for fraud, unauthorized trading,
churning, mismanagement and breach of fiduciary duty. In recent years, there has
been an increasing incidence of litigation involving the securities industry,
including class actions that generally seek rescission and substantial damages.
In the ordinary course of business, the Company and/or its subsidiaries may
be parties to legal proceedings and regulatory inquiries, the outcome of which,
either singularly or in the aggregate, is not expected to be material. There can
be no assurance however that any sanctions will not have a material adverse
effect on the financial condition or results of operations of the Company and/or
its subsidiaries.
The following is a brief summary of certain matters pending against or
involving the Company and its subsidiaries.
On or about February 28, 2005, Knight Equity Markets, LP ("Knight") filed
an arbitration action (NASD Case No. 05-01069) against vFinance Investments,
claiming that vFinance Investments received roughly $6.5 million in dividends
that allegedly belong to Knight. vFinance Investments asserts that the dividends
actually went to two of its clients, Pearl Securities LLC ("Pearl Securities")
and Michael Balog, and that vFinance Investments has no liability. vFinance
Investments filed third party claims against Pearl Securities and Michael Balog
to bring all of the parties into the action. Knight is seeking approximately
$6.5 million in damages plus costs, attorney fees and punitive damages. vFinance
Investments denies any liability to Knight and intends to vigorously defend
against Knight's claims.
On or about September 27, 2005, John S. Matthews filed an arbitration
action (NASD Case No. 05-014991) against the Company, claiming that the Company
wrongfully terminated his independent contract with the Company and that the
Company "stole" his clients and brokers. Mr. Matthews obtained a temporary
restraining order and an agreed upon injunction was issued by the NASD panel.
Mr. Matthews and JMS Capital Holding Corp., a plaintiff in the arbitration
action also requested unspecified damages resulting from the Company's alleged
improper activity. The Company and Mr. Matthews entered into a settlement
agreement in July 2007 with respect to this arbitration action. Pursuant to the
terms of the settlement agreement, the Company paid $50.0 thousand to Mr.
Matthews in July 2007 and is further obligated to make payments to Mr. Matthews
totaling $250.0 thousand ($50.0 thousand in cash payable over 10 months and an
additional $200.0 thousand in cash or the Company's stock, at the Company's
option over the next three years). In connection with this settlement, the
Company recorded $250.0 thousand of arbitration settlement expense (a component
of general and administrative costs) during the nine months ended September 30,
2007.
The Company engaged in a number of other legal proceedings incidental to
the conduct of its business. These claims aggregate a range of $75.0 thousand to
$300.0 thousand.
15
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except per share data)
As of September 30, 2007 and December 31, 2006, the Company had accrued
approximately $240.0 thousand and $70.0 thousand, respectively, to provide for
these matters. In 2005 the Company acquired an errors and omissions policy for
certain future claims in excess of the policy's $75.0 thousand per claim
deductible, up to an aggregate of $1.0 million. While the Company will
vigorously defend itself in these matters, and will assert insurance coverage
and indemnification to the maximum extent possible, there can be no assurance
that these lawsuits and arbitrations will not have a material adverse impact on
its financial position.
7. SUBSEQUENT EVENTS
On November 8, 2007, the Company announced entering into a definitive
agreement to merge (the "Merger") with National Holdings Corporation
("National"). In conjunction with the Merger, National will issue shares of
common stock in National for all outstanding shares of common stock of the
Company (other than shares held by National or the Company or any stockholders
of the Company who properly exercise dissenters' rights under Delaware law). For
each outstanding share of the Company's stock, the Company's shareholders will
receive 0.14 shares in National representing in the aggregate approximately 40%
of National. The special committee of the board of directors and the board of
directors of National have unanimously approved the merger agreement. The
special committee of the board of directors and the board of directors of the
Company have unanimously approved the merger agreement and recommended that the
Company's stockholders adopt the agreement and approve the Merger.
