As
filed with the Securities and Exchange Commission on May 8,
2007.
Registration
No. 333-138658
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
AMENDMENT
NO. 1
TO
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
vFinance,
Inc.
(Exact
name of Registrant as specified in its charter)
Delaware
|
6200
|
58-1974423
|
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
No.)
|
3010
North Military Trail
Suite
300
Boca
Raton, FL 33431
(561)
981-1000
(Address
and telephone number of principal executive offices)
Leonard
J. Sokolow
Chief
Executive Officer
3010
North Military Trail
Suite
300
Boca
Raton, FL 33431
(561)
981-1000
(Name,
address and telephone number of agent for service)
with
copies to:
Leslie
J. Croland, Esq.
Edwards
Angell Palmer & Dodge LLP
350
East Las Olas Blvd., Suite 1150
Fort
Lauderdale, Florida 33334-3607
(954)
727-2600
Approximate
date of commencement of proposed sale to the public:
From
time to time after the effective date of this registration statement.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check
the
following box: x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.¨
CALCULATION
OF REGISTRATION FEE
Title
of Each Class
of
Securities to be Registered
|
|
Amount
to be registered (1)
|
|
Proposed
maximum
offering
price
per
unit (2)
|
|
Proposed
maximum aggregate offering
price
(2)
|
|
Amount
of registration fee (2)
|
|
Common
Stock, $.001par
value per share
|
|
|
13,000,000
|
|
$
|
0.23
|
|
$
|
2,990,000
|
|
$
|
92
|
|
(1) |
Includes
up to 13,000,000 shares of the Registrant’s common stock issued to the
Selling Stockholder, as defined in the accompanying prospectus,
on May 11,
2006. Pursuant to Rule 416 under the Securities Act of 1933, as
amended
(the “Securities Act”), to the extent additional shares of Registrant’s
common stock may be issued or issuable as a result of a stock split,
stock
dividend or other distribution declared at any time by the Registrant
while this registration statement is in effect, this registration
statement is hereby deemed to cover all such additional shares
of common
stock.
|
(2) |
Estimated
solely for purposes of calculating the registration fee according
to Rule
457(c) under the Securities Act of 1933, as amended, on the basis
of the
average of the high and low prices of the Registrant’s common stock
reported on the Over-the-Counter Bulletin Board on May 7, 2007.
The
Registrant previously paid $293 in connection with this Registration
Statement originally filed on November 13,
2006.
|
The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to Section 8(a), may
determine.
The
information in this prospectus is not complete and may be changed. The Selling
Stockholder may not sell these securities until the registration statement
filed
with the Securities and Exchange Commission is effective. This prospectus
is not
an offer to sell these securities, and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not
permitted.
SUBJECT
TO COMPLETION, DATED MAY 8, 2007
PROSPECTUS
vFinance,
Inc.
13,000,000
Shares of
Common
Stock
This
prospectus relates to the resale, from time to time, of up to
13,000,000 shares
of
our common stock by the selling stockholder named in this prospectus in the
section “Selling Stockholder,” whom we refer to in this document as the “Selling
Stockholder.” The 13,000,000 shares of common stock registered for public resale
pursuant to this prospectus were issued to Sterling Financial Group of
Companies, Inc. and Sterling Financial Investment Group, Inc. as partial payment
for certain assets acquired from Sterling Financial Group of Companies, Inc.
by
our subsidiary, vFinance Investments, Inc. All of the shares of our common
stock
are included in this prospectus pursuant to registration rights we granted
to
the Selling Stockholder. The common stock offered by this prospectus shall
be
adjusted to cover any additional securities as may become issuable to prevent
dilution resulting from stock splits, stock dividends or similar transactions.
We will not receive any of the proceeds from the sale of any of the shares
covered by this prospectus. References in this prospectus to “the Company,”
“we,” “our,” and “us” refer to vFinance, Inc.
Our
common stock is traded on the Over-the-Counter Bulletin Board under the symbol
“VFIN.” On April 25,
2007,
the last reported sale price for our common stock was $0.21 per share.
An
investment in shares of our common stock involves a high degree of risk. You
should carefully consider the “Risk Factors” beginning on page 2 before you
decide whether to invest in shares of our common stock.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal offense.
vFinance,
Inc.
3010
North Military Trail
Suite
300
Boca
Raton, FL 33431
(561)
981-1000
The
date of this prospectus is _________________, 2007
TABLE
OF CONTENTS
|
|
Page
Number
|
|
PROSPECTUS
SUMMARY
|
|
|
1
|
|
RISK
FACTORS
|
|
|
2
|
|
FORWARD-LOOKING
STATEMENTS
|
|
|
12
|
|
USE
OF PROCEEDS
|
|
|
12
|
|
SELLING
STOCKHOLDER
|
|
|
13
|
|
PLAN
OF DISTRIBUTION
|
|
|
14
|
|
SELECTED
FINANCIAL DATA
|
|
|
16
|
|
DESCRIPTION
OF OUR BUSINESS
|
|
|
18
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS
|
|
|
28
|
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
|
|
37
|
|
DIRECTORS
AND EXECUTIVE OFFICERS
|
|
|
38
|
|
COMPENSATION
DISCUSSION & ANALYSIS
|
|
|
39
|
|
EXECUTIVE
COMPENSATION
|
|
|
44
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
|
|
50
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
|
|
51
|
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|
|
|
53
|
|
DESCRIPTION
OF CAPITAL STOCK
|
|
|
55
|
|
LEGAL
MATTERS
|
|
|
56
|
|
EXPERTS
|
|
|
56
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
|
|
56
|
|
FINANCIAL
STATEMENTS
|
|
|
F-1
|
|
You
should rely only on the information contained or incorporated by reference
in
this prospectus and in any accompanying prospectus supplement. We have not
authorized anyone to provide you with different information.
We
have not authorized the Selling Stockholder to make an offer of these shares
of
common stock in any jurisdiction where the offer is not permitted.
You
should not assume that the information in this prospectus or any prospectus
supplement is accurate as of any date other than the date on the front of the
documents.
PROSPECTUS
SUMMARY
This
summary calls your attention to selected information in this prospectus, but
may
not contain all the information that is important to you in deciding whether
to
invest in our common stock. For a more complete description of this offering,
and to understand this offering more fully, you should read this entire document
carefully, including the “Risk Factors” and the documents referred to under
“Where You Can Find More Information.”
The
Company
vFinance,
Inc. was incorporated in the state of Delaware in February 1992. vFinance,
Inc.
is a global financial services holding company which specializes in high growth
opportunities. Our expertise this marketplace flows from three principal
lines of business: providing investment banking and advisory services to micro,
small and mid-cap high growth companies; making markets in over 3,000 micro
and
small cap stocks; and offering information services on our website, which is
a
leading destination for emerging companies seeking capital and investors seeking
opportunities. Due to our focus, we are uniquely positioned to offer alternative
investments to institutional and high net-worth investors seeking to outperform
market indices in addition to offering a full range of investment options.
With
over 40 locations in the U.S. and other parts of the world, we serve more than
12,000 corporate, institutional and high net-worth clients. vFinance
Investments, Inc. ("vFinance Investments") and EquityStation, Inc.
("EquityStation"), both our subsidiaries, are broker-dealers registered with
the
Securities and Exchange Commission (“SEC”), and members of the National
Association of Securities Dealers ("NASD") and Securities Investor Protection
Corporation ("SIPC"). vFinance Investments is also a member of the National
Futures Association ("NFA"). In all 50 states, the District of Columbia, Latin
America and other parts of the world, vFinance Investments provides investment
banking, retail and institutional brokerage services. EquityStation offers
a
suite of services, including trading technology, routing software, hedge fund
incubation, capital introduction and custodial services, to institutional
traders, hedge funds and professional traders designed to enhance their trading
performance.
We
own a
financial services website or "channel" on the World Wide Web located at
http://www.vfinance.com. Clients, investors, shareholders and other stakeholders
may access us through this website. With an estimated 500,000 unique visitors
annually, our website reaches a global audience of entrepreneurs, CEOs, and
private and institutional investors in over 150 countries. The website provides
sales leads to our investment banking, brokerage and institutional divisions.
The website is the premier destination for the search phrases "venture capital"
and "raising capital." Website visitors have convenient access to a variety
of
financial services, proprietary business development tools, searchable databases
and daily news. The website has over 60,000 "opted in" subscribers that receive
a newsletter on private funding several times a week. The website features
our
database of venture capital firms and angel investors accessible with vSearch,
a
proprietary web-based data mining tool that allows entrepreneurs to search
potential funding sources by different criteria, including geography, amount
of
funds required, industry, stage of corporate development, or keyword. Much
of
the information on the website is provided free of charge, however, users are
charged nominal fees for the use of proprietary search engines and premium
services such as our business planning services.
The
Offering
This
prospectus relates to the offer and sale from time to time of up to 13,000,000
shares of our common stock by the Selling Stockholder. We are also registering
for sale any additional shares of common stock which may become issuable by
reason of any stock dividend, stock split, recapitalization or other similar
transaction effected without the receipt of consideration, which results in
an
increase in the number of outstanding shares of our common stock.
The
Selling Stockholder may sell these shares in the over-the-counter market or
otherwise, at market prices prevailing at the time of sale, at prices related
to
the prevailing market price, or at negotiated prices. We will not receive any
proceeds from the sale of shares by the Selling Stockholder.
As
of
April 25,
2007,
there were 54,679,876 shares outstanding, including the 13,000,000 shares of
our
common stock offered by the Selling Stockholder pursuant to this prospectus.
The
number of shares offered by this prospectus represents approximately 23.8%
of
the total common stock outstanding as of April 25, 2007.
RISK
FACTORS
You
should carefully consider the risks described below before making an investment
decision. The risks described below are not the only ones facing our company.
Additional risks not presently known to us or that we currently believe are
immaterial may also impair our business operations. Our business could be harmed
by any of these risks. The trading price of our common stock could decline
due
to any of these risks and you may lose all or part of your investment. In
assessing these risks, you should also refer to the other information contained
in this prospectus, including our consolidated financial statements and related
notes.
In
addition to other information in this prospectus, the following risks should
be
considered in evaluating our condition and prospects. These risks may have
a
material effect on our operating results.
Risks
Related to Our Company
We
have a limited operating history and as a result, it may be difficult to
evaluate our business and prospects.
We
have a
limited operating history despite the fact that we commenced our broker-dealer
operations in 1999. As a result of acquisitions of Colonial Direct Financial
Group Inc. and First Level Capital, now know as vFinance Investments, in 2001,
EquityStation and select assets of Global in 2004, and select assets of Sterling
Financial in 2006, our business has remained in flux. Our business and prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development. These risks are
particularly severe among companies in new and rapidly evolving markets such
as
online business development services and those in regulated industries such
as
the securities industry. It may be difficult or impossible to accurately
forecast our operating results and to evaluate our business and prospects based
on our historical results.
We
have had substantial losses since inception.
Prior
to
2004, we had sustained substantial losses in each year since our inception
due
to ongoing operating expenses and a lack of revenues sufficient to offset those
operating expenses. We have raised capital to fund ongoing operations by private
sales of our securities, some of which sales have been highly dilutive and
involved considerable expense. For the year ended December 31, 2004, when we
earned a substantial profit for the first time in our history, our results
amounted to net income of $2.6 million, including a $1.5 million non-cash gain
on debt forgiveness. For the years ended December 31, 2006 and 2005, however,
our results amounted to net losses of $2.1 million and $1.0 million,
respectively.
The
net
losses generated in 2006 and 2005 resulted primarily from increased costs from
expanded facilities and staff, as well as amortization expense associated with
the Global Acquisition and the acquisition of Sterling Financial, non-cash
impairment charges in 2005 and stock option expense in 2006. We expect to
continue to make significant capital expenditures to enhance our products and
technologies, and to expand domestic and international sales and operations.
As
a result, we will need to continue to generate significant additional revenue
to
achieve profitability and generate sufficient working capital to fund our
planned spending. Even if we do achieve profitability, we may not be able to
maintain or increase profitability on a quarterly or annual basis. If we do
not
achieve, maintain or increase our profitability, the market price for our common
stock may further decline.
Obtaining
future financing may be costly and could be dilutive to existing stockholders.
If we are not able to obtain financing when and in the amounts needed, and
on
terms that are acceptable, our operations, financial condition and prospects
could be materially adversely affected, and we could be forced to curtail our
operations or sell part or all of our assets.
We
may need to raise additional funds, which may not be available when we need
them.
Based
on
our current spending plans and our projected working capital, we believe that
our cash on hand and cash generated from our operations will be sufficient
to
fund our operations for at least the next 12 months. However, we may attempt
to
raise additional capital to operate the business, support expansion plans,
develop new or enhanced services and products, respond to competitive pressures,
acquire complementary businesses or technologies or respond to unanticipated
events. We can provide no assurances that additional financing will be available
when needed on favorable terms, if at all. If these funds are not available
when
we need them, we may need to change our business strategy or reduce our
operations or investment activities. In addition, any issuance of additional
equity securities will dilute the ownership interest of our existing
stockholders and the issuance of additional debt securities may increase the
perceived risk of investing in us.
If
we do
not secure substantial additional funding to meet our capital needs, we may
have
to issue additional shares of common stock. If additional funds are raised
through the issuance of equity or convertible debt securities, the percentage
ownership of our current stockholders will be reduced and these securities
may
have rights and preferences superior to those of our current stockholders.
If we
raise capital through debt financing, we may be forced to accept restrictions
affecting our liquidity, including restrictions on our ability to incur
additional indebtedness or pay dividends.
We
are currently subject to extensive securities regulation and the failure to
comply with these regulations could subject us to penalties or sanctions.
The
securities industry and our business are subject to extensive regulation by
the
SEC, state securities regulators and other governmental regulatory authorities.
We are also regulated by industry self-regulatory organizations, including
the
New York Stock Exchange (“NYSE”), the NASD, the NFA and the Municipal Securities
Rulemaking Board. The regulatory environment is also subject to change, and
we
may be adversely affected as a result of new or revised legislation or
regulations imposed by the SEC, other federal or state governmental regulatory
authorities, or self-regulatory organizations. We also may be adversely affected
by changes in the interpretation or enforcement of existing laws and rules
by
these governmental authorities and self-regulatory organizations.
vFinance
Investments and EquityStation are registered broker-dealers with the SEC and
members of the NASD. Broker-dealers are subject to regulations which cover
all
aspects of the securities business, including:
· |
sales
methods and supervision;
|
· |
trading
practices among broker-dealers;
|
· |
use
and safekeeping of customers' funds and
securities;
|
· |
capital
structure of securities firms;
|
· |
the
conduct of directors, officers and
employees
|
Compliance
with many of the regulations applicable to us involves a number of risks,
particularly in areas where applicable regulations may be subject to varying
interpretation. The requirements imposed by these regulators are designed to
ensure the integrity of the financial markets and to protect customers and
other
third parties who deal with us. Consequently, these regulations often serve
to
limit our activities, including through net capital, customer protection and
market conduct requirements. Much of the regulation of broker-dealers has been
delegated to self-regulatory organizations, principally NASD Regulation, Inc.,
the regulatory arm of the NASD, and NYSE Regulation, which will soon undergo
a
merger, both of which are overseen by the SEC. We are primarily regulated by
the
NASD and SEC. NASD Regulation Inc. and the NYSE adopt rules, subject to approval
by the SEC, that govern their members and conduct periodic examinations of
member firms' operations.
If
we are
found to have violated any applicable regulation, formal administrative or
judicial proceedings may be initiated against us that may result
in:
· |
civil
penalties, including treble damages in the case of insider trading
violations;
|
· |
the
issuance of cease-and-desist
orders;
|
· |
the
deregistration or suspension of our broker-dealer
activities;
|
· |
the
suspension or disqualification of our officers or employees;
and/or
|
· |
other
adverse consequences.
|
The
imposition of any of these or other penalties could have a material adverse
effect on our operating results and financial condition.
We
are subject to various risks associated with the securities industry.
As
securities broker-dealers, we are subject to uncertainties that are common
in
the securities industry. These uncertainties include:
· |
the
volatility of domestic and international financial, bond and stock
markets, as demonstrated by past disruptions in the financial
markets;
|
· |
extensive
governmental regulation;
|
· |
substantial
fluctuations in the volume and price level of securities;
and
|
· |
dependence
on the solvency of various third
parties.
|
As
a
result of these risks, revenues and earnings may vary significantly from quarter
to quarter and from year to year. We are much smaller and have much less capital
than many of our competitors in the securities industry. Accordingly, we could
be impacted by these risks to a larger degree. In the event of a market
downturn, our revenues would likely decline and, if we were unable to reduce
expenses at the same pace, our profit margins would quickly erode.
Our
business could be adversely affected by a breakdown in the financial markets.
As
a
securities broker-dealer, our business is materially affected by conditions
in
the financial markets and economic conditions in general, both in the United
States and elsewhere around the world. Many factors or events could lead to
a
breakdown in the financial markets including war, terrorism, natural
catastrophes and other types of disasters. These types of events could cause
people to begin to lose confidence in the financial markets and their ability
to
function effectively. If the financial markets are unable to effectively prepare
for these types of events and ease public concern over their ability to
function, our revenues may decline and our operations could be adversely
affected.
We
have incurred, and may in the future incur, significant losses from trading
and
investment activities due to market fluctuations and
volatility.
We
generally maintain trading and investment positions in the equity markets.
To
the extent that we own assets, i.e., have long positions, a downturn in those
markets could result in losses from a decline in the value of such long
positions. Conversely, to the extent that we have sold assets that we do not
own, i.e., have short positions in any of those markets, an upturn could expose
us to potentially unlimited losses as we attempt to cover our short positions
by
acquiring assets in a rising market.
We
may,
from time to time, have a trading strategy consisting of holding a long position
in one asset and a short position in another from which we expect to earn
revenues based on changes in the relative value of the two assets. If, however,
the relative value of the two assets changes in a direction or manner that
we
did not anticipate or against which we are not hedged, we might realize a loss
in those paired positions. In addition, we maintain trading positions that
can
be adversely affected by the level of volatility in the financial markets,
i.e.,
the degree to which trading prices fluctuate over a particular period, in a
particular market, regardless of market levels.
Our
revenues may decline in adverse market or economic
conditions.
Unfavorable
financial or economic conditions may reduce the number and size of the
transactions in which we provide underwriting services, merger and acquisition
consulting and other services. Our investment banking revenues, in the form
of
financial advisory and underwriting fees, are directly related to the number
and
size of the transactions in which we participate and would therefore be
adversely affected by a sustained market downturn. Additionally, a downturn
in
market conditions could lead to a decline in the volume of transactions that
we
execute for our customers and, therefore, to a decline in the revenues we
receive from commissions and spreads. Customer relationship intangible assets
comprised approximately 35% of our total assets as of December 31, 2006. We
must
review customer relationships for impairment whenever events or circumstances
indicate that impairment may be present, which may result in a material,
non-cash write down of customer relationships. A significant decrease in
revenues or cash flows derived from acquired customer relationships could result
in a material, non-cash write-down of customer relationships. Such impairment
would have a material adverse impact on our results of operations and
shareholders' equity.
Our
risk management policies and procedures may leave us exposed to unidentified
risks or an unanticipated level of risk.
The
policies and procedures we employ to identify, monitor and manage risks may
not
be fully effective. Some methods of risk management are based on the use of
observed historical market behavior. As a result, these methods may not
accurately predict future risk exposures, which could be significantly greater
than the historical measures indicate. Other risk management methods depend
on
evaluation of information regarding markets, clients or other matters that
are
publicly available or otherwise accessible by us. This information may not
be
accurate, complete, up-to-date or properly evaluated. Management of operational,
legal and regulatory risks requires, among other things, policies and procedures
to properly record and verify a large number of transactions and events. We
cannot be assured that our policies and procedures will effectively and
accurately record and verify this information.
We
seek
to monitor and control our risk exposure through a variety of separate, but
complementary financial, credit, operational and legal reporting systems. We
believe that we are able to evaluate and manage the market, credit and other
risks to which we are exposed. Nonetheless, our ability to manage risk exposure
can never be completely or accurately predicted or fully assured. For example,
unexpectedly large or rapid movements or disruptions in one or more markets
or
other unforeseen developments can have a material adverse effect on our results
of operations and financial condition. The consequences of these developments
can include losses due to adverse changes in inventory values, decreases in
the
liquidity of trading positions, higher volatility in earnings, increases in
our
credit risk to customers as well as to third parties and increases in general
systemic risk.
Credit
risk exposes us to losses caused by financial or other problems experienced
by
third parties.
We
are
exposed to the risk that third parties that we us money, securities or other
assets will not perform their obligations. These parties include:
· |
trading
counterparties;
|
· |
other
financial intermediaries as well as issuers whose securities we
hold.
|
These
parties may default on their obligations owed to us due to bankruptcy, lack
of
liquidity, operational failure or other reasons. This risk may arise, for
example, from:
· |
holding
securities of third parties;
|
· |
executing
securities trades that fail to settle at the required time due to
non-delivery by the counterparty or systems failure by clearing agents,
exchanges, clearing houses or other financial intermediaries;
and
|
· |
extending
credit to clients through bridge or margin loans or other arrangements.
|
Significant
failures by third parties to perform their obligations owed to us could
adversely affect our revenues and perhaps our ability to borrow in the credit
markets.