The transaction is subject to various closing conditions, including
approval by the Financial Industry Regulatory Authority ("FINRA") and other
applicable regulatory authorities, approval of the Merger by the Company's
stockholders, completion by National of a private placement of equity securities
resulting in gross proceeds of at least $3 million, effectiveness of a
Registration Statement on Form S-4 for the National securities to be issued in
the Merger to the Company's stockholders and other customary closing conditions.
The Merger is expected to close during the first half of calendar year 2008.
Until the Merger is completed, both companies will continue to operate their
businesses independently. Following the Merger, it is intended that National
will operate the broker-dealer subsidiaries independently.
Under the terms of the definitive merger agreement, vFinance or National
may, subject to the provisions of the merger agreement, terminate the agreement
upon payment of a termination fee.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included under
Item 1. In addition, reference should be made to our audited consolidated
financial statements and notes thereto and related Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our most
recent Annual Report on Form 10-K.
Certain amounts have been reclassified from the previously reported
financial statements to conform to the income statement presentation of the
current period.
We have restated certain amounts in the Unaudited Condensed Consolidated
Statements of Income for the three and nine months ended September 30, 2006 as a
result of comments from the staff of the Securities and Exchange Commission, as
discussed in Note 1 to our unaudited condensed consolidated financial statements
contained herein.
Recent Developments
On November 8, 2007, we entered into a definitive agreement to merge ("the
Merger")with National Holdings Corporation ("National"). In conjunction with the
Merger, National will issue shares of common stock in National for all our
outstanding shares of common stock (other than shares held by National or us or
any of our stockholders who properly exercise dissenters' rights under Delaware
law). For each outstanding share of our stock, our shareholders will receive
0.14 shares in National representing in the aggregate approximately 40% of
National. The transaction is subject to various closing conditions, including
approval by the Financial Industry Regulatory Authority ("FINRA") and other
applicable regulatory authorities, approval of the Merger by our stockholders,
completion by National of a private placement of equity securities resulting in
gross proceeds of at least $3 million, effectiveness of a Registration Statement
on Form S-4 for the National securities to be issued in the Merger to our
stockholders and other customary closing conditions. The Merger is expected to
close during the first half of calendar year 2008. Until the Merger is
completed, both companies will continue to operate their businesses
independently. Following the Merger, it is intended that National will operate
the broker-dealer subsidiaries independently. Under the terms of the definitive
merger agreement, vFinance or National may, subject to the provisions of the
merger agreement, terminate the agreement upon payment of a termination fee. We
believe the Merger will be consummated, but the outcome cannot be predicted with
any certainty. See Note 7 to our unaudited condensed consolidated financial
statements for additional information about the transaction.
17
The following table and discussion summarizes the changes in major revenue
and expense categories for the three and nine months ended September 30, 2007
and 2006.
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------------- ----------------------------------------------
2007 2006 Change % Chg. 2007 2006 Change % Chg.
(Restated (Restated
and Revised) and Revised)
---------- ------------ ---------- --------- ----------- ------------- ---------- ---------
Revenues:
Commissions - agency $ 6,014.5 $ 4,849.9 1,164.6 24.0 % 18,521.8 $ 14,374.7 4,147.1 28.8 %
Trading profits 2,849.6 2,794.5 55.1 2.0 % 9,684.7 6,798.6 2,886.1 42.5 %
Success fees 648.7 1,000.2 (351.5) 35.1)% 3,092.0 3,850.8 (758.8) (19.7)%
Other brokerage related income 1,453.6 847.9 605.7 71.4 % 4,681.7 2,394.0 2,287.7 95.6 %
Consulting fees 13.9 44.7 (30.8) (68.9)% 50.0 347.7 (297.7) (85.6)%
Other 30.0 70.9 (40.9) (57.7)% 100.4 351.6 (251.2) (71.4)%
---------- ------------ ---------- --------- ----------- ------------- ---------- ---------
Total revenues 11,010.3 9,608.1 1,402.2 14.6 % 36,130.6 28,117.4 8,013.2 28.5 %
---------- ------------ ---------- --------- ----------- ------------- ---------- ---------
Compensation, commissions and benefits 9,334.6 7,641.4 1,693.2 22.2 % 29,247.3 22,197.1 7,050.2 31.8 %
Clearing and transaction costs 1,055.0 1,015.8 39.2 3.9 % 3,298.8 3,006.6 292.2 9.7 %
General and administrative costs 719.2 785.3 (66.1) (8.4)% 2,699.2 2,015.5 683.7 33.9 %
Occupancy and equipment costs 277.0 335.4 (58.4) (17.4)% 809.2 860.2 (51.0) (5.9)%
Depreciation and amortization 325.0 310.2 14.8 4.8 % 964.0 643.9 320.1 49.7 %
---------- ------------ ---------- --------- ----------- ------------- ---------- ---------
Total operating costs 11,710.8 10,088.1 1,622.7 16.1 % 37,018.5 28,723.3 8,295.2 28.9 %
---------- ------------ ---------- --------- ----------- ------------- ---------- ---------
Loss from operations (700.5) (480.0) (220.5) 45.9 % (887.9) (605.9) (282.0) 46.5 %
---------- ------------ ---------- --------- ----------- ------------- ---------- ---------
Other income (expenses):
Interest income 7.4 19.4 (12.0) (61.9)% 32.6 56.6 (24.0) (42.4)%
Interest expense (26.3) (14.3) (12.0) 83.9 % (62.5) (44.5) (18.0) 40.4 %
Dividend income 3.0 5.6 (2.6) (46.4)% 10.2 19.4 (9.2) (47.4)%
Other income, net 75.1 37.3 37.8 101.3 % 78.9 58.4 20.5 35.1 %
---------- ------------ ---------- --------- ----------- ------------- ---------- ---------
Total other income, net 59.2 48.0 11.2 23.3 % 59.2 89.9 (30.7) (34.1)%
---------- ------------ ---------- --------- ----------- ------------- ---------- ---------
Loss before income taxes (641.3) (432.0) (209.3) 48.4 % (828.7) (516.0) (312.7) 60.6 %
========== ============ ========== ========= =========== ============= ========== =========
THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2006
STATEMENT OF OPERATIONS
Revenues
Total revenues for the three months ended September 30, 2007 increased 15%,
or $1.4 million, compared to the three months ended September 30, 2006. The $1.4
million increase is attributable primarily to higher agency commissions and
other brokerage related income, which increased by 24% and 71%, respectively,
both driven by the addition of new brokers in 2006 and 2007. Additionally,
trading profits for the three months ended September 30, 2007 increased 2%, or
$55.1 thousand compared to the three months ended September 30, 2006, primarily
as a result of an increase in our fixed income trading group, partially offset
by a decrease from our equity market making activities. Success fees from
investment banking decreased 35%, or $351.5 thousand, in the three months ended
September 30, 2007 compared to the three months ended September 30, 2006,
primarily as a result of a decrease in investment banking transactions.
18
Operating Expenses
Compensation, commissions and benefits.
Compensation, commissions and benefits for the three months ended September
30, 2007 increased 22%, or $1.7 million, compared to the three months ended
September 30, 2006. Commissions are correlated with our revenues, primarily
agency commissions, trading profits and success fees from investment banking.
Additional increases in compensation, commissions and benefits are primarily
attributable to incentive compensation provided to new brokers, as well as
increased salaries.
Clearing and transaction costs.
Clearing and transaction costs for the three months ended September 30,
2007 increased $39.2 thousand, or 4%, compared to the three months ended
September 30, 2006, primarily as a result of an increase in transaction volume
attributable to the addition of new brokers, partially offset by a shift in our
revenue mix to lower-cost institutional trading transactions.
General and administrative costs.
General and administrative costs for the three months ended September 30,
2007 decreased $66.1 thousand, or 8%, compared to the three months ended
September 30, 2006, primarily as a result of improved recovery of costs incurred
on behalf of independent brokers.
Occupancy and equipment costs.
Occupancy and equipment costs for the three months ended September 30, 2007
decreased $58.4 thousand, or 17%, compared to the three months ended September
30, 2006, primarily because in December 2006 we subleased office space acquired
under a lease assumed in connection with the Sterling Financial Acquisition.