We
may have difficulty retaining or recruiting our independent
contractors.
We
are
dependent upon the independent contractor model for our retail brokerage
business. As such, approximately 81% of our retail registered representatives
are independent contractors. We are exposed to the risk that a large group
of
independent contractors leave the firm or decide to affiliate with another
firm
and that we are unable to recruit suitable replacements. A loss of a large
group
of our independent contractors could have a material adverse impact on our
ability to generate revenue in the retail brokerage business.
We
may have difficulty effectively managing our growth.
Over
the
past several years, we have experienced significant growth in our business
activities through a variety of transactions. We expect our business to continue
to grow through similar transactions as well as organically. Future growth
through mergers, acquisitions and other such transactions involves numerous
risks such as:
· |
difficulties
and expenses incurred in connection with the subsequent assimilation
of
the operations and services or products of the acquired
company;
|
· |
the
potential loss of key employees of the acquired company;
and
|
· |
the
diversion of management's attention from other business concerns.
|
If
we are
unable to effectively address these risks, we may be required to restructure
the
acquired business or write off the value of some or all of the assets of the
acquired business. Further, this type of growth requires increased investments
in management personnel, financial and management systems and controls as well
as facilities. We cannot be assured that we will experience parallel growth
in
these areas. If these areas do not grow at the same time, our operating margins
may decline from current levels.
Additionally,
as is common in the securities industry, we will continue to be highly dependent
on the effective and reliable operation of our communications and information
systems. We believe that our current and anticipated future growth will require
implementation of new and enhanced communications and information systems and
training of our personnel to operate such systems. Any difficulty or significant
delay in the implementation or operation of existing or new systems or the
training of personnel could adversely affect our ability to manage our
growth.
Intense
competition from existing and new entities may adversely affect our revenues
and
profitability.
The
securities industry is rapidly evolving, intensely competitive and has few
barriers to entry. We expect competition to continue to intensify in the
future.
Many of our competitors have significantly greater financial, technical,
marketing and other resources than we do. They may also offer a wider range
of
services and financial products and have greater name recognition and a larger
client base than we do. These competitors may be able to respond more quickly
to
new or changing opportunities, technologies and client requirements. They
may
also be able to undertake more extensive promotional activities, offer more
attractive terms to clients, and adopt more aggressive pricing policies.
We may
not be able to compete effectively with current or future competitors and
competitive pressures faced by us may harm our business.
The
precautions we take to prevent and detect employee misconduct may not be
effective, and we could be exposed to unknown and unmanaged risks or
losses.
We
run
the risk that employee misconduct could occur. Misconduct by employees could
include:
· |
employees
binding us to transactions that exceed authorized limits or present
unacceptable risks to us;
|
· |
employees
hiding unauthorized or unsuccessful activities from us; or
|
· |
the
improper use of confidential
information.
|
These
types of misconduct could result in unknown and unmanaged risks or losses to
us
including regulatory sanctions and serious harm to our reputation. The
precautions we take to prevent and detect these activities may not be effective.
If employee misconduct does occur, our business operations could be materially
adversely affected.
We
may experience losses associated with securities laws violations and
litigation.
Many
aspects of our business involve substantial risks of liability. An underwriter
is exposed to substantial liability under federal and state securities laws,
other federal and state laws, and court decisions, including decisions with
respect to underwriters' liability and limitations on indemnification of
underwriters by issuers. For example, a firm that acts as an underwriter may
be
held liable for material misstatements or omissions of fact in a prospectus
used
in connection with the securities being offered or for statements made by its
securities analysts or other personnel. In recent years, there has been an
increasing incidence of litigation involving the securities industry, including
class actions that seek substantial damages. Our underwriting activities will
usually involve offerings of the securities of smaller companies, which often
involve a higher degree of risk and are more volatile than the securities of
more established companies. In comparison with more established companies,
smaller companies are also more likely to be the subject of securities class
actions, not to carry directors and officer's liability insurance or policies
with lower limits, and to become insolvent. Each of these factors increases
the
likelihood that an underwriter of smaller companies' securities will be required
to contribute to an adverse judgment or settlement of a securities
lawsuit.
In
the
normal course of business, our operating subsidiaries have been and continue
to
be the subject of numerous civil actions and arbitrations arising out of
customer complaints relating to our activities as a broker-dealer and as a
result of other business activities. In general, the cases involve various
allegations that our employees mishandled customer accounts. We believe that,
based on our historical experience and the reserves established by us, the
resolution of the claims presently pending will not have a material adverse
effect on our financial condition. However, although we typically reserve an
amount we believe will be sufficient to cover any damages assessed against
us,
we have in the past been assessed damages that exceeded our reserves. If we
misjudged the amount of damages that may be assessed against us from pending
or
threatened claims or if we are unable to adequately estimate the amount of
damages that will be assessed against us from claims that arise in the future
and fail to appropriately reserve, our financial condition may be materially
adversely affected.
Our
directors, executive officers and senior managers control over 60% of our common
stock voting rights and may have interests differing from those of other
stockholders.
Our
directors, executive officers and senior managers control over 60% of our
outstanding common stock, directly as stockholders and indirectly through
control relationships with other stockholders. There is no supermajority vote
required by our Certificate of Incorporation with regard to matters requiring
stockholder approval. These directors and executive officers, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and approval
of significant corporate transactions including mergers, consolidations and
the
sale of substantially all of our assets. This control could have the effect
of
delaying or preventing a third party from acquiring or merging with us, which
could hinder stockholders' ability to receive a premium for their
shares.
Our
"vFinance" brand may not achieve the broad recognition necessary to
succeed.
We
believe that broader recognition and positive perception of the "vFinance"
brand
is essential to our future success. Accordingly, we intend to continue to pursue
an aggressive brand enhancement strategy, which will include multimedia
advertising, promotional programs and public relations activities. These
initiatives will require significant expenditures. If our brand enhancement
strategy is unsuccessful, these expenses may never be recovered and we may
be
unable to increase future revenues. Successful positioning of our brand will
depend in a large part on:
· |
the
success of our advertising and promotional
efforts;
|
· |
an
increase in the number of users and page views of our website;
and
|
· |
the
ability to continue to provide a website and services useful to our
clients.
|
If
we do not continue to develop and enhance our services in a timely manner,
our
business may be harmed.
Our
future success will depend on our ability to develop and enhance our services
and add new services. We operate in a very competitive industry in which the
ability to develop and deliver advanced services through the Internet and other
channels is a key competitive factor. There are significant risks in the
development of new or enhanced services, including the risks that we will be
unable to:
· |
effectively
use new technologies;
|
· |
adapt
our services to emerging industry or regulatory standards;
or
|
· |
market
new or enhanced services.
|
If
we are
unable to develop and introduce new or enhanced services quickly enough to
respond to market or customer requirements or to comply with emerging industry
standards, or if these services do not achieve market acceptance, our business
could be seriously harmed.
Internet
and internal computer system failures or compromises of our systems or security
could damage our reputation and harm our business.
Although
a significant portion of our business is conducted using traditional methods
of
contact and communications such as face-to-face meetings, a portion of our
business is conducted through the Internet. We could experience system failures
and degradations in the future. We cannot assure you that we will be able to
prevent an extended system failure if any of the following events
occur:
· |
subsystem,
component, or software failure;
|
· |
a
power or telecommunications
failure;
|
· |
an
earthquake, fire, or other natural disaster or act of
God;
|
· |
hacker
attacks or other intentional acts of vandalism;
or
|
· |
terrorists
acts or war.
|
Failure
to adequately protect the integrity of our computer systems and safeguard the
transmission of confidential information could harm our
business.
The
secure transmission of confidential information over public networks is a
critical element of our operations. We rely on encryption and authentication
technology to provide the security and authentication necessary to effect secure
transmission of confidential information over the Internet. To the best of
our
knowledge, to date, we have not experienced any security breaches in the
transmission of confidential information. Moreover, we continually evaluate
advanced encryption technology to ensure the continued integrity of our systems.
However, we cannot assure you that advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments will
not result in a compromise of the technology or other algorithms used by our
vendors and us to protect client transaction and other data. Any compromise
of
our systems or security could harm our business.
We
depend on a limited number of key executives who would be difficult to replace.
Our
success depends significantly on the continued services of our senior
management, especially Leonard J. Sokolow, our Chairman and Chief Executive
Officer. Losing Mr. Sokolow or any of our subsidiaries' other key executives
could seriously harm our business. We cannot assure you that we will be able
to
retain our key executives or that we would be able to replace any of our key
executives if we were to lose their services for any reason. Competition for
these executives is intense. If we had to replace any of these key executives,
we would not be able to replace the significant amount of knowledge that these
key executives have about our operations. We do not maintain "key person"
insurance policies on any of our executives.
Our
operating broker-dealer subsidiaries extend credit to their clients and are
subject to risks as a result.
Our
broker-dealers, vFinance Investments and EquityStation, clear all transactions
for customers on a fully-disclosed basis with their clearing brokers, NFS,
Jefferies, Merrill Lynch Pierce Fenner & Smith (Broadcoart Clearing
Division), Fortis Clearing, Legent Clearing and North American Clearing. These
clearing brokers carry and clear all customer securities accounts. A limited
portion of the customer securities activities for both broker-dealers are
transacted on a "margin" basis, pursuant to which credit is extended to
customer. The credit extended to customers (a) is secured by cash and securities
in customer accounts, or (b) involves (i) "short sales" (i.e., the sale of
securities not yet purchased) or (ii) the purchase and sale of commodity futures
contracts, substantially all of which are transacted on a margin basis. These
risks are increased during periods of volatile markets in which the value of
the
collateral held could fall below the amount borrowed by clients. If margin
requirements are not sufficient to cover losses, our broker-dealers may be
required to sell or buy securities at prevailing market prices and incur losses
to satisfy their client obligations.
We
may underwrite securities through vFinance Investments and are subject to losses
relating to a decline in the market value of securities that we hold in
inventory and to potential liability for engaging in underwriting activities.
The
underwriting activities of vFinance Investments involve the purchase, sale
or
short sale of securities as a principal. As an underwriter, vFinance Investments
purchases securities on a "firm commitment" basis and is subject to risk that
it
may be unable to resell securities or be required to dispose of securities
at a
loss. In connection with our investment-banking activities in which vFinance
Investments acts as a manager or co-manager of public offerings of securities,
we expect to make increased commitments through vFinance Investments of capital
to market-making activities in securities of those issuers. Any additional
concentration of capital in the securities of those issuers held in inventory
will increase the risk of loss from possible declines in the market price of
those securities. In addition, under federal securities laws, other laws and
court decisions with respect to underwriters' liabilities and limitations on
the
indemnification of underwriters by issuers, an underwriter is subject to
substantial potential liability for misstatements or omissions of material
facts
in prospectuses and other communications with respect to securities offerings.
Our potential liability through vFinance Investments as an underwriter is
generally not covered by insurance. Moreover, underwriting commitments
constitute a charge against net capital and the ability of vFinance Investments
to make underwriting commitments may be limited by the requirement that it
must
at all times be in compliance with the net capital rule.
Our
success and ability to compete depend to a significant degree on our
intellectual property.
We
rely
on copyright and trademark law, as well as confidentiality arrangements, to
protect our intellectual property. We own the following federally registered
marks: vFinance, Inc.®, vFinance.com, Inc.®, AngelSearch®, Direct2Desk® and
Hedge Fund Accelerator®. We currently do not have any patents. The concepts and
technologies we use may not be patentable. Our competitors or others may adopt
product or service names similar to "vFinance.com," thereby impeding our ability
to build brand identity and possibly leading to client confusion. Our inability
to adequately protect the name "vFinance.com" would seriously harm our business.
Policing unauthorized use of our intellectual property is made especially
difficult by the global nature of the Internet and the inherent difficulty
in
controlling the ultimate destination or security of software or other data
transmitted on it.
The
laws
of other countries may afford us little or no effective protection for our
intellectual property. We cannot assure you that the steps we take will prevent
misappropriation of our intellectual property or that agreements entered into
for that purpose will be enforceable. In addition, litigation may be necessary
in the future to:
· |
enforce
our intellectual property rights;
|
· |
determine
the validity and scope of the proprietary rights of others;
or
|
· |
defend
against claims of infringement or
invalidity.
|
Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could seriously harm our
business.
Our
Board of Directors can issue shares of "blank check" preferred stock without
further action by our stockholders.
Our
Board
of Directors has the authority, without further action by the stockholders,
to
issue up to 2.5 million shares of preferred stock in one or more series and
to
fix the rights, preferences, privileges and restrictions in each series of
the
preferred stock, including:
· |
voting
rights, which may be greater or lesser than the voting rights of
the
common stock;
|
· |
rights
and terms of redemption;
|
· |
liquidation
preferences; and
|
The
issuance of shares of preferred stock could adversely affect the voting power
of
holders of our common stock and the likelihood that these holders will receive
dividends and payments upon our liquidation and could have the effect of
delaying, deferring or preventing a change in control of the Company. We have
no
current plans to issue any additional preferred stock in the next twelve months.
Although the issuance of preferred stock may be necessary in order to raise
additional capital.
Risks
Related to the Offering
Our
stock price has been and continues to be volatile.
The
market price for our common stock could fluctuate due to various factors. These
factors include:
· |
announcements
regarding developments in our business, acquisitions and financing
transactions;
|
· |
announcements
by us or our competitors of new contracts, technological innovations
or
new products;
|
· |
changes
in government regulations;
|
· |
fluctuations
in our quarterly and annual operating results;
and
|
· |
general
market conditions.
|
In
addition, the stock markets have, in recent years, experienced significant
price
fluctuations. These fluctuations often have been unrelated to the operating
performance of the specific companies whose stock is traded. Market
fluctuations, as well as economic conditions, have adversely affected, and
may
continue to adversely affect, the market price of our common stock.
There
are risks associated with our stock trading on the OTC Bulletin Board rather
than a national exchange.
There
are
significant consequences associated with our stock trading on the OTC Bulletin
Board rather than a national exchange. The effects of not being able to list
our
securities on a national exchange include:
· |
limited
release of the market prices of our
securities;
|
· |
limited
interest by investors in our
securities;
|
· |
volatility
of our stock price due to low trading
volume;
|
· |
increased
difficulty in selling our securities in certain states due to "blue
sky"
restrictions; and
|
· |
limited
ability to issue additional securities or to secure additional
financing.
|
Because
our common stock is subject to penny stock rules, a stockholder may have greater
difficulty selling shares.
The
Securities Enforcement and Penny Stock Reform Act of 1990 applies to stocks
characterized as "penny stocks," and requires additional disclosure relating
to
the market for penny stocks in connection with trades in any stock defined
as a
penny stock. The SEC has adopted regulations that generally define a penny
stock
to be any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions.
The
exceptions include exchange-listed equity securities and any equity security
issued by an issuer that has:
· |
net
tangible assets of at least $2.0 million, if the issuer has been
in
continuous operation for at least three
years;
|
· |
net
tangible assets of at least $5.0 million, if the issuer has been
in
continuous operation for less than three years;
or
|
· |
average
annual revenue of at least $6.0 million for the last three
years.
|
Unless
an exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the associated risks.
If
our
financial condition does not meet the above tests, then trading in the common
stock will be covered by Rules 15g-1 through 15g-6 and 15g-9 promulgated under
the Securities Exchange Act. Under those rules, broker-dealers who recommend
such securities to persons other than their established customers and
institutional accredited investors must make a special written suitability
determination for the purchaser and must have received the purchaser's written
agreement to a transaction prior to sale. These regulations would likely limit
the ability of broker-dealers to trade in our common stock and thus would make
it more difficult for purchasers of common stock to sell their securities in
the
secondary market. The market liquidity for the common stock could be severely
affected.
Stockholders
holdings may be diluted as a result of additional stock
issuances.
As
of
April 25, 2007, we had outstanding approximately 54.7 million shares of common
stock, options to purchase an approximate total of 14.4 million shares of
common
stock and warrants to purchase an approximate total of 3.9 million shares
of
common stock. We are authorized to issue up to 100 million shares of common
stock and are therefore able to issue additional shares without being required
to obtain stockholder approval. If we issue additional shares, or if our
existing stockholders exercise or convert their outstanding options or notes,
our other stockholders may own a smaller percentage of the Company.
FORWARD-LOOKING
STATEMENTS
The
information contained in this prospectus includes forward-looking statements
as
defined in the Private Securities Reform Act of 1995. These forward looking
statements are often identified by words such as “may,” “will,” “expect,”
“intend,” “anticipate,” “believe,” “estimate,” “continue,” “plan” and similar
expressions. These statements involve estimates, assumptions and uncertainties
that could cause actual results to differ materially from those expressed for
the reasons described in this prospectus. You should not place undue reliance
on
these forward-looking statements.
You
should be aware that our actual results could differ materially from those
contained in the forward-looking statements due to a number of factors,
including:
· |
general
economic conditions;
|
· |
our
ability to obtain future financing or funds when
needed;
|
· |
the
inability of our broker-dealer operations to operate profitably in
the
face of intense competition from larger full-service and discount
brokers;
|
· |
a
general decrease in merger and acquisition activities and our potential
inability to receive success fees as a result of transactions not
being
completed; increased competition from business development
portals;
|
· |
our
potential inability to implement our growth strategy through acquisitions
or joint ventures;
|
· |
acquisitions,
business combinations, strategic partnerships, divestures, and other
significant transactions may involve additional uncertainties;
and
|
· |
our
ability to maintain and execute a successful business
strategy.
|
You
should also consider carefully the statements under “Risk Factors” and other
sections of this prospectus, which address additional factors that could cause
our actual results to differ from those set forth in the forward-looking
statements and could materially and adversely affect our business, operating
results and financial condition. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the applicable cautionary
statements.
The
forward-looking statements speak only as of the date on which they are made,
and, except to the extent required by federal securities laws, we undertake
no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events. In addition, we cannot assess the impact
of
each factor on our business or the extent to which any factor, or combination
of
factors, or factors we are unaware of, may cause actual results to differ
materially from those contained in any forward-looking statements.
USE
OF PROCEEDS
Any
net
proceeds from any sale of shares of our common stock covered by this prospectus
will be received by the Selling Stockholder. We will not receive any proceeds
from the sale of shares by the Selling Stockholder.
SELLING
STOCKHOLDER
All
of
the 13,000,000 shares of our common stock registered for public resale pursuant
to this prospectus and listed under the column "Shares Available for Sale Under
This Prospectus" on the table set forth below were issued as partial payment
for
certain assets acquired from Sterling Financial Group of Companies, Inc. and
Sterling Financial Investment Group, Inc. by our subsidiary, vFinance
Investments. These shares of our common stock are included in this prospectus
pursuant to registration rights we granted to the Seller
Stockholder.
The
following table presents information as of April 25, 2007 and sets forth the
number of shares beneficially owned by the Selling Stockholder as of the date
of
this prospectus. We are not able to estimate the amount of shares that will
be
held by the Selling Stockholder after the completion of this offering because:
(1) the Selling Stockholder may sell less than all of the shares registered
under this prospectus; and (2) to our knowledge, the Selling Stockholder
currently has no agreements, arrangements or understandings with respect to
the
sale of any of its shares. The following table assumes that all of the shares
being registered pursuant to this prospectus will be sold. The Selling
Stockholder is not making any representation that any shares covered by this
prospectus will be offered for sale.
Name
of Selling
Stockholder
|
|
Number
of Shares of Common Stock Owned Before the
Offering **
|
|
Percent
of Common Stock Owned Before the
Offering
|
|
Shares
Available for Sale Under
This
Prospectus
|
|
Number
of Shares of Common Stock To Be Owned After Completion of
the
Offering
|
|
Percent
of Common Stock to be Owned After Completion of
the
Offering
|
|
Sterling
Financial Group of Companies, Inc. (1)
|
|
|
13,000,000
|
|
|
23.8
|
%
|
|
13,000,000
|
|
|
—
|
|
|
*
|
|
** |
Beneficial
ownership is determined in accordance with the rules of the SEC.
Shares of
common stock subject to options or warrants currently exercisable
or
exercisable within 60 days of April 25, 2007, are deemed outstanding
for
computing the percentage ownership of the stockholder holding the
options
or warrants, but are not deemed outstanding for computing the percentage
ownership of any other stockholder. Percentage of ownership is based
on
54,679,876 shares of common stock outstanding as of April 25,
2007.
|
(1) |
Charles
Garcia, as the sole officer of Sterling Financial Group of Companies,
Inc., has the power to vote and to dispose of all of the shares held
by
Sterling Financial Group of Companies, Inc., and is deemed to have
shared
voting power and shared dispositive power with respect to such shares.
|
PLAN
OF DISTRIBUTION
The
Selling Stockholder may, from time to time, sell any or all of its shares of
common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholder may use any one or more of the
following methods when selling shares:
· |
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
· |
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
· |
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
· |
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
· |
privately
negotiated transactions;
|
· |
broker-dealers
may agree with the Selling Stockholder to sell a specified number of
such shares at a stipulated price per
share;
|
· |
a
combination of any such methods of sale;
and
|
· |
and
any other method permitted pursuant to applicable
law.
|
The
Selling Stockholder may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
After
the
effective date of the registration statement, the Selling Stockholder may also
engage in short sales against the box, puts and calls and other transactions
in
our securities or derivatives of our securities and may sell or deliver shares
in connection with these trades.
Broker-dealers
engaged by the Selling Stockholder may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Stockholder (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
Selling Stockholder does not expect these commissions and discounts to exceed
what is customary in the types of transactions involved. Any profits on the
resale of shares of common stock by a broker-dealer acting as principal might
be
deemed to be underwriting discounts or commissions under the Securities Act.
Discounts, concessions, commissions and similar selling expenses, if any,
attributable to the sale of shares will be borne by the Selling Stockholder.
The
Selling Stockholder may agree to indemnify any agent, dealer or broker-dealer
that participates in transactions involving sales of the shares if liabilities
are imposed on that person under the Securities Act.
The
Selling Stockholder may from time to time pledge or grant a security interest
in
some or all of the shares of common stock beneficially owned by it and, if
they
default in the performance of its secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act amending the
list
of Selling Stockholders to include the pledgee, transferee or other successors
in interest as Selling Stockholders under this prospectus.
The
Selling Stockholder also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this prospectus
and may sell the shares of common stock from time to time under this prospectus
after we have filed an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of Selling
Stockholders to include the pledgee, transferee or other successors in interest
as Selling Stockholders under this prospectus.
The
Selling Stockholder and any broker-dealers or agents that are involved in
selling the shares of common stock may be deemed to be "underwriters" within
the
meaning of the Securities Act in connection with such sales. In such event,
any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares of common stock purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. The Selling
Stockholder has advised us that it has acquired its securities in the ordinary
course of business and it has not entered into any agreements, understandings
or
arrangements with any underwriters or broker-dealers regarding the sale of
its
shares of common stock, nor is there an underwriter or coordinating broker
acting in connection with a proposed sale of shares of common stock by such
Selling Stockholder. If we are notified by Selling Stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares
of
common stock, if required, we will file a supplement to this prospectus. If
the
Selling Stockholder uses this prospectus for any sale of the shares of common
stock, it will be subject to the prospectus delivery requirements of the
Securities Act.
We
are
required to pay all fees and expenses incident to the registration of the shares
of common stock. We have agreed to indemnify the Selling Stockholder against
certain losses, claims, damages and liabilities, including liabilities under
the
Securities Act.
The
anti-manipulation rules of Regulation M under the Securities Exchange Act of
1934 may apply to sales of our common stock and activities of the Selling
Stockholder.
SELECTED
FINANCIAL DATA
The
selected historical financial information presented below is derived from our
audited consolidated financial statements for the years ended December 31,
2002,
2003, 2004, 2005 and 2006. The selected quarterly financial information was
derived from our unaudited consolidated financial statements for the periods
ended March 31, June 30, September 30, and December 31 for the years 2004,
2005 and 2006, respectively.
The
unaudited financial statements include all adjustments including normal
recurring adjustments, that management considers necessary to fairly present
the
Company’s financial position and results of operations.
The
data
set forth below should be read in conjunction with the financial statements
and
accompanying notes incorporated by reference.
Selected
Historical Financial Data
|
|
As
of and for the Year
|
|
|
|
2006
|
|
2005
(Restated and Revised)
|
|
2004
(Restated and Revised)
|
|
2003
(Restated and Revised)
|
|
2002
(Restated and Revised)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
38,594,900
|
|
$
|
26,070,700
|
|
$
|
26,500,000
|
|
$
|
24,601,800
|
|
$
|
19,399,700
|
|
Income
(loss) from operations
|
|
|
(2,258,400
|
)
|
|
(1,162,200
|
)
|
|
1,517,800
|
|
|
493,500
|
|
|
(1,796,500
|
)
|
Gain
on forgiveness of debt
|
|
|
-
|
|
|
-
|
|
|
1,500,000
|
|
|
-
|
|
|
-
|
|
Net
income (loss)
|
|
$
|
(2,133,500
|
)
|
$
|
(999,600
|
)
|
$
|
2,454,800
|
|
$
|
320,400
|
|
$
|
(2,431,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share: basic
|
|
$
|
(0.04
|
)
|
$
|
(0.02
|
)
|
$
|
0.07
|
|
$
|
0.01
|
|
$
|
(0.09
|
)
|
Wt.
Avg. shares outstanding: basic
|
|
|
48,714,800
|
|
|
40,049,700
|
|
|
33,773,300
|
|
|
29,609,100
|
|
|
26,716,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share: diluted
|
|
$
|
(0.04
|
)
|
$
|
(0.02
|
)
|
$
|
0.07
|
|
$
|
0.01
|
|
$
|
(0.09
|
)
|
Wt.
Avg. shares outstanding: diluted
|
|
|
48,714,800
|
|
|
40,049,700
|
|
|
35,840,200
|
|
|
29,963,400
|
|
|
26,716,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
11,643,200
|
|
$
|
8,897,000
|
|
$
|
9,814,100
|
|
$
|
6,378,500
|
|
$
|
5,129,200
|
|
Long-term
debt including capital lease, obligations, net of current portion
|
|
|
125,600
|
|
$
|
225,100
|
|
|
-
|
|
$
|
1,889,600
|
|
$
|
1,701,600
|
|
Shareholders’
equity
|
|
$
|
6,899,700
|
|
$
|
4,974,500
|
|
$
|
6,085,700
|
|
$
|
1,273,900
|
|
$
|
849,400
|
|
See
Notes
1, 4, 8 and 9 to our Consolidated Financial Statements included in this
prospectus for discussions of the effect of restating and revising certain
items
in our historical financial statements, acquisitions, shareholders' equity
and
stock options, respectively, and their effect on comparability of year-to-year
data. See “Market for Common Equity and Related Stockholder Matters” included in
this prospectus for a discussion of our dividend policy.
Selected
Quarterly Financial Data (Unaudited)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Total
|
|
Year
ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
(As
Revised & Restated)
|
|
$
|
9,007,600
|
|
$
|
9,654,500
|
|
$
|
9,529,400
|
|
$
|
10,403,400
|
|
$
|
38,594,900
|
|
Income
(Loss) from operations
(As
Revised & Restated)
|
|
|
388,400
|
|
|
(361,500
|
)
|
|
(433,800
|
)
|
|
(1,851,500
|
)
|
|
(2,258,400
|
)
|
Net
income (loss)
(As
Revised & Restated)
|
|
$
|
411,600
|
|
$
|
(342,800
|
)
|
$
|
(385,700
|
)
|
$
|
(1,816,600
|
)
|
$
|
(2,133,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
(As
Revised & Restated)
|
|
$
|
6,610,900
|
|
$
|
6,311,600
|
|
$
|
6,591,200
|
|
$
|
6,557,000
|
|
$
|
26,070,700
|
|
Income
(Loss) from operations
(As
Revised & Restated)
|
|
|
(99,000
|
)
|
|
(97,000
|
)
|
|
(152,000
|
)
|
|
(814,200
|
)
|
|
(1,162,200
|
)
|
Net
income (loss)
(As
Revised & Restated)
|
|
|
(61,300
|
)
|
|
(85,800
|
)
|
|
(120,900
|
)
|
|
(731,600
|
)
|
|
(999,600
|
)
|
DESCRIPTION
OF OUR BUSINESS
Our
History
We
were
incorporated in the state of Delaware in February 1992. On November 8, 1999,
we
acquired vFinance Holdings, Inc., a Florida corporation, and Union Atlantic
LC,
a Florida limited liability company, through a Share Exchange Agreement. We
received all the outstanding capital stock of vFinance Holdings, Inc. and all
the outstanding membership interests of Union Atlantic LC in exchange for a
total of approximately 7.0 million shares of our common stock.
On
January 4, 2001, we closed the merger of NW Holdings, Inc. ("NWH"), a Florida
corporation, into us where we were the surviving corporation. On the closing
date of the merger, NWH was the parent company of and wholly owned First Level
Capital, Inc., a Florida corporation. First Level Capital, Inc. is now known
as
vFinance Investments, which has offices in New York, New Jersey and Florida.
In
addition to these offices, we have relationships with certain independent
contractors located throughout the United States.
Also,
on
January 4, 2001, we completed the merger of Colonial Direct Financial Group,
Inc., a Delaware corporation, with and into Colonial Acquisition Corp., our
wholly owned subsidiary, with Colonial Direct Financial Group, Inc. as the
surviving corporation and as our wholly owned subsidiary. At the time of the
merger, Colonial Direct Financial Group, Inc. was a holding company comprised
of
two diversified financial services companies, including First Colonial
Securities Group, Inc. and Colonial Direct Retirement Services, Inc., and a
company that provides administrative support to these financial service
companies, Colonial Direct Capital Management, Inc. Although Colonial Direct
Financial Group, Inc. is no longer one of our subsidiaries, the majority of
the
personnel, client accounts and client assets of First Colonial Securities Group,
Inc. still remain with vFinance Investments.
On
November 2, 2004, our wholly-owned subsidiary, vFinance Investments completed
its acquisition of certain assets of Global Partners Securities, Inc. ("Global")
and 100% of the issued and outstanding equity securities of EquityStation,
Inc.
("EquityStation"), all of which were owned by Level2.com, Inc. ("Level2"),
a
subsidiary of Global (together, the "Global Acquisition").
The
assets acquired in the Global Acquisition consisted primarily of customer
accounts and some older computer equipment. Business lines acquired included
wholesale market-making in selected equities for institutional clients and
direct market access equity trading. vFinance Investments assumed no liabilities
in connection with the acquisition of Global's assets. Two of the principals
of
Global and Equity Station each entered into employment agreements with us,
which
provided an annual base salary of $144,000, certain incentive bonuses, and
options to purchase 350,000 shares of our common stock. The options are
exercisable at $0.19 per share and vest ratably over a three year
period.
EquityStation
is a broker-dealer registered with the SEC and is a member of the NASD. The
company is a Florida corporation incorporated on July 22, 1999. EquityStation
offers institutional traders, hedge funds and professional traders a suite
of
services designed to advance their trading through cutting-edge trading
technologies and routing software, hedge fund incubation, capital introduction
and custodial services.
In
May
2006, vFinance Investments completed the acquisition of 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 include customer relationships
associated with Sterling Financial's Institutional Fixed Income and Latin
American businesses. These transactions were approved by the NASD on April
28,
2006.
In
connection with this acquisition, we established new divisions to focus on
the
rapidly-growing U.S. Hispanic and Latin American investment markets and to
provide investment advisory services relating to fixed income products and
execution of fixed income investment transactions.
Industry
Overview
In
the
last decade, the U.S. investment banking industry has been characterized and
influenced by the following trends:
· |
increased
levels of industry consolidation, particularly involving smaller
regional
investment banks that primarily provided investment banking and brokerage
services to middle-market companies and their institutional
investors;
|
· |
the
tendency for global competitors and acquired firms, once part of
larger
organizations, to focus on larger market capitalization companies
and
larger transactions; and
|
· |
the
emergence of smaller boutique investment banking firms focused exclusively
on growth industries, particularly technology and
healthcare.
|
In
recent
years, there have been a number of acquisitions by larger financial services
institutions of U.S. brokerage and investment banking firms that offer similar
products and services to those that we provide. These larger financial
institutions have generally allocated capital and resources toward larger market
capitalization companies and transactions. This shift of focus away from smaller
market capitalization companies has led to a decline in service to these
companies, including investment banking and research coverage, and as a result
such companies have reduced access to capital.
Additionally,
because the United States securities industry has also been subjected to
increased regulation and governmental scrutiny, including certain mandated
changes, many larger firms have restructured their businesses and market-making
activities away from companies whose market capitalization is below certain
thresholds. Research and capital markets resources previously dedicated to
smaller market capitalization companies were either reassigned to larger
companies or eliminated. These circumstances have contributed to both companies
in, and investors focused on, the growth and middle-market sectors seeking
the
services of boutique investment banking professionals who have a high degree
of
applicable industry knowledge. This increase in regulation has also made it
more
expensive for smaller firms to remain in business thus accelerating the
consolidation of these firms.
To
facilitate access to capital markets and to industry and company specific
research, smaller boutique financial services firms have emerged to offer
investment banking and research support to small and middle-market
capitalization companies.
Our
Market Opportunity
We
view
ourselves as a strategically positioned financial services holding company
recognized for our insight into alternative investments to institutional and
high-net worth investors seeking to outperform market indices. The market
opportunity available to us is significant due to the following
factors:
Market
Consolidation Opportunities
Our
industry continues to consolidate. During the past several years, we have
successfully acquired industry related businesses.
Our
Targeted Addressable Market Continues to Grow
High
growth middle market or small capitalization companies not serviced by
the
larger firms will continue to seek out capital. Institutions and high net
worth
investors looking for alternative investments in order to outperform market
indices will continue to seek out investment opportunities. Additional
opportunities continue to arise in the U.S., Latin America, Canada, Mexico,
Europe, China and India.
Our
Extensive Insight from and traffic to the our website into High Growth
Companies
and Institutional and High Net Worth Investors
Through
our website, we are in a unique position to generate a lot of information
about
high growth companies who are seeking capital and institutional and high
net
worth investors who are seeking investments. Our website generates leads
for our
institutional and retail business units.
Our
Competitive Strengths
Highly
Regarded Investment Banking, Retail Brokerage, and Institutional Equity and
Fixed Income Trading
We
believe that we are widely recognized for the quality of the services we provide
to our institutional and retail clients. We analyze each material aspect of
client's business, develop strong professional relationships with management
and
related industry professionals, and effectively communicate with investors
and
institutions.
Experienced
Professionals
We
believe that our team of professionals, including our executive management
team,
has diverse and extensive experience, ranging from 8 to 15 years in the
financial service industries. Our sales and trading professionals have developed
long-term client relationships with hedge funds, pension funds, state and local
municipalities, banks, insurance companies and high net worth individuals,
and
these core clients have historically made up a significant portion of our
revenues.
Focus
on Under-Served Business Opportunities
We
seek
out under-served business opportunities where there is a market need that is
not
being addressed by the larger firms.
Entrepreneurial
Culture
We
have
fully embraced an entrepreneurial culture. Our employees own our common stock
or
may be granted options as an incentive, which, when coupled with our competitive
compensation packages, enables our employees to directly benefit from their
individual production as well as our overall performance. Every employee has
the
incentive to generate ideas and communicate them to management to maximize
client returns and our overall profitability.
Our
Growth Strategies
Our
goal
is to become a leading financial services company providing brokerage, trading,
investment banking, financial and operational services, and insight into market
place opportunities to our clients. In order to achieve this goal, we plan
on
implementing the following strategies:
· |
expand
investment banking efforts to include additional capabilities and
markets
including the U.S. Hispanic Markets, Europe, Canada, Mexico, China,
Latin
America and India;
|
· |
capitalize
on trading resources by leveraging technology and increasing the
size and
asset class of brokered
transactions;
|
· |
expanding
retail brokerage through recruiting initiatives and market expansion
including growth in Latin America and other emerging
markets;
|
· |
grow
through acquisitions and mergers;
and
|
Financial
Arrangements with Clearing Brokers
vFinance
Investments entered into a clearing agreement with National Financial Services
LLC, Member New York Stock Exchange ("NYSE")/SIPC, a Fidelity Investments
company ("NFS") in 2004 (the "Clearing Agreement"), for NFS to serve as vFinance
Investment's primary clearing broker. The Clearing Agreement requires NFS to
pay
a monthly incentive bonus to vFinance Investments up to $25,000 per month (up
to
an aggregate of $1.5 million) over the five-year term of the Clearing Agreement.
vFinance Investments also received a $200,000 payment from NFS in 2004, as
compensation for the transition costs associated with migrating to a new
clearing firm. As consideration for these incentives, NFS required a termination
fee of $1.7 million in the event vFinance Investments terminates the Clearing
Agreement, reduced annually on a pro rata basis over the five-year term of
the
Clearing Agreement. As of December 31, 2006, our contingent obligation in
connection with the Clearing Agreement was $1.0 million.
EquityStation
and vFinance Investments have ancillary clearing agreements with Merrill Lynch
Pierce Fenner & Smith (Broadcoart Clearing Division), Fortis Clearing,
Legent Clearing and North American Clearing, providing services in the areas NFS
is not suited to handle. These clearing agreements contain customary terms
and
conditions.
Our
Business
Retail
Brokerage
The
largest portion of our revenues, 62%, 72% and 65% in 2006, 2005 and 2004,
respectively was attributable to commissions and other brokerage-related income
generated by our retail brokerage activities.
vFinance
Investments' retail brokerage division buys and sells securities for its
customers in exchange for a commission, or in exchange for a fee, based on
customer assets or as dictated by security placement agreements. Through
our
brokers, we offer a wide variety of financial investments, including, but
not
limited to, equities, corporate bonds, municipal securities, collateralized
mortgage obligations, mutual funds and insurance products. We are licensed
in
all fifty states, plus the District of Columbia and Puerto Rico, and our
registered representatives are registered in those states where their customers
reside. vFinance Investments' relationship with its registered representatives
can be either as an employee, or in an independent contractor, depending
on how
the broker chooses to conduct his business. As an employee, all of the expenses
of his operation are paid for by the company, and he is only charged for
certain
fees such as special information services, insurance, benefits and professional
services. As an independent contractor, in exchange for a higher overall
payout,
the broker would be responsible for all of the fees associated with his
business, including, but not limited to, rent, telecommunications expenses,
insurance, benefits, transactions fees, all information services, state and
regulatory registration fees and compliance oversight.
Market
Making
We
generated 25%, 16% and 19% of our revenues from trading profits in our market
making activities in 2006, 2005 and 2004, respectively.
vFinance
Investments provides liquidity by making markets in over 3,000 Over-the-Counter
Bulletin Board ("OTC Bulletin Board"), National Market System, Pink Sheet,
and
NASDAQ Small Cap stocks and American Depositary Receipts in addition to
providing this liquidity to our other business units. Our customers are national
and regional full-service broker-dealers, electronic discount brokers and
institutional investors that require fast and efficient executions for each
security. This expertise supports our investment banking strategy of servicing
high growth public companies that are looking for a financial services firm
that
is capable of assisting them in building broad-based market support for their
securities. As a market maker, we use our capital and systems resources to
represent a stock and compete with other market makers. Operated primarily
by
electronic execution, buyers and sellers meet via computer to make bids and
offers. Each market maker competes for "customer order flow" by displaying
buy
and sell quotations for a guaranteed number of shares in a security. Once an
order is received, the market maker will immediately purchase for or sell from
its own inventory, or seek the other side of the trade until it is executed,
often in a matter of seconds. The market maker generates all of its revenue
from
the difference between the price paid when a security is bought and price
received when that security is sold or the price received when the security
is
shorted and the price received when the short is covered.
Investment
Banking
We
derived 13%, 11% and 14% of our revenues from our investment banking activities
in 2006, 2005 and 2004, respectively. We assist emerging growths, private
and
public companies by (i) developing sound strategic plans, (ii) obtaining
equity,
mezzanine, bridge, or acquisition capital, hard return to (iii) executing
strategically sound acquisitions or divestiture strategies, (iv) raising
capital
in the public markets, and (v) maximizing shareholder value by conducting
recapitalizations or other liquidity transactions. As consideration for such
services, we are paid retainers and success fees, based on the percentage
of the
total value of a transaction, which are contingent on the successful completion
of a specified transaction. As part of our success fees, we periodically
receive
equity instruments and stock purchase warrants from companies for which we
perform services in addition to cash paid for such services.
In
the
area of corporate finance, vFinance Investments has been active as an
underwriter or selling group member in numerous public equity transactions.
Participation as a managing underwriter or in an underwriting syndicate involves
both economic and regulatory risks. An underwriter may incur losses if it is
unable to resell the securities it is committed to purchase. In addition, under
the federal securities laws, other laws and court decisions with respect to
underwriters' liabilities and limitations on the indemnification of underwriters
by issuers, an underwriter is subject to substantial potential liability for
misstatements or omissions of material facts in prospectuses and other
communications with respect to such offerings. Acting as a managing underwriter
increases these risks. Underwriting commitments constitute a charge against
net
capital and our subsidiaries' ability to make underwriting commitments may
be
limited by the requirement that they must at all times be in compliance with
regulations regarding their net capital.
Institutional
Services
A
critical element of our business strategy is to identify institutional quality
investments that offer above market returns. We support that mission by
providing institutional investment managers, primarily hedge fund managers,
a
complete array of services designed to enhance portfolio performance. Hedge
funds represent the fastest growing segment of the money management market
and
by definition are focused on achieving positive returns for their investors
while controlling risk. We offer fund managers access to direct market access
trading platforms, investment opportunities and independent research products
that boost return on investment. Additionally, we offer fund managers the
ability to reduce their transaction costs by offering them access to our trading
desk for illiquid securities and automated trading systems for their liquid
transactions. We have a mutually beneficial relationship with our Investment
Banking Division ("IBD") as fund managers looking for investment opportunities
fund IBD's corporate clients and having relationships with fund managers creates
opportunities to increase the number and quality of IBD clients.