Depreciation and amortization.
Depreciation and amortization for the three months ended September 30, 2007
increased $14.8 thousand, or 5%, compared to the three months ended September
30, 2006, primarily as a result of depreciation expense related to recent
property, plant and equipment additions, including equipment under capital
leases.
NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2006
STATEMENT OF OPERATIONS
Revenues
Total revenues for the nine months ended September 30, 2007 increased 29%,
or $8.0 million, compared to the nine months ended September 30, 2006. The $8.0
million increase is attributable to higher agency commissions, increased trading
profits, and other brokerage related income, all driven primarily by the
addition of new brokers in 2006 and 2007. Success fees from investment banking
decreased 20%, or $758.8 thousand, in the nine months ended September 30, 2007
compared to the nine months ended September 30, 2006, primarily as a result of a
decrease in investment banking transactions.
19
Operating Expenses
Compensation, commissions and benefits.
Compensation, commissions and benefits for the nine months ended September
30, 2007 increased 32%, or $7.1 million, compared to the nine months ended
September 30, 2006. Commissions are correlated with our revenues, primarily
agency commissions, trading profits and success fees from investment banking.
Additional increases in compensation, commissions and benefits are primarily
attributable to incentive compensation provided to new brokers, as well as
increased salaries.
Clearing and transaction costs.
Clearing and transaction costs for the nine months ended September 30, 2007
increased $292.2 thousand, or 10%, compared to the nine months ended September
30, 2006, primarily as a result of an increase in transaction volume
attributable to the addition of new brokers, partially offset by a shift in our
revenue mix to lower-cost institutional trading transactions.
General and administrative costs.
General and administrative costs for the nine months ended September 30,
2007 increased $683.7 thousand, or 34%, compared to the nine months ended
September 30, 2006, primarily as a result of professional fees associated with
arbitration and litigation matters during the first six months of 2007 and the
expansion of our Sarbanes-Oxley and Gramm-Leach-Bliley compliance programs.
Remaining increases resulted from temporary labor and other increased
professional fees to support our growth.
Occupancy and equipment costs.
Occupancy and equipment costs for the nine months ended September 30, 2007
decreased $51.0 thousand, or 6%, compared to the nine months ended September 30,
2006, primarily because in December 2006 we subleased office space acquired
under a lease assumed in connection with the Sterling Financial Acquisition.
Depreciation and amortization.
Depreciation and amortization for the nine months ended September 30, 2007
increased $320.1 thousand, or 50%, compared to the nine months ended September
30, 2006, primarily as a result of the amortization expense associated with the
customer relationships from the Sterling Financial Acquisition and depreciation
expense related to property and equipment additions, including computer
equipment under capital leases.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our liquidity and regulatory capital needs
through the issuance of equity and debt securities. As of September 30, 2007,
liquid assets consisted primarily of cash and cash equivalents of $4.5 million
and marketable securities of $737.5 thousand, for a total of $5.2 million, which
approximates the $5.2 million in liquid assets as of December 31, 2006. As of
September 30, 2007, we had long-term capital lease obligations of $206.6
thousand, net of current obligations of $201.3 thousand.
20
Both vFinance Investments and EquityStation are subject to the SEC Uniform
Net Capital Rule (rule 15c3-1), which requires the maintenance of minimum net
capital. Both vFinance Investments and EquityStation have elected to use the
alternative standard method permitted by the rule. This method requires that
vFinance Investments maintain minimum net capital equal to the greater of
$250,000 or a specified amount per security based on the bid price of each
security for which vFinance Investments is a market maker and requires
EquityStation to maintain minimum capital equal to $100,000. As of September 30,
2007, vFinance Investments and EquityStation net capital exceeded the
requirement by $764.6 thousand and $416.4 thousand, respectively.
Advances, dividend payments and other equity withdrawals from the Company's
broker-dealer subsidiary are restricted by the regulations of the SEC and other
regulatory agencies. These regulatory restrictions may limit the amounts that a
broker-dealer subsidiary may dividend or advance to the Company.