Internet
Strategy
The
Center for Innovative Entrepreneurship, dedicated to providing research services
to promote innovative entrepreneurship has been engaged by vFinance Holdings,
Inc., by means of a licensing arrangement, to operate its financial services
website or "channel" on the World Wide Web located at http://www.vfinance.com.
With an estimated 500,000 unique visitors annually, our website reaches a global
audience of entrepreneurs, CEOs, and private and institutional investors in
over
150 countries. The website provides sales leads to our investment banking,
brokerage and institutional services divisions. The website is the premier
destination for the search phrases "venture capital" and "raising capital."
Website visitors have convenient access to a variety of financial services,
proprietary business development tools, searchable databases and daily news.
The
website has over 60,000 "opted in" subscribers that receive a daily newsletter
on private funding. The website features our database of venture capital firms
and angel investors accessible with vSearch, our proprietary web-based data
mining tool that allows entrepreneurs to search potential funding sources by
different criteria, including, geography, amount of funds required, industry,
stage of corporate development or keyword. Much of the information on the
website is provided free of charge, however, we do charge nominal fees for
the
use of proprietary search engines and premium services such as our business
planning services.
Administration,
Operations, Securities Transactions Processing and Customer
Accounts
Our
operating subsidiaries, vFinance Investments and EquityStation, do not hold
any
funds or securities for customers. Instead, they use the services of clearing
agents on a fully-disclosed basis. These clearing agents process all securities
transactions and maintain customer accounts on a fee basis. Customer accounts
are protected through the SIPC for up to $500,000, of which coverage for
cash
balances is limited to $100,000. In addition, all customer accounts of vFinance
Investments are fully protected by an Excess Securities Bond providing
protection for the account's entire net equity (both cash and securities).
The
services of our subsidiaries' clearing agents include billing and credit
control
as well as receipt, custody and delivery of securities. The clearing agents
provide the operational support necessary to process, record and maintain
securities transactions for our subsidiary's brokerage activities. They provide
these services to our subsidiary's customers at a total cost that we believe
is
less than it would cost us to process such transactions on our own. The clearing
agents also lend funds to our subsidiaries' customers through the use of
margin
credit. These loans are made to customers on a secured basis, with the clearing
agents maintaining collateral in the form of saleable securities, cash or
cash
equivalents. vFinance Investments and EquityStation have agreed to indemnify
the
clearing brokers for losses they incur on these credit
arrangements.
Competition
All
aspects of our business are highly competitive. In our investment banking
activities, we compete with large Wall Street investment banks as well as
regional boutique banks that offer private placement services to small- and
middle-market companies. We compete for these investment banking transactions
on
the basis of our relationships with the issuers and potential investors, our
experience in the industry and transactional fees. In our general brokerage
activities, we compete directly with numerous other broker-dealers, many of
which are large well-known firms with substantially greater financial and
personnel resources. We compete for brokerage transactions on the basis of
our
experience in the industry, our ability to execute transactions and the strength
of our relationships with our clients. Many of our competitors for brokerage
service and investment banking transactions employ extensive advertising and
actively solicit potential clients in order to increase business. In addition,
brokerage firms compete by furnishing investment research publications to
existing clients, the quality and breadth of which are considered important
in
the development of new business and the retention of existing clients. We also
compete with a number of smaller regional brokerage firms throughout the United
States. In our advisory activities, we compete with investment banking and
consulting firms on the basis of expertise in our broad variety of
industries.
The
securities industry has become considerably more concentrated and more
competitive since we were founded, as numerous securities firms have either
ceased operations or have been acquired by or merged into other firms. In
addition, companies not engaged primarily in the securities business, but with
substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with greater capital
resources than ours.
Since
the
adoption of the Gramm-Leach-Bliley Act of 1999, commercial banks and thrift
institutions have been able to engage in traditional brokerage and investment
banking services, thus increasing competition in the securities industry and
potentially increasing the rate of consolidation in the securities
industry.
We
also
compete with other securities firms for successful sales representatives,
securities traders and investment bankers. Competition for qualified employees
in the financial services industry is intense. Our continued ability to compete
effectively depends on our ability to attract new employees and to retain and
motivate our existing employees.
Government
Regulation
Regulation
of the Securities Industry and Broker-Dealers
Our
business is subject to extensive regulation applicable to the securities
industry in the United States and elsewhere. As a matter of public policy,
regulatory bodies in the United States and the rest of the world are charged
with safeguarding the integrity of the securities and other financial markets
and with protecting the interests of customers participating in those markets.
In the United States, the SEC is the federal agency responsible for the
administration of the federal securities laws. In general, broker-dealers are
required to register with the SEC under the Securities Exchange Act of 1934,
as
amended (the "Exchange Act"). Under the Exchange Act, every registered
broker-dealer that does business with the public is required to be a member
of
and is subject to the rules of the NASD. The NASD administers qualification
testing for all securities principals and registered representatives for its
own
account and on behalf of the state securities authorities. vFinance Investments
and EquityStation are broker-dealers registered with the SEC and members of
the
NASD.
Our
broker-dealers are also subject to regulation under state law. vFinance
Investments and EquityStation are currently registered as broker-dealers
in all
50 states and the District of Columbia. The NASD approved the change of
ownership to us of (i) Union Atlantic Capital, L.C. from Pinnacle Capital
Group,
L.C., (ii) First Level Capital, Inc. from NWH, (iii) First Colonial Securities
Group, Inc., (iv) Global Partners and EquityStation, and (v) Sterling Financial.
A recent amendment to the federal securities laws prohibits the states from
imposing substantive requirements on broker-dealers that exceed those imposed
under federal law. The amendment, however, does not preclude the states from
imposing registration requirements on broker-dealers that operate within
their
jurisdiction or from sanctioning these broker-dealers who have engaged in
misconduct.
The
SEC,
self-regulatory organizations, such as the NASD, and state securities
commissions may conduct administrative proceedings which can result in censure,
fine, the issuance of cease-and-desist orders, or the suspension or expulsion
of
a broker-dealer, its officers, or its employees. The SEC and self-regulatory
organization rules cover many aspects of a broker-dealer's business, including
capital structure and withdrawals, sales methods, trade practices among
broker-dealers, use, and safekeeping of customers' funds and securities,
record-keeping, the financing of customers' purchases, broker-dealer and
employee registration, and the conduct of directors, officers, and employees.
Additional legislation, changes in rules promulgated by the SEC and
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules, may directly affect the mode of operation and
profitability of broker-dealers.
The
Uniform Net Capital Rule and NASD rules require prior notice to the SEC and
the
NASD for certain withdrawals of capital and also provide that the SEC may
restrict for up to 20 business days any withdrawal of equity capital, or
unsecured loans or advances to shareholders, employees or affiliates if the
capital withdrawal, together with all other net capital withdrawals during
a
30-day period, exceeds 30% of excess net capital and the SEC concludes that
the
capital withdrawal may be detrimental to the financial integrity of the
broker-dealer.
In
addition, the Uniform Net Capital Rule provides that the total outstanding
principal amount of a broker-dealer's indebtedness under certain subordination
agreements, the proceeds of which are included in its net capital, may not
exceed 70% of the sum of the outstanding principal amount of all subordinated
indebtedness included in net capital, par or stated value of capital stock,
paid
in capital in excess of par, retained earnings and other capital accounts for
a
period in excess of 90 days. A change in the Uniform Net Capital Rule, the
imposition of new rules or any unusually large charge against net capital could
limit those parts of our operations that require the intensive use of capital
and also could restrict our ability to pay dividends, repay debt and repurchase
shares of our outstanding stock.
As
of
April 25, 2007, the minimum amount of net capital required to be maintained
by
vFinance Investments was $1,000,000 and the minimum amount of net capital
required to be maintained by our wholly-owned subsidiary, EquityStation was
$100,000. A significant operating loss or any unusually large charge against
net
capital could adversely affect our ability to expand or even maintain our
present levels of business, which could have a material adverse affect on
our
business and operations. vFinance Investments and EquityStation are members
of
SIPC which provides, in the event of the liquidation of a broker-dealer,
protection for clients' accounts up to $500,000, subject to a limitation
of
$100,000 for claims for cash balances. VFinance Investments' retail clients'
accounts are carried on the books and records of NFS and Legent Clearing.
NFS
has obtained additional insurance from a private insurer, Customer Asset
Protection Co. (CAPCO), for the full value of the customer's account in excess
of the standard SIPC coverage. The client accounts for EquityStation are
carried
on the books and records of Merrill Lynch, Pierce, Fenner &
Smith.
Application
of Laws and Rules to Internet Business and Other Online
Services
Due
to
the increasing popularity and use of the Internet and other online services,
various regulatory authorities are considering laws and/or regulations with
respect to the Internet or other online services covering issues such as user
privacy, pricing, content copyrights and quality of services. In addition,
the
growth and development of the market for online commerce may prompt more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business online. When the Securities Act of 1933, as
amended ("the "Securities Act"), which governs the offer and sale of securities,
and the Exchange Act, which governs, among other things, the operation of the
securities markets and broker-dealers, were enacted, such acts did not
contemplate the conduct of a securities business through the Internet and other
online services. The recent increase in the number of complaints by online
traders could lead to more stringent regulations of online trading firms and
their practices by the SEC, NASD and other regulatory agencies.
Although
the SEC, in releases and no-action letters, has provided guidance on various
issues related to the offer and sale of securities and the conduct of a
securities business through the Internet, the application of the laws to the
conduct of a securities business through the Internet continues to evolve.
Furthermore, the applicability to the Internet and other online services of
existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes and personal privacy is uncertain and may
take
years to resolve. Uncertainty regarding these issues may adversely affect the
viability and profitability of our business.
As
our
services, through our subsidiaries, are available over the Internet in multiple
jurisdictions, and as we, through our subsidiaries, have numerous clients
residing in these jurisdictions, these jurisdictions may claim that our
subsidiaries are required to qualify to do business as a foreign corporation
in
each such jurisdiction. While vFinance Investments and EquityStation are
currently registered as broker-dealers in the jurisdictions described in
this
prospectus, vFinance Investments, EquityStation and our non-broker dealer
subsidiaries are qualified to do business as corporations in only a few
jurisdictions. Failure to qualify as an out-of-state or foreign corporation
in a
jurisdiction where we are required to do so could subject us to taxes and
penalties for the failure to qualify.
Intellectual
Property
We
own
the following federally registered marks: vFinance, Inc.®, vFinance.com, Inc.®,
AngelSearch®, Direct2Desk® and Hedge Fund Accelerator®.
Employees
At
April
25, 2007, we employed the following personnel:
Position
|
|
Salaried
|
|
Contract
|
|
Total
|
|
|
|
|
|
|
|
|
|
Officers
|
|
|
12
|
|
|
-
|
|
|
12
|
|
Administration
|
|
|
28
|
|
|
20
|
|
|
48
|
|
Brokers
|
|
|
28
|
|
|
119
|
|
|
147
|
|
Traders
|
|
|
21
|
|
|
3
|
|
|
24
|
|
Investment
Bankers
|
|
|
6
|
|
|
14
|
|
|
20
|
|
Web
Operations
|
|
|
3
|
|
|
-
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
98
|
|
|
156
|
|
|
254
|
|
None
of
our personnel are covered by a collective bargaining agreement. We consider
our
relationships with our employees to be good. Any future increase in the number
of employees will depend upon the growth of our business. Our registered
representatives are required to take examinations administered by the NASD
and
state authorities in order to qualify to transact business and are required
to
enter into agreements with us obligating them, among other things, to adhere
to
industry rules and regulations, our supervisory procedures and not to solicit
customers in the event of termination.
Seasonality
and Backlog
Our
business is not subject to significant seasonal fluctuations, and there are
no
material backlogs in our business.
Research
and Development and Environmental Matters
We
did
not incur any research and development expenses during the last three fiscal
years. We do not incur any significant costs or experience any significant
effects as a result of compliance with federal, state and local environmental
laws.
Description
of Property
The
Company leases office space in four locations. The following chart provides
information related to these lease obligations:
Office
Location
|
|
Approximate
Square Footage
|
|
Lease
Rental
|
|
Expiration
Date
|
|
3010
N. Military, Boca Raton, FL
|
|
|
15,750
|
|
$
|
523,164
|
|
|
2/28/2009
|
|
880
Third Ave., New York, NY
|
|
|
7,850
|
|
$
|
188,520
|
|
|
6/30/2008
|
|
131
Gaither Drive, Mount Laurel, NJ
|
|
|
1,400
|
|
$
|
19,600
|
|
|
9/31/2008
|
|
1200
N. Federal Highway, Boca Raton FL
|
|
|
16,250
|
|
$
|
581,050
|
|
|
7122/2014
|
|
Our
corporate headquarters are located at 3010 North Military Trail, Boca Raton,
Florida 33431, where we lease 15,756 square feet for an annual rent of $523,164.
The lease expires on February 28, 2009.
On
December 15, 2004, we entered into a new lease at 880 Third Avenue, New York,
New York for office space on the twelfth floor with an annual rent of $188,520
for approximately 7,850 square feet. The lease expires on June 30, 2008.
On
August
1, 2004, we entered into a lease in Mt. Laurel, New Jersey. The opening of
this
office was part of our disaster recovery plan implemented in order to be able
to
provide our clients with uninterrupted service. The lease is for approximately
1,400 square feet with an annual rent of $19,600 and expires on September 31,
2008.
Effective
September 27, 2006, vFinance Investments entered into a lease for property
located in Boca Raton for additional office. The lease is for approximately
16,250 square feet with an estimated annual rent of $581,050 and expires on
July
22, 2014.
We
consider the facilities of our company and our subsidiaries to be reasonably
insured and adequate for the foreseeable needs of our company and its
subsidiaries.
Legal
Proceedings
From
time
to time, vFinance, Inc. and/or one of our subsidiaries is named as a party
to a
lawsuit that has arisen in the ordinary course of business. Although it is
possible that losses exceeding amounts already recorded may be incurred upon
ultimate resolution of these existing legal proceedings, we believe that such
losses, if any, will not have a material adverse effect on our business, results
of operations or financial position; however, unfavorable resolution of each
matter individually or in the aggregate could affect the consolidated results
of
operations for the quarterly and annual periods in which they are
resolved.
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, we and/or our subsidiaries may be parties to other
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
our financial condition or results of operations and/or our subsidiaries. The
following is a brief summary of certain matters pending against or involving
us
and our 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 rightfully belong to Knight. vFinance Investments asserted 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 us, claiming that we wrongfully terminated his
independent contractor agreement with us and that we "stole" his clients
and
brokers. Mr. Matthews has obtained a temporary restraining order and an agreed
upon injunction was issued by the NASD panel. Mr. Matthews and JMS Capital
Holding Corp. ("JMS"), a plaintiff in the arbitration action, also request
unspecified damages resulting from our alleged improper activity. The full
hearing on the merits was postponed and has not yet been rescheduled. We
intend
to vigorously defend this matter. In addition to contesting and defending
against JSM's and Mr. Matthews claims, we filed a counterclaim for indemnity
based upon the contractual agreement between the parties.
On
or
about April 2005 Gregory F. and Ruth A. Whitten filed an arbitration action
(NASD Case No. 05-02103) with NASD naming vFinance Investments, Inc., as
a
Co-Respondent. The Statement of Claim filed in this action alleges, negligent
and intentional misrepresentations, breach of fiduciary duty, violation of
Washington State Securities Act, and violation of the Washington Consumer
Protection Act, in connection with the handling of claimants' brokerage accounts
by Robert Agriogianis. The Statement of Claim alleges compensatory damages
in
excess of $445,000 plus interest, costs, and attorney's fees. vFinance has
filed
an Answer and Affirmative Defenses with NASD and discovery is substantially
complete. The Final Hearing is set for May 2, 3, & 4, 2007. vFinance
Investments denies any liability to Gregory F. and Ruth A. Whitten and intends
to vigorously defend against their claim.
We
are
engaged in a number of other legal proceedings incidental to the conduct of
our
business. These claims aggregate within the range of $50,000 to
$260,000.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
This
discussion presents management’s analysis of our results of operations and
financial condition as of and for each of the years ended December 31, 2006,
2005 and 2004, respectively. The discussion should be read in conjunction with
our audited consolidated financial statements and the notes related thereto
which appear elsewhere in this prospectus.
We
have
restated and revised certain amounts in our 2005 and 2004 Consolidated Financial
Statements as a result of comments we received from the staff of the Securities
and Exchange Commission. As a result of these restatements and revisions, our
total revenues and income (loss) from operations increased (decreased) from
previously reported amounts by $244,400 and $(137,7000), respectively, in 2005
and $170,700 and $(17,600), respectively, in 2004. Additionally, our net income
(loss) increased (decreased) from previously reported amounts by $137,700 ($0.01
per share) and $(128,000) ($0.01 per share) in 2005 and 2004, respectively.
See
Note 1 to our Consolidated Financial Statements included in this prospectus
for
additional discussion of the restatement and revision.
In
addition to the aforementioned restatement and revision, certain
reclassifications of amounts previously reported have been made to the
accompanying Consolidated Financial Statements in order to maintain consistency
and comparability between periods presented.
Overview
We
are a
global financial services company which specializes in high growth
opportunities. Our insight into this marketplace flows from three principal
lines of business: providing investment banking and advisory services to micro,
small and mid-cap high growth companies; making markets in over 3,000 micro
and
small cap stocks; and offering information services on our website, a leading
destination for emerging companies seeking capital and investors seeking
opportunities. Due to our focus, we believe we are uniquely positioned to offer
alternative investments to institutional and high net-worth investors seeking
to
outperform market indices in addition to offering a full range of investment
options. With over 40 offices in the U.S. and other parts of the world, we
serve
more than 12,000 corporate, institutional and high net worth clients. vFinance
Investments, Inc. ("vFinance Investments, Inc.") and EquityStation, Inc.
("EquityStation"), both our subsidiaries, are broker-dealers registered with
the
Securities and Exchange Commission ("SEC"), and members of National Association
of Securities Dealers ("NASD") and Securities Investor Protection Corporation
("SIPC"). vFinance Investments is also a member of the National Futures
Association ("NFA").
In
May
2006, we completed the acquisition of select assets of Sterling Financial Group
(the "Sterling Financial Acquisition"), following the acquisition of certain
assets of Global Partners Securities, Inc. ("Global") and 100% of the issued
and
outstanding equity securities of EquityStation in November 2004 (the "Global
Acquisition"). These acquisitions are reflected in our financial statements
from
their respective transaction dates, affecting the comparability of our results
of operations in the years ended December 31, 2006, 2005 and 2004, as discussed
in the sections that follow. See Note 4, "Acquisitions," to our Consolidated
Financial Statements included in this prospectus for further information about
the Sterling Financial and Global Acquisitions.
The
largest portion of our revenues, 62%, 72% and 65% in 2006, 2005 and 2004,
respectively, was attributable to retail brokerage commissions and other
brokerage-related income generated by our wholly owned broker-dealer
subsidiaries, vFinance Investments and EquityStation. Our retail brokerage
operations buy and sell securities for our customers from other dealers on
an
agency basis, and charge our customers a commission for our services. Such
commission revenue is derived from brokerage transactions in listed and
over-the-counter securities and mutual fund securities. We also generated 25%,
16% and 19% of our revenues through trading profits generated in our market
making activities in 2006, 2005 and 2004, respectively. The majority of our
remaining revenues are derived primarily from investment banking-related success
and consulting fees.
We
reported a net loss of $2.1 million ($0.04 per basic and diluted share) in
2006,
compared to $1.0 million ($0.02 per basic and diluted share) in 2005. Our
revenues increased $12.5 million in 2006, or 48%, principally as a result
of the
Sterling Financial Acquisition and improved market conditions for our investment
banking and trading businesses. Increases in compensation, commissions and
benefit expenses, clearing and transaction costs and occupancy and equipment
costs related to the increased revenues and the Sterling Financial Acquisition
offset these increased revenues. Additionally, we recorded $448,200 of
stock-based compensation expense in 2006 compared to $19,400 in 2005, as
a
result of the implementation of Statement of Financial Accounting Standards
No.
123 (revised 2004), "Share Based Payment" ("SFAS No. 123R"). Our depreciation
and amortization expense also increased by $512,400 in 2006, primarily as
a
result of amortization expense recorded in connection with the Sterling
Financial Acquisition.
We
reported a net loss of $1.0 million ($0.02 per basic and diluted share) in
2005,
compared to net income of $2.4 million ($0.07 per basic and diluted share)
in
2004. During 2005, our revenues decreased $429,300, or 2%, primarily as a result
of less favorable market conditions for the investment banking and trading
businesses in 2005 than in 2004, while our clearing and transaction costs
increased $737,900 in 2005, principally as a result of the addition of the
EquityStation platform business and increases in execution fees for wholesale
trading. Additionally, our depreciation and amortization expense increased
$280,200 in 2005, primarily as a result of the Global Acquisition, and we
recorded a goodwill impairment charge of $420,000. During 2004, we recorded
a
$1.5 million gain on forgiveness of debt, in connection with the termination
of
a credit agreement.
Results
of Operations
The
following table and discussion summarizes the changes in the major revenue
and
expense categories for the past three years, with 2005 and 2004 having been
restated:
|
|
As
of and for the Years Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change
|
|
2004
|
|
Change
|
|
%
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
- agency
|
|
$
|
20,323,700
|
|
$
|
15,941,200
|
|
$
|
4,382,500
|
|
|
27
|
%
|
$
|
14,571,900
|
|
$
|
1,369,300
|
|
|
9
|
%
|
Trading
profits
|
|
|
9,606,000
|
|
|
4,177,400
|
|
|
5,428,600
|
|
|
130
|
%
|
|
5,156,800
|
|
|
(979,400
|
)
|
|
(19
|
)%
|
Success
fees
|
|
|
4,523,500
|
|
|
2,250,500
|
|
|
2,273,000
|
|
|
101
|
%
|
|
3,395,600
|
|
|
(1,145,100
|
)
|
|
(34
|
)%
|
Other
brokerage related income
|
|
|
3,546,000
|
|
|
2,837,600
|
|
|
708,400
|
|
|
25
|
%
|
|
2,567,500
|
|
|
270,100
|
|
|
11
|
%
|
Consulting
fees
|
|
|
375,400
|
|
|
523,600
|
|
|
(148,200
|
)
|
|
(28
|
)%
|
|
370,800
|
|
|
152,800
|
|
|
41
|
%
|
Other
|
|
|
220,300
|
|
|
340,400
|
|
|
(120,100
|
)
|
|
(35
|
)%
|
|
437,400
|
|
|
(97,000
|
)
|
|
(22
|
)%
|
Total
revenues
|
|
|
38,594,900
|
|
|
26,070,700
|
|
|
12,524,200
|
|
|
48
|
%
|
|
26500,000
|
|
|
(429,300
|
)
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation,
commissions and benefits
|
|
|
31,232,000
|
|
|
20,313,300
|
|
|
10,918,700
|
|
|
54
|
%
|
|
19,791,000
|
|
|
522,300
|
|
|
3
|
%
|
Clearing
and transaction costs
|
|
|
4,337,200
|
|
|
2,977,200
|
|
|
1,360,000
|
|
|
46
|
%
|
|
2,239,300
|
|
|
737,900
|
|
|
33
|
%
|
General
and administrative costs
|
|
|
3,158,800
|
|
|
2,332,800
|
|
|
826,000
|
|
|
35
|
%
|
|
2,310,200
|
|
|
22,600
|
|
|
1
|
%
|
Occupancy
and equipment costs
|
|
|
1,166,600
|
|
|
743,300
|
|
|
423,300
|
|
|
57
|
%
|
|
475,600
|
|
|
267,700
|
|
|
56
|
%
|
Depreciation
and amortization
|
|
|
958,700
|
|
|
446,300
|
|
|
512,400
|
|
|
115
|
%
|
|
166,100
|
|
|
280,200
|
|
|
169
|
%
|
Goodwill
impairment
|
|
|
—
|
|
|
420,000
|
|
|
(420,000
|
)
|
|
100
|
%
|
|
—
|
|
|
420,000
|
|
|
nm
|
|
Total
operating costs
|
|
|
40,853,300
|
|
|
27,232,900
|
|
|
13,620,400
|
|
|
50
|
%
|
|
24,982,200
|
|
|
2,250,700
|
|
|
9
|
%
|
Income
(loss) from operations
|
|
|
(2,258,400
|
)
|
|
(1,162,200
|
)
|
|
(1,096,200
|
)
|
|
94
|
%
|
|
1,517,800
|
|
|
(2,680,000
|
)
|
|
(177
|
)%
|
nm
- not
meaningful
|
|
As
of and for the Years Ended December 31
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change
|
|
2004
|
|
Change
|
|
%
Change
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on forgiveness of debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0
|
%
|
|
1,500,000
|
|
|
(1,500,000
|
)
|
(100)%
|
Interest
income
|
|
|
85,300
|
|
|
82,600
|
|
|
2,700
|
|
|
3
|
%
|
|
35,100
|
|
|
47,500
|
|
135
%
|
Interest
expense
|
|
|
(59,700
|
)
|
|
(30,700
|
)
|
|
(29,000
|
)
|
|
94
|
%
|
|
(394,400
|
)
|
|
363,700
|
|
(92)%
|
Dividend
income
|
|
|
22,500
|
|
|
5,900
|
|
|
16,600
|
|
|
281
|
%
|
|
27,300
|
|
|
(21,400
|
)
|
(78)%
|
Other
income (expense), net
|
|
|
76,800
|
|
|
104,800
|
|
|
(28,000
|
)
|
|
(27
|
)%
|
|
(231,000
|
)
|
|
335,800
|
|
Nm
|
Total
other income (expense)
|
|
|
124,900
|
|
|
162,600
|
|
|
(37,700
|
)
|
|
(23
|
)%
|
|
937,000
|
|
|
(774,400
|
)
|
(83)%
|
Income
(loss) before income taxes
|
|
|
(2,133,500
|
)
|
|
(999,600
|
)
|
|
(1,133,900
|
)
|
|
113
|
%
|
|
2,454,800
|
|
|
(3,454,400
|
)
|
(141)%
|
Income
tax benefit (provision)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
nm
|
|
|
(40,000
|
)
|
|
40,000
|
|
(100)%
|
Net
income (loss)
|
|
$
|
(2,133,500
|
)
|
$
|
(999,600
|
)
|
$
|
(1,133,900
|
)
|
|
113
|
%
|
$
|
2,414,800
|
|
$
|
(3,414,400
|
)
|
(141)%
|
nm
- not
meaningful
Results
of Operations
|
|
As
of and for the Years Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change (Restated and Revised)
|
|
2004
(Restated and Revised)
|
|
Change
|
|
%
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
- agency
|
|
$
|
20,323,700
|
|
$
|
15,941,200
|
|
$
|
4,382,500
|
|
|
27
|
%
|
$
|
14,571,900
|
|
$
|
1.369,300
|
|
|
9
|
%
|
Trading
profits
|
|
|
9,606,000
|
|
|
4,177,400
|
|
|
5,428,600
|
|
|
130
|
%
|
|
5,156,800
|
|
|
(979,400
|
)
|
|
(19
|
)%
|
Success
fees
|
|
|
4,523,500
|
|
|
2,250,500
|
|
|
2,273,000
|
|
|
101
|
%
|
|
3,395,600
|
|
|
(1,145,100
|
)
|
|
(34
|
)%
|
Other
brokerage related income
|
|
|
3,546,000
|
|
|
2,837,600
|
|
|
708,400
|
|
|
25
|
%
|
|
2,567,500
|
|
|
270,100
|
|
|
11
|
%
|
Consulting
fees
|
|
|
375,400
|
|
|
523,600
|
|
|
(148,200
|
)
|
|
(28
|
)%
|
|
370,800
|
|
|
152,800
|
|
|
41
|
%
|
Other
|
|
|
220,300
|
|
|
340,400
|
|
|
(120,100
|
)
|
|
(35
|
)%
|
|
437,400
|
|
|
(97,000
|
)
|
|
(22
|
)%
|
Total
revenues
|
|
$
|
38,594,900
|
|
$
|
26,070,700
|
|
$
|
12,524,200
|
|
|
48
|
%
|
$
|
26,500,000
|
|
|
(429,300
|
)
|
|
(2
|
)%
|
In
2006,
total revenues increased $12.5 million, or 48%, primarily as a result of the
Sterling Financial Acquisition and more favorable market conditions.
Approximately 43% of the $12.5 million increase is attributable to increased
trading profits, derived from the customer relationships acquired from Sterling
Financial in May 2006 and generally more favorable trading conditions in our
market making activities. An additional 35% of the 2006 revenue increase
resulted from higher agency commissions, attributable to the addition of new
brokers, through both the Sterling Financial Acquisition and other brokers
hired
independently. The majority of the remaining increase was due to higher revenues
from success fees relating to investment banking transactions, resulting
primarily from more favorable market conditions in 2006. Non-cash revenues
derived from success fees increased to $2.0 million in 2006 from $487,500 in
2005.
Total
revenues decreased 2% in 2005 compared to 2004, primarily as a result of 19%
and
34% decreases in trading profits and success fees, respectively, resulting
from
less favorable market conditions in 2005 than in 2004 for the trading and
investment banking businesses, respectively. Partially offsetting these factors,
was a 9% increase in retail agency commissions, attributable to a $1.6 million
increase in revenues from the customer relationships recorded in the Global
Acquisition, derived from having a full year of operations in 2005, compared
to
two months in 2004.
|
|
As
of and for the Years Ended December 31,
|
|
|
|
2006
|
|
2005
(Restated and Revised)
|
|
Change
|
|
%
Change
|
|
2004
(Restated and Revised)
|
|
Change
|
|
%
Change
|
|
Compensation,
commissions and benefits
|
|
$
|
31,232,000
|
|
$
|
20,313,300
|
|
$
|
10,918,700
|
|
|
54
|
%
|
$
|
19,791,000
|
|
$
|
522,300
|
|
|
3
|
%
|
Clearing
and transaction costs
|
|
|
4,337,200
|
|
|
2,977,200
|
|
|
1,360,000
|
|
|
46
|
%
|
|
2,239,300
|
|
|
737,900
|
|
|
33
|
%
|
General
and administrative costs
|
|
|
3,158,800
|
|
|
2,332,800
|
|
|
826,000
|
|
|
35
|
%
|
|
2,310,200
|
|
|
22,600
|
|
|
1
|
%
|
Occupancy
and equipment costs
|
|
|
1,166,600
|
|
|
743,300
|
|
|
423,300
|
|
|
57
|
%
|
|
475,600
|
|
|
267,700
|
|
|
56
|
%
|
Depreciation
and amortization
|
|
|
958,700
|
|
|
446,300
|
|
|
512,400
|
|
|
115
|
%
|
|
166,100
|
|
|
280,200
|
|
|
169
|
%
|
Goodwill
impairment
|
|
|
-
|
|
|
420,000
|
|
|
(420,000
|
)
|
|
(100
|
)%
|
|
-
|
|
|
420,000
|
|
|
nm
|
|
Total
operating costs
|
|
$
|
40,853,300
|
|
$
|
27,232,900
|
|
$
|
13,620,400
|
|
|
50
|
%
|
$
|
24,982,200
|
|
$
|
2,250,700
|
|
|
9
|
%
|
nm
- not
meaningful
Compensation,
commissions and benefits
Compensation,
commissions and benefits increased $10.9 million, or 54%, in 2006. Compensation,
commissions and benefits are correlated with to our revenues, which increased
48% in 2006, primarily as a result of the Sterling Financial Acquisition.
We
also recorded $448,200 of compensation expense in connection with the adoption
of SFAS No. 123R, effective January 1, 2006. Additional increases in
compensation, commissions and benefits are attributable to increased benefit
costs, particularly health insurance premiums. Non-cash compensation paid
increased to $1.4 million in 2006 from $158,100 in 2005.
Compensation,
commissions and benefits increased $522,300, or 3%, in 2005, primarily as a
result of increased personnel to support our growth resulting, in part, from
the
Global Acquisition, including the addition of a new senior management positions
and new staff positions.
Clearing
and transaction costs.
Clearing
and transaction costs increased $1.4 million in 2006, or 46%, primarily as
a
result of an increase in transaction volume attributable to customer
relationships acquired in the Sterling Financial Acquisition and the addition
of
other independent brokers.
Clearing
and transaction costs increased $737,900 in 2005, or 33%, primarily as a
result
of the addition of the EquityStation trading platform business and increases
in
execution fees for wholesale trading, resulting in higher
average transaction costs associated with trading activities.
General
and administrative costs.
General
and administrative expenses increased $826,000 in 2006, or 35%, primarily as
a
result of (i) a $303,000 increase in legal fees, primarily associated with
litigation and arbitration matters, (ii) $261,300 of non-cash costs associated
with the issuance of equity in connection with arbitration settlements, and
(iii) the forgiveness of $215,000 due from an unconsolidated
affiliate.
General
and administrative expenses increased $22,600 in 2005, or 1%, primarily as
a
result of the addition of a disaster recovery site in Mt. Laurel, New Jersey.
In
addition, we incurred non-cash expenses in 2005 of $80,000 for the impairment
of
our investment in an unconsolidated affiliate.
Occupancy
and equipment costs.
Occupancy
and equipment expenses increased $423,300 in 2006, or 57%, primarily as a result
of the occupancy and equipment costs associated with the Sterling Financial
Acquisition.
In
2005,
occupancy and equipment expenses increased $267,700, or 56%, primarily as a
result of increased rent expense due to expansion of our leased facilities
at
the corporate offices in Boca Raton and New York City and the addition of a
disaster recovery leased location in Mt. Laurel, New Jersey.
Depreciation
and amortization.
Depreciation
and amortization increased $512,400 in 2006, or 115%, primarily as a result
of
the amortization expense associated with the customer relationships from the
Sterling Acquisition.
In
2005,
depreciation and amortization increased $280,200, or 169%, primarily as a result
of the amortization expense associated with the customer relationships from
the
EquityStation Acquisition.
Goodwill
impairment.
In
2005,
we recorded goodwill impairment charges of $420,000 to write-off goodwill from
a
prior period acquisition, when certain brokers left the firm and we determined
there was no longer value remaining in the goodwill recorded in connection
with
the acquisition. We had no goodwill remaining at December 31, 2006 or 2005.
Other
Income (Expense)
|
|
As
of and for the Years Ended December 31,
|
|
|
|
2006
|
|
2005
(Restated
and Revised)
|
|
Change
|
|
%
Change
|
|
2004
(Restated
and Revised)
|
|
Change
|
|
%
Change
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on forgiveness of debt
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
0
|
%
|
$
|
1,500,000
|
|
$
|
(1,500,000
|
)
|
|
(100
|
)%
|
Interest
income
|
|
|
85,300
|
|
|
82,600
|
|
|
2,700
|
|
|
3
|
%
|
|
35,100
|
|
|
47,500
|
|
|
135
|
%
|
Interest
expense
|
|
|
(59,700
|
)
|
|
(30,700
|
)
|
|
(29,000
|
)
|
|
94
|
%
|
|
(394,400
|
)
|
|
363,700
|
|
|
(92
|
)%
|
Dividend
income
|
|
|
22,500
|
|
|
5,900
|
|
|
16,600
|
|
|
281
|
%
|
|
27,300
|
|
|
(21,400
|
)
|
|
(78
|
)%
|
Other
income (expense), net
|
|
|
76,800
|
|
|
104,800
|
|
|
(28,000
|
)
|
|
(27
|
)%
|
|
(231,000
|
)
|
|
335,800
|
|
|
Nm
|
|
Total
other income (expense)
|
|
$
|
124,900
|
|
$
|
162,600
|
|
$
|
(37,700
|
)
|
|
(23
|
)%
|
$
|
937,000
|
|
$
|
(774,400
|
)
|
|
(83
|
)%
|
nm
- not
meaningful
During
2004, we recorded a $1.5 million gain on forgiveness of debt as a result of
an
agreement between us and our clearing broker, pursuant to which our clearing
broker agreed to repay a credit facility under which we owed $1.5 million.
See
Note 11 to the Consolidated Financial Statements included in this prospectus
for
additional discussion on this gain.
Interest
expense increased $29,000 in 2006, or 94% primarily as a result of an increase
in capital lease obligations arising from acquisitions of computer equipment.
Interest expense decreased $363,700 in 2005, or 92%, primarily as a result
of
the elimination of interest expenses associated with the $1.5 million of debt
forgiven in 2004.
Other
income, net decreased $28,000 in 2006, or 27%, primarily because 2005 results
included income from an arbitration settlement, which did not recur in 2006,
Partially offsetting this factor was by sublease rental income recorded in
connection with the sublease of property assumed in connection with the Sterling
Financial Acquisition.
We
recorded other income, net of $104,800 in 2005, compared to other expense,
net
of $231,000 in 2004. Other income, net included $62,500 received in the
settlement of a legal matter in 2005. Other expenses, net, were comprised
primarily of $231,600 of conversion premium expense recorded in connection
with
a note conversion in 2004.
Income
Tax Provision (Benefit)
We
account for income taxes in accordance with the provision of SFAS No. 109,
"Accounting for Income Taxes," which requires the recognition of deferred
tax
assets and liabilities at tax rates expected to be in effect when these balances
reverse. Future tax benefits attributable to temporary differences are
recognized to the extent that the realization of such benefits is more likely
than not. We have concluded that it is more likely than not that our deferred
tax assets as of December 31, 2006 and 2005 will not be realized based on
the
scheduling of deferred tax liabilities and projected taxable income. The
amount
of the deferred tax assets actually realized, however, could vary if there
are
differences in the timing or amount of future reversals of existing deferred
tax
liabilities or changes in the actual amounts of future taxable income. Should
we
determine that we will be able to realize all or part of the deferred tax
asset
in the future, an adjustment to the deferred tax asset will be recorded in
the
period
such determination is made.
We
did
not record a provision for income taxes in 2006 or 2005 as a result of the
net
loss we recorded in those periods.
We
recorded a provision for income taxes of $40,000 in 2004 as a result of
Alternative Minimum Taxes under the Internal Revenue Service Code.
Liquidity
and Capital Resources
Historically,
we have satisfied our liquidity and regulatory capital needs through the
issuance of equity and debt securities. As of December 31, 2006, liquid assets
consisted primarily of cash and cash equivalents of $4.2 million and marketable
securities of $1.4 million, for a total of $5.6 million, which is approximately
$300,000 higher than $5.3 million in liquid assets as of December 31, 2005.
As
of December 31, 2006, we had long-term capital lease obligations of $125,600,
net of current obligations of $210,800.
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 and requires that the ratio of aggregate indebtedness to net capital,
both as defined, shall not exceed 15 to 1 (and the rule of the "applicable"
exchange also provides that equity capital may not be withdrawn or cash
dividends paid if the resulting net capital ratio would exceed 10 to 1). At
December 31, 2006, vFinance Investments had net capital of $1.5 million, which
was $514,500 in excess of its required net capital of $1.0 million.
EquityStation had net capital of $427,300 that was $327,300 in excess of its
required net capital of $100,000.
For
the
periods ended December 31, 2006 and 2005, we had gross deferred tax assets
of
$5.3 million and $4.6 million, respectively, which were offset by 100% valuation
allowances. The valuation allowances were recorded against certain deferred
tax
assets that were generated from net operating losses. In evaluating whether
we would recover these deferred tax assets, we have not assumed any future
taxable income in the jurisdictions associated with these carry-forwards.
Based
on our history of generating operating losses, management believes the ability
to realize the benefit of net operating loss carry-forwards to offset future
taxable income is uncertain. However, future income generation and/or the
use of
tax planning strategies to recover these deferred tax assets could lead to
the
reversal of the valuation allowances and a reduction in future income tax
expense. We believe that our estimates for the valuation allowance are
appropriate, based on current facts and circumstances.
Cash
and
cash equivalents increased (decreased) by $(222,200), $(828,900) and $1.5
million during 2006, 2005 and 2004, respectively. The major components of these
changes are discussed below.
Cash
provided by (used in) operating activities was $(55,600) in 2006 compared to
$(708,500) in 2005 and $1,409,800 in 2004. Cash provided by (used in) operating
activities includes net income adjusted for non-cash items and the effects
of
changes in working capital including changes in trading securities. Cash used
in
operating activities decreased by $652.9 million in 2006, primarily as a result
of a $405,200 decrease in amounts due from clearing brokers and accounts
receivable and a $716,000 increase in accrued compensation, partially offset
by
a $413.4 increase in trading securities.
Cash
used
in operating activities was $708,500 in 2005, compared to cash provided by
operating activities of $1.4 million in 2004, primarily as a result of a $3.4
million reduction in net income, partially offset by the effect of a $1.5
million non-cash gain on forgiveness of debt included in net income in
2004.
Cash
provided by (used in) investing activities in 2006 was $41,900 compared to
$(90,500) in 2005 and $79,000 in 2004. Cash used in investing activities
included capital expenditures of $222,700, $125,700 and $245,800 in 2006, 2005
and 2004, respectively, excluding non-cash additions to property and equipment
through capital leases. Cash provided by investing activities includes the
proceeds from sales of securities we received as success fees for investment
banking services of $426,500, $35,200 and $268,600 in 2006, 2005 and 2004,
respectively. Cash used in investing activities in 2006 also included a $161,900
investment in an unconsolidated affiliate.
Cash
used
in financing activities in 2006 was $208,500 compared to $29,900 in 2005 and
$16,300 in 2004. Cash used in financing activities was comprised of repayments
of capital lease obligations of $208,500, $143,400 and $16,300 in 2006, 2005
and
2004, respectively, partially offset by proceeds from the exercise of stock
options of $113,500 in 2005. Repayments of capital lease obligations increased
in 2006 as a result of new capital lease agreements for computer equipment,
which we entered into during 2005 and 2006 in connection with the implementation
of our disaster recovery plan and growth.
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. 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.