Cash and cash equivalents increased by $279.5 thousand and $254.9 thousand
during the nine months ended September 30, 2007 and 2006, respectively. The
major components of these changes are discussed below.
Cash provided by operating activities for the nine months ended September
30, 2007 was $592.1 thousand compared to $734.6 thousand for the nine months
ended September 30, 2006. Cash provided by operating activities includes net
income adjusted for non-cash items and the effects of changes in working capital
including changes in working capital related to trading security positions. Cash
provided by operating activities decreased for the nine months ended September
30, 2007 compared to the nine months ended September 30, 2006 primarily as a
result of lower investment banking revenue.
Cash used in investing activities for the nine months ended September 30,
2007 decreased to $109.4 thousand compared to $328.9 thousand for the nine
months ended September 30, 2006, when we made a $161.9 thousand investment in an
unconsolidated affiliate. Capital expenditures decreased by $57.6 thousand for
the nine months ended September 30, 2007 compared to the nine months ended
September 30, 2006, as we acquired $274.7 thousand of computer equipment under
capital leases during the nine months ended September 30, 2007 compared to
$132.0 thousand during the nine months ended September 30, 2006, an increase of
$142.7 thousand.
Cash used in financing activities for the nine months ended September 30,
2007 increased to $203.2 thousand compared to $150.8 thousand for the nine
months ended September 30, 2006 as a result of capital lease payments for
equipment acquired under capital leases that commenced in 2007 and in the fourth
quarter of 2006.
We believe the Merger will be consummated, but the outcome cannot be
predicted with any certainty. In the absence of consummating the Merger, we
believe cash on hand is sufficient to meet our working capital requirements over
the next twelve months. However, we may seek additional debt or equity financing
in order to carry out our long-term business strategy if the Merger is not
completed. Such funding may be a result of bank borrowings, public offerings,
private placements of equity or debt securities, or a combination thereof. We
cannot be certain that additional debt or equity financing will be available
when required or, if available, that we can secure it on terms satisfactory to
us.
21
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 to our unaudited condensed consolidated financial statements.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk, and does periodically hedge
against that risk. The Company does not hold or issue any derivative financial
instruments for trading or other speculative purposes. The Company is exposed to
market risk associated with changes in the fair market value of the marketable
securities that it holds. The Company's revenue and profitability may be
adversely affected by declines in the volume of securities transactions and in
market liquidity, which generally result in lower revenues from trading
activities and commissions. Lower securities price levels may also result in a
reduced volume of transactions, as well as losses from declines in the market
value of securities held by the Company in trading and investment positions.
Sudden sharp declines in market values of securities and the failure of issuers
and counterparts to perform their obligations can result in illiquid markets in
which the Company may incur losses in its principal trading activities.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer
and principal financial officer, has evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this quarterly report
(the "Evaluation Date"). Based on such evaluation, our principal executive
officer and principal financial officer have concluded that, as of the
Evaluation Date, our disclosure controls and procedures are effective.
Changes in Internal Controls
There was no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in
connection with the evaluation of our internal controls that occurred during our
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, such controls.
23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
Number of
Exhibit Exhibit Description
2.1* Agreement and Plan of Merger dated November 7, 2007 by and
among vFinance, Inc., National Holdings Corporation and
vFin Acquisition Corporation (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K filed
with the SEC on November 8, 2007).
31.1** Certification by Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2** Certification by Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification by Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2** Certification by Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley act of 2002.
* Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K.
Exhibit F to the Agreement and Plan of Merger is incorporated by reference
to Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the
SEC on November 8, 2007. The Company hereby undertakes to furnish copies of
any of the omitted schedules upon request by the Securities and Exchange
Commission.
** Filed herewith.
24
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Signature Title Date
Chairman of the Board and Chief
/s/ Leonard J. Sokolow Executive Officer
----------------------- (Principal Executive Officer) November 14, 2007
Leonard J. Sokolow
/s/ Alan B. Levin Chief Financial Officer and
----------------------- (Principal Financial and
Alan B. Levin Accounting Officer) November 14, 2007
25