Contractual
Obligations
The
following table summarizes our future contractual commitments as of December
31,
2006, consisting of debt payments related to capital leases and future minimum
lease payments under all non-cancelable operating leases with initial or
remaining terms in excess of one year.
|
|
Total
|
|
2007
|
|
2008
- 2009
|
|
2010
- 2011
|
|
2012
and later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations
|
|
$
|
361,800
|
|
$
|
242,400
|
|
$
|
119,400
|
|
$
|
-
|
|
$
|
-
|
|
Operating
lease obligations
|
|
|
5,864,100
|
|
|
1,356,400
|
|
|
1,974,900
|
|
|
1,246,200
|
|
|
1,286,600
|
|
Total
|
|
$
|
6,225,900
|
|
$
|
1,598,800
|
|
$
|
2,094,300
|
|
$
|
1,246,200
|
|
$
|
1,286,600
|
|
Off
Balance-Sheet Arrangements
We
were
not a party to any off-balance sheet arrangements during the three years ended
December 31, 2006. In particular, we do not have any interest in so-called
limited purpose entities, which include special purpose entities and structured
finance entities.
Critical
Accounting Policies and Estimates
This
discussion and analysis of financial condition and results of operations is
based on our Consolidated Financial Statements, which have been prepared in
accordance with United States generally accepted accounting principles.
The preparation of these financial statements requires our management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, and expenses, as well as related disclosures of contingent assets
and
liabilities. We evaluate our estimates on an ongoing basis and we base our
estimates on historical experience and various other assumptions we deem
reasonable to the situation. These estimates and assumptions form the basis
for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Changes in our estimates could
materially impact our results of operations and financial condition in any
particular period. Note 1 to our Consolidated Financial Statements includes
a
summary of the significant accounting policies and methods used in the
preparation of our Consolidated Financial Statements. Based on the high degree
of judgment or complexity in their application, we consider our critical
accounting policies and estimates to be:
Revenue
Recognition. We
periodically receive equity instruments, which include stock purchase warrants
and common and preferred stock from companies as part of compensation for
investment-banking services, which are classified as available-for-sale
securities in the accompanying Consolidated Balance Sheets. Primarily all
such
equity instruments are received from small public companies and are typically
restricted as to resale, generally receiving registration rights within one
year. When we receive equity instruments as compensation for investment banking
services, revenue is recognized based on the fair value of these instruments,
in
accordance with SFAS No. 115 "Accounting for Certain Investments in Debt
and
Equity Securities" and EITF 00-8 "Accounting by a Grantee for an Equity
Instrument to be received in Conjunction with Providing Goods or Services.” We
recognize revenue for these stock purchase warrants when received based on
the
Black Scholes valuation model. The revenue recognized related to other equity
instruments is determined based on available market information, discounted
by a
factor reflective of the expected holding period for those particular equity
instruments. The actual amount of cash proceeds realized from the disposition
of
these securities may differ materially from the amount of revenue recorded,
as a
result of changes in market values between the date of receipt and the date
the
security is sold.
Occasionally,
we receive equity instruments in private companies with no readily available
market value. Equity interests and warrants for which there is not a public
market are valued based on factors such as significant equity financing by
sophisticated, unrelated new investors, history of positive cash flow from
operations, the market value of comparable publicly traded companies (discounted
for liquidity) and other pertinent factors. Management also considers recent
offers to purchase a portfolio company's securities and the filings of
registration statements in connection with a portfolio company's initial public
offering when valuing warrants.
Customer
Claims. In
the
normal course of business, our operating subsidiaries have been and continue
to
be the subject of numerous civil actions and arbitrations arising out of
customer complaints relating to activities as a broker-dealer, as an employer
and as a result of other business activities. In general, the cases involve
various allegations that our employees mishandled customer accounts. Based
on
our historical experience and consultation with counsel, we typically reserve
an
amount we believe will be sufficient to cover any damages assessed against
us.
However, we have in the past been assessed damages that exceeded our reserves.
If we misjudged the amount of damages that may be assessed against us from
pending or threatened claims or if we are unable to adequately estimate the
amount of damages that will be assessed against us from claims that arise in
the
future and reserve accordingly, our operating income would be
reduced.
Fair
Value. "Investments
in trading securities" and "Securities sold, not yet purchased" on our
Consolidated Balance Sheets are carried at fair value or amounts that
approximate fair value, with related unrealized gains and losses recognized
in
our results of operations. The estimates of fair value are fundamental to our
financial condition and results of operations and, in certain circumstances,
require complex judgments. vFinance Investments relies upon its clearing firms
to provide us with these fair values, because the clearing firms use market
data
services that provide fair values of securities based on current market prices.
In the case of restricted securities, we further adjust the fair values of
securities received to reflect the restrictions.
Fair
values for certain derivative contracts are derived from pricing models that
consider current market and contractual prices for the underlying financial
instruments or commodities, as well as time value and yield curve or volatility
factors underlying the positions. Pricing models and their underlying
assumptions impact the amount and timing of unrealized gains and losses
recognized, and the use of different pricing models or assumptions could produce
different financial results. Changes in fixed income and equity markets will
impact our estimates of fair value in the future, potentially affecting
principal trading revenues. The illiquid nature of certain securities or debt
instruments also requires a high degree of judgment in determining fair value
due to the lack of listed market prices and the potential impact of the
liquidation of our position on market prices, among other factors.
New
Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No.
123R, and in March 2005 the SEC issued Staff Accounting Bulletin ("SAB")
107
regarding its interpretation of SFAS No. 123R. The standard requires companies
to expense the grant-date fair value of stock options and other equity-based
compensation issued to employees and is effective for annual periods beginning
after June 15, 2005. Effective January 1, 2006, we adopted SFAS No. 123R
and
related interpretive guidance issued by the FASB and SEC using the modified
prospective transition method. Under the modified prospective transition
method,
SFAS No. 123R applies to new awards modified, repurchased or cancelled after
the
required effective date. Additionally, compensation cost for the portion
of the
awards for which the requisite service period has not been rendered
as of the required effective date is recognized as the requisite service
is
rendered on or after the required effective date. Accordingly, our Consolidated
Financial Statements have not been restated for prior periods to reflect
the
adoption of SFAS No. 123R.
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections
-A
Replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154
requires that a voluntary change in accounting principle be applied
retroactively with all prior period financial statements presented on the
new
accounting principle, unless it is impractical to do so. This statement also
provides that a change in method of depreciating or amortizing a long-lived
non-financial asset be accounted for as a change in estimate (prospectively)
that was effected by a change in accounting principle. Additionally, correction
of errors in previously issued financial statements should be termed a
"restatement.” The new standard is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
We
adopted SFAS No. 154 effective January 1, 2006, which did not have a material
impact on our Consolidated Financial Statements. See Notes 1 and 9 to our
Consolidated
Financial Statements included in this prospectus for additional discussion
of
SFAS No. 123R.
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 our Consolidated Financial Statements. In September
2006,
the SEC issued SAB 108 to address diversity in practice in quantifying financial
statement misstatements and the potential for the build up of improper amounts
on the balance sheet. SAB 108 identifies the approach that registrants should
take when evaluating the effects of unadjusted misstatements on each financial
statement, the circumstances under which corrections of misstatements should
result in a revision to financial statements and disclosures related to the
correction of misstatements. SAB 108 is effective for any report for an interim
period of the first fiscal year ending after November 16, 2006. The adoption
of
SAB 108 did not have a material impact on our Consolidated Financial
Statements.
In
September 2006, the SEC issued SAB 108, to address diversity in practice in
quantifying financial statement misstatements and the potential for the build
up
of improper amounts on the balance sheet. SAB 108 identifies the approach that
registrants should take when evaluating the effects of unadjusted misstatements
on each financial statement, the circumstances under which corrections of
misstatements should result in a revision to financial statements, and
disclosures related to the correction of misstatements. SAB 108 is effective
for
any report for an interim period of the first fiscal year ending after November
16, 2006. The adoption of SAB 108 did not have a material impact on our
Consolidated Financial Statements.
In
June
2006, the FASB issued FASB Interpretation No. ("FIN") 48, "Accounting for
Uncertainty in Income Taxes.” This interpretation applies to all tax positions
accounted for in accordance with SFAS No. 109, Accounting for Income Taxes.
FIN
48 clarifies the application of FASB Statement No. 109 by defining the criteria
that an individual tax position must meet in order for the position to be
recognized within the financial statements. It also provides guidance on
measurement, de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition for tax positions. This
interpretation is effective for fiscal years beginning after December 15,
2006,
with earlier adoption permitted. The adoption of FIN 48 is not expected to
have
a material impact on our Consolidated Financial Statements.
In
February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments" which amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. "SFAS
No.
155 simplifies the accounting for certain derivatives embedded in other
financial instruments by allowing them to be accounted for as a whole if
the
holder elects to account for the whole instrument on a fair value basis.
SFAS
No. 155 also clarifies and amends certain other provisions of SFAS No. 133
and
SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired,
issued or subject to a remeasurement event occurring in fiscal years beginning
after September 15, 2006. The adoption of SFAS No. 155 is not expected to
have a
material impact on our Consolidated Financial Statements.
Effects
of Inflation and Foreign Currency Fluctuation
We
do not
believe that inflation or foreign currency fluctuations significantly affected
our financial position and results of operations as of and for the fiscal year
ended December 31, 2006.
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We
have
exposure to market risk, and periodically hedge against that risk. We do not
hold or issue any derivative financial instruments for trading or other
speculative purposes. We are exposed to market risk associated with changes
in
the fair market value of the marketable securities that we hold. Our 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 we hold 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 we may incur losses in its principal trading activities.
DIRECTORS
AND EXECUTIVE OFFICERS
The
following table sets forth the names, ages and positions of our executive
officers and directors as of April 25, 2007. Under our bylaws, each director
holds office until the election and qualification of his successor or until
his
earlier resignation or removal:
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Leonard
J. Sokolow
|
|
50
|
|
Chairman
and Chief Executive Officer
|
Charles
R. Modica
|
|
59
|
|
Director
|
Alan
B. Levin
|
|
43
|
|
Chief
Financial Officer
|
Richard
Campanella
|
|
55
|
|
Secretary
|
Leonard
J. Sokolow
has been
the chairman of our Board of Directors since January 1, 2007, one of our
directors since November 8, 1997 and our Chief Executive Officer since November
8, 1999. From January 5, 2001 through December 31, 2006, Mr. Sokolow was
our
President. From November 8, 1999 through January 4, 2001, Mr. Sokolow was
Vice
Chairman of our Board. Since September 1996, Mr. Sokolow has been President
of
Union Atlantic LC, a merchant, banking and strategic consulting firm
specializing domestically and internationally in technology industries that
is a
wholly-owned subsidiary of our Company. Union Atlantic LC has been inactive
since September 16, 2005. Since August 1993, Mr. Sokolow has been President
of
Genesis Partners, Inc., a private financial business-consulting firm. Genesis
Partners, Inc. has been inactive since December 31, 2002. From August 1994
through December 1998, Mr. Sokolow was the Chairman and Chief Executive Officer
of the Americas Growth Fund, Inc., a public closed-end management investment
company. Mr. Sokolow received his B.A. degree in Economics from the University
of Florida in 1977, a J.D. degree from the University of Florida Levin College
of Law in 1980 and an LL.M. degree in Taxation from the New York University
Graduate School of Law in 1982. Mr. Sokolow is a Certified Public Accountant.
He
is also a director of Consolidated Water Co. Ltd., a position he has held
since
May 2006.
Charles
R. Modica
has been
one of our directors since January 3, 2007. Mr. Modica has served as Chairman
of
the Board of Trustees and Chancellor of St. George's University located in
Grenada, West Indies, since founding the university as a School of Medicine
in
1976. He has served on the Board of Trustees of Barry University, Miami,
Florida, since 1983, and as Chairman of such Board of Trustees from 1997 -
2001.
Additionally, he served on the Board of Trustees of Rosarian Academy, West
Palm
Beach, Florida, from 1995 to 2001, and as Chairman of such Board of Trustees
from 1998 to 2001. Mr. Modica also has served on the Board of Trustees of WXEL
Public Radio and Television of Florida since 1998. Mr. Modica received his
B.S.
degree in Biology from Bethany College in 1970 and his J.D. degree from the
Delaware Law School in 1975.
Alan
B. Levin
has been
our Chief Financial Officer since January 2007. Mr. Levin had been our Interim
Chief Financial Officer since July 2006 and our Controller since June 2005.
Prior to joining us, Mr. Levin served as Chief Financial Officer for United
Capital Markets, Inc. from September 2000 to January 2005. Mr. Levin has over
18
years serving in various industries in accounting management roles. He has
spent
the last 8 years serving as Financial and Operations Principal within the
brokerage industry. He received a B.S. degree in Economics with a concentration
in Accounting from Southern Connecticut State University in New Haven,
Connecticut in 1986.
Richard
Campanella
has been
our Secretary since December 18, 2001. Mr. Campanella currently serves as the
President, Chief Operating Officer and Chief Compliance Officer of vFinance
Investments. He assumed the role of President and Chief Operating Officer of
vFinance Investments, Inc. as of January 2006. From February 1994 to April
2001,
Mr. Campanella was a partner of Commonwealth Associates, a registered
broker-dealer, where he served as the director of Compliance. He received a
B.
A. degree in Business Administration from
the
College of Staten Island in 1972.
In
connection with Mr. Mahoney's departure, Messrs. Mahoney and Sokolow entered
into a voting agreement dated December 29, 2006 (the "Voting Agreement"). Under
the terms of the Voting Agreement, as long as either party owns 1.0 million
shares of our common stock, as adjusted for stock splits and other
recapitalizations, each party will vote for the other party or his designee
to
serve on our Board of Directors.
Audit
Committee
Our
Board
of Directors serves as our audit committee. Leonard J. Sokolow has been
designated as an "audit committee financial expert" as such term is defined
in
the SEC's rules.
COMPENSATION
DISCUSSION & ANALYSIS
In
this
section, we will give an overview and analysis of our compensation program
and
policies, the material compensation decisions we have made under those programs
and policies, and the material factors that we considered in making compensation
decisions for our Named Executive Officers, as defined under the heading
"Executive Compensation.” Specific information regarding the compensation earned
by or paid to our Named Executive Officers in 2006 is set forth in a series
of
tables under the heading "Executive Compensation.” The discussion below is
intended to help you understand the detailed information provided in those
tables and put that information into context within our overall compensation
program.
Overview
of Compensation Program
Our
Board
of Directors has responsibility for establishing, implementing and continually
monitoring adherence with our compensation philosophy, maintaining competitive
compensation and structuring compensation to achieve our compensation
objectives. Generally, the types of compensation and benefits we provide to
our
Named Executive Officers are similar to those provided to our other executive
officers.
Compensation
Philosophy and Objectives
Our
Board
believes that compensation paid to our Named Executive Officers should be
aligned with our performance, and that compensation should be structured to
ensure that our Named Executive Officers' compensation opportunities are related
to achievement of our financial and operational goals, such as meeting targets
for profitability, revenue, cash flow, acquisitions and mergers, recruiting,
balance sheet objectives and operating within the capital expenditures budget,
all of which impact stockholder value. Our Board evaluates both performance
and
compensation to ensure that we maintain our ability to attract and retain highly
skilled and motivated employees in key positions and that compensation provided
to key employees remains competitive relative to the compensation paid to
similarly situated executives of our peer companies, which include Sanders
Morris Harris Group, Siebert Financial Corp., MCF Corporation, Ladenburg Thalman
Financial Services, Paulson Capital Corp., First Montauk Financial, Empire
Financial Holding Company, Investors Capital Holdings Ltd. and National Holdings
Corporation. To that end, our Board believes that the executive compensation
packages we provide to our executives, including our Named Executive Officers,
should include a mix of base salary and equity-based and incentive-based
compensation.
Our
compensation decisions with respect to our Named Executive Officer compensation
opportunities are influenced by (a) the executive's level of responsibility
and
function within the Company, (b) our overall performance and profitability,
and
(c) our assessment of the competitive marketplace, including our Peer Companies
located in our geographical business area.
Setting
Executive Compensation
Based
on
the foregoing philosophy and objectives, our Board has structured our Named
Executive Officers' base salary and equity-based and incentive-based
compensation to motivate executives to achieve our business goals and reward
the
executives for achieving such goals. In furtherance of this, our Board plans
to
reassess our compensation program as the employment agreements of our Named
Executive Officers come up for renewal to ensure that our goals and objectives
are achieved.
In
determining the compensation of our Named Executive Officers as set forth in
their most recent employment agreements, our Board reviewed (i) the Report
on
Compensation of Top Management in Small and Regional Firms - 2005, prepared
by
the Securities Industry Association, which covered compensation paid to
executive officers of 43 member firms; (ii) the Report on Management and
Professional Earnings in the Securities Industry - 2006, prepared by the
Securities Industry Association, which covered compensation information for
188
middle-management and professional positions; and (iii) the Report on Office
Salaries in the Securities Industry - 2006, prepared by the Securities Industry
Association, which provides compensation information for 95 non-exempt
positions. Using this information, our Board determined the total compensation
of our Named Executive Officers, pursuant to their current employment
agreements.
2006
Executive Compensation Components
For
the
fiscal year ended December 31, 2006, the principal components of compensation
for our Named Executive Officers were:
· |
equity-based
compensation;
|
· |
incentive-based
compensation; and
|
Base
Salary
Base
salaries for our executives are established based on the scope of their
responsibilities and their prior relevant background, training, and experience,
taking into account competitive market compensation paid by the companies
represented in the compensation data our Board reviewed for similar positions
and the overall market demand for such executives at the time of hire or entry
into employment agreements. As with total compensation, we believe that
executive base salaries should be competitive with the salaries paid to
executives in similar positions and with similar responsibilities in the
companies of comparable size to us represented in the compensation data
reviewed. An executive's base salary is also evaluated together with other
components of the executive's other compensation to ensure that the executive's
total compensation is in line with our overall compensation philosophy and
objectives.
Base
salaries are reviewed annually and increased based upon (i) a need to realign
base salaries with market levels for the same positions in the companies of
similar size to us represented in the compensation data reviewed; (ii) an
internal review of the executive's compensation, both individually and relative
to other executive officers; (iii) the individual performance of the executive
and (iv) an assessment of whether significant corporate goals were achieved.
Additionally, we adjust base salaries as warranted throughout the year for
promotions or other changes in the scope or breadth of an executive's role
or
responsibilities.
Equity-Based
Compensation
Under
the
terms of our Named Executive Officers' employment agreements, they are entitled
to receive equity-based compensation in the form of stock options. We believe
that equity compensation is an effective means of creating a long-term link
between the compensation provided to our Named Executive Officers and other
key
management personnel with gains realized by the stockholders. All stock options
incorporate the following features:
· |
the
term of the grant does not exceed 5
years;
|
· |
the
grant price is not less than the market price on the date of grant;
and
|
· |
options
vest 25% per year over four years beginning with the first anniversary
of
the date of grant.
|
We
use
stock options as a long-term incentive vehicle because:
· |
stock
options align the interests of executives with those of the stockholders,
support a pay-for-performance culture, foster employee stock ownership,
and focus the management team on increasing value for the
stockholders;
|
· |
stock
options are performance based (all of the value received by the recipient
from a stock option is based on the growth of the stock price above
the
option price); and
|
· |
the
five year vesting for stock options creates incentive for increases
in
stockholder value over a longer term and encourages executive
retention.
|
In
determining the number of options to be granted to Named Executive Officers,
we
take into account the individual's position, scope of responsibility, ability
to
affect profits and stockholder value, the individual's historic and recent
performance, and the value of stock options in relation to other elements of
total compensation.
Incentive-Based
Compensation
Discretionary
Bonus.
Our
former Chairman and our former Chief Financial Officer were, and our current
Chairman and Chief Executive Officer and our current Chief Financial Officer
are, eligible to receive periodic bonuses in amounts determined by our Board
in
its sole discretion based upon targets for revenue, profitability, cash flow,
acquisitions and mergers closed, recruiting, capital expenditure budget
objectives, balance sheet objectives and the respective individual performance
of the executive. The annual bonuses paid to our current Chairman and Chief
Executive Officer and current Chief Financial Officer are, and those paid to
our
former Chairman and our former Chief Financial Officer were, paid in cash.
These
bonus provisions are intended, in accord with our compensation philosophies
and
objectives, to align executive interests with stockholder
interests.
Incentive
Bonus.
Our
employment agreements with our former Chairman and our current Chairman and
Chief Executive Officer, provide for the payment of an incentive bonus equal
to
10% of the "Income," up to a maximum of 50% of such officer's base salary.
"Income" is computed in accordance with the following formula:
Income
=
“Revenues” - “Expensese” - “Reserves”
Where,
· |
"Revenues"
means 100% of cash revenues or other income received by
us;
|
· |
"Expenses"
means the direct and indirect expenses for our operation including,
but
not limited to, salaries, profit sharing expenses to divisional executives
or other divisional employees (excluding the subject officer), taxes,
allocable rent, utilities, phone, accounting, bookkeeping, etc.;
and
|
· |
"Reserves"
means, in the context of current facts and circumstances, the appropriate
reserve for future contingencies and demands on cash resources
attributable to the operations of such
division.
|
The
incentive bonuses paid to our former Chairman, our current Chairman and Chief
Executive Officer and Chief Financial Officer are paid as frequently as
quarterly in cash, as directed by the Board of Directors.
Our
employment agreements with our former Chief Financial Officer provided and
the
employment agreement with the President and Chief Operating Officer of vFinance
Investments provides for the payment of annual incentive bonuses. Our
employment agreement with our former Chief Financial Officer provided for
an
incentive bonus based upon the percentage of the increase (if any) of operating
profits from the creation and/or sale of financial, home resource, information,
data and telecommunication services. The bonus was computed using the following
percentages:
Period
|
|
Percentage
|
|
|
|
|
|
Year
Just Ended
|
|
|
10
|
%
|
Incremental
profit of the prior year
|
|
|
8
|
%
|
Incremental
profit of two years ago
|
|
|
6
|
%
|
Incremental
profit of three years ago
|
|
|
4
|
%
|
Incremental
profit of four years ago
|
|
|
2
|
%
|
Our
employment agreement with the President and Chief Operating Officer of
vFinance Investments provides for the payment of an incentive bonus of 10%
of the pre-tax net income of our retail brokerage division above
$1,732,000.
The
incentive bonuses paid to our former and present Chief Financial Officer
and the
President and Chief Operating Officer of vFinance Investments are paid
periodically in cash, as directed by the Board of Directors.
These
bonus provisions are intended to align executive interests with stockholder
interests.
As
the
employment agreements of our Named Executive Officers come up for renewal,
our
Board plans to review the employment agreements to determine if our Named
Executive Officers' compensation levels are competitive and have the right
mix
of incentive-based compensation.
Benefits
Our
former Chairman and our former Chief Financial Officer participated, and our
current Chairman and Chief Executive Officer and our current Chief Financial
Officer participate, in a variety of health and welfare benefit plans for which
we pay the premium. We believe that health and welfare benefits help ensure
that
we have a productive and focused workforce.
Termination-Based
Compensation
Termination
Our
employment agreement with our current Chief Financial Officer is, and our
employment agreement with our former Chief Financial Officer was, terminable
at
will. Accordingly, we will not incur any obligations upon the termination of
these Named Executive Officers.
Our
employment agreement with our former Chairman could have been, and our
employment agreement with our current Chairman and Chief Executive Officer
may
be, terminated upon the occurrence of the following:
i. |
the
death of such Named Executive Officer;
|
ii. |
such
Named Executive Officer giving 30 days' notice of
termination;
|
iii.
|
the
Named Executive Officer being unable to discharge his duties due
to
physical or mental illness (for the purpose of this discussion
"Disability") for a period of more than nine consecutive months or
12
months during any 18-month period; and
|
iv.
|
(a)
the final non-appealable adjudication of such Named Executive Officer
as
guilty of a felony or (b) the unanimous determination of our Board
(other
than such Named Executive Officer) that such Named Executive Officer
has
engaged in material intentional misconduct or the gross neglect of
his
duties that has a material adverse effect on our business (for the
purpose
of this discussion, "For Cause").
|
Upon
the
death or "Disability" of our former Chairman and our current Chairman and Chief
Executive Officer or our termination of our employment agreements with such
Named Executive Officers other than "For Cause," such employment agreements
provide that we would be required to pay these Named Executive Officers a lump
sum payment equal to the sum of (a) twice the sum of their respective highest
annual base salary during employment with us, and (b) twice the greater of
(i)
the highest bonus, incentive or other compensation payment actually received
by
such officer during the three years preceding the termination and (ii) the
highest bonus, incentive or other compensation payment such officer was entitled
to receive during the three years preceding the termination. Additionally,
we
will be required to provide all applicable benefits to such officer and his
family for a period of two years. All stock options warrants or other similar
securities will become fully vested. Our employment agreement with our former
Chairman was mutually terminated in 2006. For a description the terms of the
resignation agreement, see "Executive Compensation - Employment
Agreements."
Prior
to
December 31, 2006, our employment agreement with the President and Chief
Operating Officer of vFinance Investments could have been terminated for "Good
reason" by such officer or for "Cause" by us. If our employment agreement with
the President and Chief Operating Officer of vFinance Investments was terminated
for "Good reason" by such officer or other than for "Cause" by us prior to
December 31, 2006, we would have been obligated to continue paying the President
and Chief Operating Officer of vFinance Investments his base salary until such
date. After December 31, 2006, the President and Chief Operating Officer of
vFinance Investments is terminable at will.
In
determining whether to approve and setting the terms of such termination
arrangements, our Board recognizes that executives, especially highly ranked
executives, often face challenges securing new employment following termination.
Based upon the data reviewed by our Board, we believe that the payments to
be
made upon termination are generally in line with severance packages offered
to
similarly situated executives.
Change
in Control
Upon
the
acquisition by an individual or company of 50.1% or more of our issued and
outstanding shares, all options granted to our current Chief Financial Officer
and the President and Chief Operating Officer of vFinance Investments pursuant
to their respective employment agreements will become immediately
vested.
Upon
the
acquisition by an individual or company of 51% or more of our issued and
outstanding shares, all options granted to our former Chief Financial Officer
pursuant to her employment agreement would have become immediately vested.
Additionally, if our former Chief Financial Officer's employment were terminated
following such acquisition, we would have been required to pay our former Chief
Financial Officer 12 months' salary.
Upon
a
"Change in Control," as defined below, anytime from January 3, 2007 up to and
including January 3, 2010, we have agreed to pay to our former Chairman an
amount equal to: (a) twice the sum of his highest annual base salary during
his
employment with us, and (b) twice the greater of (i) the highest bonus,
incentive or other compensation payment actually received by him during the
three years preceding the Change in Control and (ii) the highest bonus,
incentive or other compensation payment he was entitled to receive during the
three years preceding the Change in Control. In the event of a Change in
Control, all stock options, warrants, stock appreciation rights and other
similar securities held by our former Chairman will become immediately and
fully
vested.
Upon
a
Change in Control, we have agreed to pay to our current Chairman and Chief
Executive Officer an amount equal to: (a) twice the sum of his highest annual
base salary during his employment with us, and (b) twice the greater of (i)
the
highest bonus, incentive or other compensation payment actually received by
him
during the three years preceding the Change in Control and (ii) the highest
bonus, incentive or other compensation payment he was entitled to receive during
the three years preceding the Change in Control. In the event of a Change in
Control, all stock options, warrants, stock appreciation rights and other
similar securities held by our current Chairman and Chief Executive Officer
will
become immediately and fully vested.
In
determining whether to approve and in setting the terms of such Change in
Control arrangements, our Board recognizes the importance to us and our
stockholders of avoiding the distraction and loss of key management personnel
that may occur in connection with rumored or actual fundamental corporate
changes. A properly arranged Change in Control provision protects stockholder
interests by enhancing employee focus during rumored or actual Change in Control
activity through:
· |
incentives
to remain with us despite uncertainties while a transaction is under
consideration or pending; and
|
· |
assurance
of compensation for terminated employees after a Change in
Control.
|
We
believe that our change in control arrangements are generally in line with
such
arrangements offered to similarly situated officers of the
companies.
For
the
purposes of this discussion, a "Change of Control" means the occurrence of
the
following events: (1) thirty percent (30%) or more of our voting stock is
acquired by any person (other than the subject executive officer), entity or
affiliated group; (ii) an unapproved change to the majority control of our
Board; (iii) any merger, consolidation or business combination pursuant to
which
we are not the surviving corporation; (iv) our liquidation or dissolution;
or
(v) the sale of all or substantially all of our assets.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table provides compensation information for the year ended December
31, 2006 for Named Executive Officers. The "Compensation Discussion &
Analysis" section of this prospectus includes information regarding the
material
terms of plans and agreements pursuant to which certain items set forth
below
are paid.
Name
and Principal Position
(a)
|
|
Year
(b)
|
|
Salary
($)
(c)
|
|
Bonus
($)
(1)
(d)
|
|
Option
Awards
($)
(f)
|
|
All
Other
Comp.
($)
(i)
|
|
Total
($)
(j)
|
|
Leonard
J. Sokolow
|
|
|
2006
|
|
|
340,698
|
|
|
155,000
|
|
|
280,000
|
|
|
9,160
|
|
|
784,858
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alan
B. Levin
|
|
|
2006
|
|
|
118,192
|
|
|
27,000
|
|
|
135,000
|
|
|
—
|
|
|
280,192
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
Campanella
|
|
|
2006
|
|
|
147,512
|
|
|
7,024
|
|
|
—
|
|
|
—
|
|
|
154,536
|
|
President
and Chief Operating Officer of vFinance Investments, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy
Mahoney
|
|
|
2006
|
|
|
283,373
|
|
|
106,000
|
|
|
—
|
|
|
9,160
|
|
|
398,533
|
|
Former
Chairman and Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sheila
Reinken
|
|
|
2006
|
|
|
118,035
|
|
|
26,581
|
|
|
—
|
|
|
5,343
|
|
|
149,959
|
|
Former
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Mr.
Levin
assumed the position of Chief Financial Officer effective on December 29, 2006
and the position of interim Chief Financial Officer on July 24, 2006. Prior
to
July 2006, Mr. Levin served as our Controller. The information presented herein
represents actual amounts paid for the period from January 1, 2006 to December
31, 2006.
(2)
Ms.
Reinken resigned from the position of Chief Financial Officer July 26, 2006.
The
information presented herein represents actual amounts paid for the period
from
January 1, 2006 to July 26, 2006.
(3)
Bonus
amounts have been determined pursuant to the bonus terms outlined in our Named
Executive Officers' respective employment agreements or based on the discretion
of the Board of Directors.
(4)
Options
amounts have been determined pursuant to the option terms outlined in our Named
Executive Officers' respective employment agreements or based on the discretion
of the Board of Directors.
(5)
Represents
health insurance contributions.
Grants
Of Plan-Based Awards
The
following table shows all plan-based awards granted to Named Executive Officers
during fiscal year 2006. Certain terms of the Corporation's Stock Plan pursuant
to which the grants identified in the table were made are described in the
"Compensation Discussion & Analysis - Long-Term Equity-Based Compensation"
section of this prospectus.
|
|
Estimated
Future Payouts Under
Non-Equity
Incentive Plan
Awards:
|
|
Estimated
Future Payouts
Under
Equity Incentive Plan
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
(a)
|
|
Grant
Date
(b)
|
|
Threshold
($)
(c)
|
|
Target
($)
(d)
|
|
Maximum
($)
(e)
|
|
Threshold
($)
(f)
|
|
Target
(g)
|
|
Maximum
($)
(h)
|
|
Leonard
J. Sokolow
|
|
|
12/29/2006
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Alan
B. Levin
|
|
|
12/29/2006
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
Campanella
|
|
|
2006
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy
Mahoney
|
|
|
2006
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sheila
Reinken
|
|
|
2006
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Name
(a)
|
|
All
Other Stock Awards: Number of Shares of Stock or
Units
(#)
(i)
|
|
All
Other Option Awards:
Number
of Securities
Underlying
Options
(#)
(j)
|
|
Exercise
or Base Price of Option Awards
($/Sh)
(k)
|
|
Grant
Date Fair Value of Stock and Option Awards ($)
(l)
|
|
Leonard
J. Sokolow
|
|
|
—
|
|
|
2,000,000
|
|
|
0.21
|
|
|
140,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alan
B. Levin
|
|
|
—
|
|
|
500,000
|
|
|
0.20
|
|
|
|
|
|
|
|
—
|
|
|
500,000
|
|
|
0.21
|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
Campanella
|
|
|
|
|
|
600,000
|
|
|
0.17
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy
Mahoney
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sheila
Reinken
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Employment
Agreements
Leonard
J. Sokolow - Chairman and Chief Executive Officer
On
November 16, 2004, we entered into a new employment agreement with Leonard
J.
Sokolow, who is the beneficial owner of 11.4% of our total outstanding common
shares at December 31, 2006, pursuant to which Mr. Sokolow served as our Chief
Executive Officer and President. The employment agreement provides that Mr.
Sokolow receive an initial base salary of $257,000 per annum, subject to a
5%
increase per annum beginning January 1, 2005. Our Board will review the base
salary at least annually and may increase (but not decrease) the base salary
from time to time. Additionally, the employment agreement provides that Mr.
Sokolow receive (i) a discretionary bonus, interim cash bonus and/or other
bonus
when and in such amounts as may be determined by our Board of Directors based
on
his performance, our performance and/or other factors and (ii) incentive
compensation paid quarterly no later than the 45th day following the end of
quarter primarily based on our performance. The employment agreement has a
term
of three years, subject to automatic extensions for one year on each anniversary
date thereafter unless we have provided a non-renewal notice thirty (30) days
prior to such anniversary date. The employment agreement also contains
provisions related to change of control, discussed in detail under the heading
"Executive Compensation - Post-Termination / Change in Control Benefits,"
below.
On
May
12, 2006, Mr. Sokolow and we entered into an amendment to his employment
agreement to provide a base salary of $343,511. On December 29, 2006, Mr.
Sokolow and we entered into another amendment to his employment agreement,
pursuant to which Mr. Sokolow serves as the Chairman of our Board of Directors
and our Chief Executive Officer. Mr. Sokolow's base salary was increased from
$343,511 per annum to $396,750 per annum, subject to an annual increase based
on
the reported cost of living adjustment beginning January 1, 2008. None of the
other terms of Mr. Sokolow's employment agreement were modified in any material
respect.
Timothy
E. Mahoney - Former Chairman and Chief Operating
Officer
Pursuant
to his employment agreement, Mr. Mahoney received an annual base salary of
$283,394 and was entitled to bonus or incentive compensation as determined
by
our Board of Directors based on his performance, our performance and other
factors. The employment agreement provided that if we terminated Mr. Mahoney
other than for cause or upon death or disability, or if Mr. Mahoney voluntarily
terminated his employment due to an adverse change in duties, a reduction in
compensation or benefits or the relocation of our principal offices
(collectively a "Triggering Event"), we would have been required to pay Mr.
Mahoney (a) two times his highest annual base salary in one lump sum, and (b)
twice the greater of (i) the highest bonus, incentive or other compensation
payment actually received by Mr. Mahoney during the three years preceding the
Triggering Event and (ii) the highest bonus, incentive or other compensation
payment Mr. Mahoney was entitled to receive during the three years preceding
the
Triggering Event. We would have also been required to provide Mr. Mahoney up
to
two years of other employee benefits.
On
December 29, 2006, Mr. Mahoney and we entered into a Resignation Agreement
(the
"Resignation Agreement"), pursuant to which Mr. Mahoney resigned from his
positions as the Chairman of our Board of Directors and our Chief Operating
Officer effective January 3, 2007. In accordance with the Resignation Agreement,
we have agreed to pay to Mr. Mahoney, upon a Change in Control anytime from
January 3, 2007 up to and including January 3, 2010 an amount equal to: (a)
twice the sum of Mr. Mahoney's highest annual base salary during his employment
with us, and (b) twice the greater of (i) the highest bonus, incentive or
other
compensation payment actually received by Mr. Mahoney during the three years
preceding the Change in Control and (ii) the highest bonus, incentive or
other
compensation payment Mr. Mahoney was entitled to receive during
the three years preceding the Change in Control. In the event of a Change
in
Control, all stock options, warrants, stock appreciation rights and other
similar securities held by Mr. Mahoney will become immediately and fully
vested.
In
connection with Mr. Mahoney's resignation, on December 29, 2006, the Company
and
Mr. Mahoney jointly terminated Mr. Mahoney's Amended and Restated Employment
Agreement dated November 16, 2004, which termination was effective January
3,
2007.
The
termination of the employment agreement prior to the expiration of its term
will
not cause us to incur any early termination penalties of any kind, and all
post-employment matters between Mr. Mahoney and us are governed by the
Resignation Agreement.
Alan
B. Levin - Chief Financial Officer
On
July
24, 2006, we entered into an employment agreement with Alan B. Levin, pursuant
to which Mr. Levin served as our Interim Chief Financial Officer. Under the
terms of his employment agreement, Mr. Levin is entitled to an annual base
salary of $135,000, plus certain incentive bonuses. On December 29, 2006, Mr.
Levin was appointed our Chief Financial Officer, upon which his annual base
salary increased to $165,000 under his employment agreement. In addition, we
granted to Mr. Levin five-year options to purchase 500,000 of our shares at
an
exercise price of $0.20 per share, of which 125,000 options shall vest on July
24, 2007, and 125,000 options shall vest each subsequent yearly anniversary
thereafter provided that Mr. Levin is employed on the applicable vesting date.
Mr. Levin's employment is terminable at will. Upon the acquisition by any
individual, group or entity of more than 50% of the issued and outstanding
shares of the Company's common stock, Mr. Levin's options will vest
immediately.
Richard
Campanella - Secretary and President and Chief Operating Officer of vFinance
Investments, Inc.
On
January 20, 2005, we entered into an employment agreement with Richard
Campanella, pursuant to which Mr. Campanella serves as the President and Chief
Operating Officer of vFinance Investments. Under the terms of his employment
agreement, Mr. Campanella is entitled to an annual base salary of $135,000,
plus
certain incentive bonuses. In addition, we granted to Mr. Campanella five-year
options to purchase 600,000 of our shares at an exercise price of $0.18 per
share, of which 150,000 options vested on July 1, 2006, and 125,000 options
shall vest each subsequent yearly anniversary thereafter provided that Mr.
Campanella is employed on the applicable vesting date. If our employment
agreement with Mr. Campanella was terminated for "Good reason" by such officer
or other than for "Cause" by us prior to December 31, 2006, we would have been
obligated to continue paying Mr. Campanella his base salary until such date.
After December 31, 2006, Mr. Campanella's employment with us is terminable
at
will.
Sheila
C. Reinken - Former Chief Financial Officer and Chief Administrative
Officer
On
November 15, 2004, we entered into an employment agreement with Sheila C.
Reinken, pursuant to which Mrs. Reinken served as our Chief Financial Officer
and Chief Administrative Officer. The employment agreement provided for the
payment of an annual base salary of $155,000, a discretionary bonus with a
target of 50% of her base salary, plus certain incentive bonuses. In addition,
we granted Ms. Reinken options to purchase 600,000 shares of our common stock,
of which 150,000 options vested on January 4, 2006, at an exercise price of
$0.245 per share.
Ms.
Reinken resigned from her position as our Chief Financial Officer and Chief
Administrative Officer on July 21, 2006. Because Ms. Reinken's employment was
terminable at will, we did not incur any obligations as a result of her
termination.
Outstanding
Equity Awards At Year-End
None
of
our Named Executive Officers exercised options or received stock awards during
the year ended December 31, 2006.
Option
Awards
|
|
Name
|
|
Number
of Securities Underlying Unexercised Option (#),
Exercisable
|
|
Number
of Securities Underlying Unexercised Option (#),
Unexercisable
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(e)
|
|
(f)
|
|
|
|
|
375,000
|
|
|
1,125,000
|
|
|
0.155
|
|
|
12/29/10
|
|
Leonard
J. Sokolow
|
|
|
—
|
|
|
2,000,000
|
|
|
0.210
|
|
|
12/28/11
|
|
Alan
B. Levin
|
|
|
40,000
|
|
|
120,000
|
|
|
0.180
|
|
|
06/13/10
|
|
|
|
|
12,500
|
|
|
37,500
|
|
|
0.155
|
|
|
12/29/10
|
|
|
|
|
—
|
|
|
500,000
|
|
|
0.200
|
|
|
07/23/11
|
|
|
|
|
— |
|
|
500,000
|
|
|
.210
|
|
|
12/28/11
|
|
Richard
Campanella
|
|
|
150,000
|
|
|
450,000
|
|
|
0.170
|
|
|
06/30/10
|
|
Timothy
Mahoney
|
|
|
1,500,000
|
|
|
—
|
|
|
0.155
|
|
|
12/29/10
|
|
Sheila
Reinken
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Exercises and Stock Vested
None
of
our Named Executive Officers exercised options or received stock awards during
the year ended December 31, 2006.
Pension
Benefits
We
do not
have any defined benefit plans and only offer defined contribution
plans.
Non-Qualified
Deferred Compensation
We
do not
have any non-qualified deferred contribution plans or other deferred
compensation plans.
Post-Termination
/ Change in Control Benefits
The
section below describes the payments that may be made to Named Executive
Officers upon termination or Change in Control, as defined below, pursuant
to
individual agreements. For payments made to a participant upon a retirement
other than in connection with termination or a Change in Control, see Pension
Benefits above.
Termination
Our
employment agreement with our current Chief Financial Officer is, and our
employment agreement with our former Chief Financial Officer was, terminable
at
will. Accordingly, we will not incur any obligations upon the termination of
these Named Executive Officers.
Our
employment agreement with our former Chairman could have been, and our
employment agreement with our current Chairman and Chief Executive Officer
may
be, terminated upon the occurrence of the following:
i.
|
the
death of such Named Executive Officer;
|
ii.
|
such
Named Executive Officer giving 30 days' notice of
termination;
|
iii.
|
the
Named Executive Officer being unable to discharge his duties due
to
physical or mental illness (for the purpose of this discussion
"Disability") for a period of more than nine consecutive months or
12
months during any 18-month period; and
|
iv.
|
(a)
the final non-appealable adjudication of such Named Executive Officer
as
guilty of a felony or (b) the unanimous determination of our Board
(other
than such Named Executive Officer) that such Named Executive Officer
has
engaged in material intentional misconduct or the gross neglect of
his
duties that has a material adverse effect on our business (for the
purpose
of this discussion, "For Cause").
|
Upon
the
death or "Disability" of our former Chairman and our current Chairman and Chief
Executive Officer or our termination of our employment agreements with such
Named Executive Officers other than "For Cause," such employment agreements
provide that we would be required to pay these Named Executive Officers a lump
sum payment equal to the sum of (a) twice the sum of their respective highest
annual base salary during employment with us, and (b) twice the greater of
(i)
the highest bonus, incentive or other compensation payment actually received
by
such officer during the three years preceding the termination and (ii) the
highest bonus, incentive or other compensation payment such officer was entitled
to receive during the three years preceding the termination. Additionally,
we
will be required to provide all applicable benefits to such officer and his
family for a period of two years. All stock options warrants or other similar
securities will become fully vested.
Our
employment agreement with our former Chairman was mutually terminated in 2006.
For a description the terms of the Resignation Agreement, see "Executive
Compensation - Employment Agreements," above. The termination of the employment
agreement prior to the expiration of its term will not cause us to incur any
early termination penalties of any kind, and all post-employment matters between
our former Chairman and us are governed by the Resignation
Agreement.
Prior
to
December 31, 2006, our employment agreement with the President and Chief
Operating Officer of vFinance Investments, Inc. could have been terminated
for
"Good reason" by such officer or for "Cause" by us. If our employment agreement
with the President and Chief Operating Officer of vFinance Investments, Inc.
was
terminated for "Good reason" by such officer or other than for "Cause" by
us
prior to December 31, 2006, we would have been obligated to continue paying
the
President and Chief Operating Officer of vFinance Investments his base
salary for the remainder of the term of his employment
agreement.
Assuming
our current Chairman and Chief Executive Officer's employment was terminated
on
December 31, 2006 upon his death or "Disability" or our termination other than
"For Cause," we would be required to pay him a lump sum of approximately $1.13
million.
Change
in Control
Upon
the
acquisition by an individual or company of 50.1% or more of our issued and
outstanding shares, all options granted to our current Chief Financial Officer
and the President and Chief Operating Officer of vFinance Investments pursuant
to their respective employment agreements will become immediately vested.
Upon
the acquisition by an individual or company of 50.1% or more of our issued
and
outstanding shares on December 31, 2006, 1,157,500 shares of common stock
underlying options held by our current Chief Financial Officer and 450,000
shares of common stock underlying options held by the President and Chief
Operating Officer of vFinance Investments would have vested. The value received
by our current Chief Financial Officer and the President and Chief Operating
Officer of vFinance Investments would have been $12,550 and $24,000,
respectively, calculated as the excess of the stock closing value on December
31, 2006 over the total options outstanding for each executive at the exercise
price for their respective option grants.
Upon
a
Change in Control anytime from January 3, 2007 up to and including January
3,
2010, we have agreed to pay to our former Chairman an amount equal to: (a)
twice
the sum of his highest annual base salary during his employment with us, and
(b)
twice the greater of (i) the highest bonus, incentive or other compensation
payment actually received by him during the three years preceding the Change
in
Control and (ii) the highest bonus, incentive or other compensation payment
he
was entitled to receive during the three years preceding the Change in Control.
In the event of a Change in Control, all stock options, warrants, stock
appreciation rights and other similar securities held by our former Chairman
will become immediately and fully vested. Upon a Change in Control as of
December 31, 2006, we would have been required to pay our former Chairman a
lump
sum of $838,788.
Upon
a
Change in Control, we have agreed to pay to our current Chairman and Chief
Executive Officer an amount equal to: (a) twice the sum of his highest annual
base salary during his employment with us, and (b) twice the greater of (i)
the
highest bonus, incentive or other compensation payment actually received by
him
during the three years preceding the Change in Control and (ii) the highest
bonus, incentive or other compensation payment he was entitled to receive during
the three years preceding the Change in Control. In the event of a Change in
Control, all stock options, warrants, stock appreciation rights and other
similar securities held by our current Chairman and Chief Executive Officer
will
become immediately and fully vested. Upon a Change in Control as of December
31,
2006, we would have been required to pay our current Chairman and Chief
Executive Officer a lump sum of approximately $1.13 million.
Director
Compensation
Directors
do not receive any compensation for serving on our Board of
Directors.
Compensation
Committee Interlocks and Insider Participation
Our
Board
of Directors performs the equivalent functions of a compensation committee.
The
members of our Board of Directors during 2006 were Timothy E. Mahoney and
Leonard J. Sokolow. Mr. Mahoney was the chairman of our Board of Directors
and
our Chief Operating Officer from November 8, 1999 to January 3, 2007. Mr.
Sokolow has been the chairman of our Board of Directors since January 1, 2007,
one of our directors since November 8, 1997 and our Chief Executive Officer
since November 8, 1999. From January 5, 2001 through December 31, 2006, Mr.
Sokolow was our President. Except as otherwise set forth in this prospectus,
we
did not engage in any transactions with Messrs. Mahoney or Sokolow since January
1, 2006 in which the amount involved exceeded $120,000. None of our executive
officers serve as director of, or in any compensation-related capacity for,
companies with which members of our Board of Directors are
affiliated.
CERTAIN
RELATIONSHIPS AND
RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related
Party Transactions
Except
as
otherwise set forth in this prospectus, we did not engage in any transactions
with related parties since January 1, 2006 in which the amount involved exceeded
$120,000.
We
have a
written policy regarding the review, approval or ratification of related person
transactions. A related person transaction for the purposes of the policy is
a
transaction between us and one of our directors or nominees for director,
executive officers or 5% shareholders, or a member of one of these person's
immediate family, in which such person has a direct or indirect material
interest and involves more than $120,000. Under this policy, related person
transactions are prohibited unless our Board of Directors, or a committee
designated thereby, has determined in advance that the transaction is in our
best interests. In the event we enter into such a transaction without board
approval, the Board of Directors must promptly review its terms and may ratify
the transaction if it determines it is appropriate.
Director
Independence
The
Board
of Directors has determined that Charles R. Modica is "independent" as such
term
is defined by the applicable listing standards of The NASDAQ Stock Market,
Inc.
Our Board of Directors based this determination on our directors' employment
relationships.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
table
below provides information regarding the beneficial ownership of the common
stock as of April 25, 2007. The table reflects ownership by: (1) each person
or
entity who owns beneficially 5% or more of the shares of our outstanding common
stock, (2) each of our directors, (3) each of the Named Executive Officers,
and
(4) our directors and officers as a group. Except as otherwise indicated, and
subject to applicable community property laws, we believe the persons named
in
the table have sole voting and investment power with respect to all shares
of
common stock held by them. Except as otherwise indicated, each stockholder's
percentage ownership of our common stock in the following table is based on
54,679,876 shares of common stock outstanding.
Name
of Beneficial Owner
|
|
Number
of Shares Beneficially Owned
|
|
Percent
of
Class
|
|
|
|
|
|
|
|
Leonard
J. Sokolow (2)
|
|
|
6,258,010
|
|
|
11.4
|
%
|
Timothy
E. Mahoney (3)
|
|
|
6,880,009
|
|
|
12.2
|
%
|
Highlands
Group Holdings, Inc. (4)
|
|
|
2,175,000
|
|
|
4.0
|
%
|
Alan
Levin (5)
|
|
|
142,500
|
|
|
*
|
|
Richard
Campanella (6)
|
|
|
275,000
|
|
|
*
|
|
Sterling
Financial Group of Companies, Inc. (7)
|
|
|
13,000,000
|
|
|
23.8
|
%
|
Global
Partners Securities, Inc. (8)
|
|
|
4,591,646
|
|
|
8.4
|
%
|
Level2.com,
Inc. (9)
|
|
|
4,591,646
|
|
|
8.4
|
%
|
Oxir
Investment Ltd. (10)
|
|
|
3,000,000
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
All
executive officers and directors as a group (4 persons)
|
|
|
6,675,510
|
|
|
12.1
|
%
|
*Denotes
less than 1% ownership
(1)
Beneficial ownership is determined in accordance with the rules of the SEC.
Shares of common stock subject to option or warrants currently exercisable
or
exercisable within 60 days of April 25, 2007, are deemed outstanding for
computing the percentage ownership of the stockholder holding the options or
warrants, but are not deemed outstanding for computing the percentage ownership
of any other stockholder. Unless otherwise indicated, the officer, directors
and
stockholders can be reached at our principal offices. Percentage of ownership
is
based on 54,679,876 shares of common stock outstanding as of April 25,
2007.
(2)
Includes 5,883,010 shares of common stock issued in the names of Mr. Sokolow
and
his wife, and 375,000 shares of common stock issuable upon exercise of options
at a price of $0.155 per share, which options are exercisable within 60 days
of
April 25, 2007.
(3)
Includes 2,175,000 shares of common stock issued in the name of Highlands Group
Holdings, Inc., 3,205,009 shares of common stock issued in the name of Mr.
Mahoney and 1,500,000 shares of common stock issuable upon exercise of options
at a price of $0.155 per share, which options are exercisable within 60 days
of
April 25, 2007. Mr. Mahoney’s address is 68 Cayman Place, Palm Beach Gardens,
Florida 33418.
(4)
Highlands Group Holdings, Inc., whose address is 68 Cayman Place, Palm Beach
Gardens, Florida 33418, is wholly owned by Mr. Timothy Mahoney, our former
Chairman and Chief Operating Officer. Mr. Mahoney, as the owner of Highlands
Group Holdings, Inc., is deemed to beneficially own the 2,175,000 shares held
by
Highlands Group Holdings, Inc.
(5)
Includes 50,000 shares of common stock issued in the name of Mr. Levin and
92,500 shares of common stock issuable upon exercise of options at a
weighted-average price of $0.174 per share, which options are exercisable within
60 days of April 25, 2007.
(6)
Includes 125,000 shares of common stock issued in the name of Mr. Campanella
and
150,000 shares of common stock issuable upon exercise of options at a price
of
$0.17 per share, which options are exercisable within 60 days of April 25,
2007.
(7)
Based
solely on information contained in a Schedule 13D filed with the SEC on May
22,
2006, Sterling Financial Group of Companies, Inc.'s former business address
was
1200 North Federal Highway, Suite 401, Boca Raton, Florida 33432. Charles
Garcia, as the sole officer of Sterling Financial Group of Companies, Inc.,
has
the power to vote and to dispose of all of the shares held by Sterling Financial
Group of Companies, Inc., and is deemed to have shared voting power and shared
dispositive power with respect to such shares.
(8)
Includes 3,288,253 shares of common stock and 1,303,393 shares of common stock
issuable upon exercise of warrants at a price of $0.11 per share, which warrants
are exercisable within 60 days of April 25, 2007. Global Partners Securities,
Inc.'s business address is 1909 Tyler Street, Wachovia Center, Penthouse,
Hollywood, Florida 33020. Marcos Konig, Harry Konig and Salomon Konig, as
president, vice president and director of Global Partners Securities, Inc.,
share the power to vote and to dispose of all of the shares held by Global
Partners Securities, Inc. Global Partners Securities, Inc. has informed the
Company that it intends to assign these shares of common stock for the benefit
of its creditor, Dennis de Marchena.
(9)
Includes 3,288,253 shares of common stock and 1,303,393 shares of common stock
issuable upon exercise of warrants at a price of $0.11 per share, which warrants
are exercisable within 60 days of April 25, 2007. Level2.com, Inc.'s former
business address was 2101 W Commercial Blvd., Suite 3500, Ft. Lauderdale Florida
33309. Marcos Konig, Harry Konig and Salomon Konig, as president, vice president
and director of Level2.com, Inc., respectively, share the power to vote and
to
dispose of all of the shares held by Level2.com, Inc. Level2.com, Inc. has
informed the Company that it intends to assign these shares of common stock
for
the benefit of its creditor, Dennis de Marchena.
(10)
Based solely on information contained in a Schedule 13D filed with the SEC
on
July 13, 2006, Vassili Oxenuk, as sole officer and director and sole shareholder
of Oxir Investment Ltd., has the power to vote and to dispose of all of the
shares held by Oxir Investment Ltd., and is deemed to have shared voting power
and shared dispositive power with respect to such shares. Oxir Investment Ltd.'s
business address is The Studio, St. Nicholas Close, Elstree Herts, United
Kingdom WD6 3EW. Mr. Oxenuk has advised the Company that Oxir Investments Ltd.
beneficially owns 3,000,000 shares of common stock.
In
connection with Sterling Financial Group of Companies, Inc.'s acquisition
of our
securities, on May 11, 2006, we and vFinance Investments entered into a voting
and lockup agreement with Sterling Financial Investment Group, Inc., Sterling
Financial Group of Companies, Inc., Charles Garcia, Leonard J. Sokolow and
Timothy E. Mahoney. Pursuant to this agreement, Leonard J. Sokolow and Timothy
E. Mahoney agreed, in their capacity as stockholders and directors, to vote
for
a designee of Charles Garcia to serve on our Board of Directors for so long
as
Mr. Garcia is employed by vFinance Investments and to vote for Mr. Garcia's
designee to so serve for the one-year period beginning upon Mr. Garcia's
departure. Further, Sterling Financial Group of Companies, Inc. agreed not
to
sell the acquired securities until May 11, 2007. On January 17, 2006, we
also
entered into a standstill agreement with Sterling Financial Investment Group,
Inc., Sterling Financial Group of Companies, Inc., Charles Garcia and Alexis
Korybut (the "Sterling Parties"), to provide restrictions on certain actions
for
a defined period of time.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading
History
Our
common stock has been listed for trading on the National Association of
Securities Dealers, Inc.’s Over-the-Counter Bulletin Board, or the OTC Bulletin
Board, under the symbol “VFIN.OB.” The following is a summary of the high and
low closing prices of our common stock on the OTC Bulletin Board during the
periods presented. Such prices represent inter-dealer prices, without retail
mark-up, mark down or commissions, and may not necessarily represent actual
transactions. Trading in our common stock has not been extensive and such trades
should not be characterized as constituting an active trading market.
|
|
High
|
|
Low
|
|
Year
Ended December 31, 2006
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.28
|
|
$
|
0.16
|
|
Second
Quarter
|
|
|
0.31
|
|
|
0.18
|
|
Third
Quarter
|
|
|
0.25
|
|
|
0.18
|
|
Fourth
Quarter
|
|
|
0.27
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2005
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.37
|
|
$
|
0.23
|
|
Second
Quarter
|
|
|
0.33
|
|
|
0.17
|
|
Third
Quarter
|
|
|
0.22
|
|
|
0.15
|
|
Fourth
Quarter
|
|
|
0.21
|
|
|
0.15
|
|
On
April
25, 2007 the closing sales price for the common stock was $0.21, as reported
on
the website of the Over-the-Counter Bulletin Board. As of April 25, 2007, there
were approximately 293 stockholders of record of the common stock (not including
the number of persons or entities holding stock in nominee or street name
through various brokerage firms).
Dividends
Since
inception, we have not declared or paid any dividend on our common stock. We
do
not anticipate that any dividends will be declared or paid in the future on
our
common stock.
Equity
Compensation Plan Information
The
following table sets forth certain information as of December 31, 2006, with
respect to compensation plans (including individual compensation arrangements)
under which our equity securities are authorized for issuance under: all
compensation plans previously approved by our security holders; and all
compensation plans not previously approved by our security holders.
Plan
Category
|
|
Number
of Securities to be issued upon exercise of outstanding options,
warrants
and rights (a)
|
|
Weighted-Average
Exercise Price Outstanding options, warrants and rights
(b)
|
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (excluding securities reflected in column (a)
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
Equity
compensation plans not approved by security holders (1)
|
|
|
19,538,480
|
|
|
0.10
|
|
|
—
|
|
Total
|
|
|
19,538,480
|
|
$
|
0.10
|
|
|
—
|
|
(1) Includes options and warrants granted pursuant to individual
compensation arrangements.
DESCRIPTION
OF CAPITAL STOCK
General
Our
authorized capital stock consists of 100,000,000 shares of common stock, par
value $.01 per share, and 2,500,000 shares of preferred stock, par value $.01
per share. We currently have no preferred stock outstanding.
Common
Stock
The
holders of our common stock are entitled to one vote per share on all matters
to
be voted on by stockholders and do not have cumulative voting rights. They
are
also entitled to receive any dividends that may be declared from time to time
by
our Board of Directors out of legally available funds. If our company is
liquidated, dissolved or wound up, the holders of our common stock are entitled
to share ratably in all assets remaining after payment of liabilities
outstanding at that time. Our common stock has no preemptive or conversion
rights or other subscription rights. All outstanding shares of our common stock
are fully paid and nonassessable. We may designate and issue preferred stock
in
the future. The rights and privileges of the holders of our common stock may
be
adversely affected by any issuance of preferred stock.
Preferred
Stock
The
Board
of Directors has the authority, without further action by the stockholders,
to
issue up to 2,500,000 shares of preferred stock in one or more series and to
fix
the rights, preferences, privileges and restrictions of the preferred stock,
including: dividend rights; conversion rights; voting rights, which may be
greater or lesser than the voting rights of the common stock; rights and terms
of redemption; liquidation preferences; and sinking fund terms. The issuance
of
shares of preferred stock could adversely affect the voting power of holders
of
common stock and the likelihood that these holders will receive dividends and
payments upon liquidation of our company and could have the effect of delaying,
deferring or preventing a change in control of our company. We have no present
plans to issue any shares of preferred stock.
Certain
Charter and By-Law Provisions
Our
certificate of incorporation and bylaws contain provisions that may make it
more
difficult for a third party to acquire control of our company. These provisions
could limit the price investors might be willing to pay in the future for shares
of our common stock. For example, we are allowed to issue preferred stock
without stockholder approval and special meetings of our stockholders may be
called only by the Chairman of the Board of Directors or by the Board of
Directors. These provisions may make it more difficult for stockholders to
force
our company to take action and could have the effect of delaying or preventing
a
change in control of our company. We are authorized to issue 100,000,000 shares
of common stock, of which 54,679,876 shares were issued and outstanding as
of
April
25,
2007.
We are
authorized to issue up to 2,500,000 shares of preferred stock, none of which
is
currently issued and outstanding. The number of stockholders of record for
the
common stock as of April 25, 2007 was 293. We have not paid any cash dividends
since inception, and we do not anticipate paying any cash dividend in the
foreseeable future.
Warrants
to Purchase Our Common Stock
As
of
April 25, 2007, warrants to purchase 3,959,728 shares of our common stock were
issued and outstanding. These warrants expire at various dates between January
2008 and August 2011. The weighted average exercise price of these warrants
is
$0.17. Each warrant contains provisions for the adjustment of the exercise
price
and the number of shares issuable upon the exercise of the warrant in the event
of stock dividends, stock splits, reorganizations, reclassifications and
consolidations.
Options
to Purchase Our Common Stock
As
of
April 25, 2007, options to purchase 14,420,002 shares of our common stock were
issued and outstanding. These options expire at various dates between May 2007
and February 2012 and are subject to forfeiture provisions as outlined in the
agreements upon termination of employment or service. The weighted average
exercise price of these options is $0.19. Each option contains provisions for
the adjustment of the exercise price and the number of shares issuable upon
the
exercise of the warrant in the event of stock dividends, stock splits,
reorganizations, reclassifications and consolidations.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Continental Stock Transfer
& Trust Company.
LEGAL
MATTERS
The
validity of the shares of our common stock offered by the Selling Stockholder
will be passed upon by the law firm of Edwards Angell Palmer & Dodge LLP,
Fort Lauderdale, Florida.
EXPERTS
The
consolidated financial statements of the Company as of and for the years ended
December 31, 2005 and 2006 have been included herein and in the Registration
Statement in reliance upon the reports of Sherb & Co., LLP, independent
registered public accountants, appearing elsewhere herein and upon the authority
of said firm as experts in auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
This
prospectus is part of a Registration Statement we have filed with the SEC.
We
have not included in this prospectus all of the information contained in the
Registration Statement, and you should refer to the Registration Statement
and
its exhibits for further information. We file annual, quarterly, and special
reports, proxy statements, and other information with the SEC. You may read
and
copy any document we file at the SEC’s public reference room at 100 F Street,
N.E., Washington, DC 20549. Copies of these materials may also be obtained
from
the SEC at prescribed rates by writing to the Public Reference Section of the
SEC, 100 F Street, N.E., Washington, DC 20549. You may obtain information about
the operation of the SEC public reference room in Washington, D.C. by calling
the SEC at 1-800-SEC-0330. Our filings are also available to the public from
commercial document retrieval services and at the Web site maintained by the
SEC
at http://www.sec.gov.
We
furnish our security holders with an annual report before each of our annual
meetings of stockholders. Our annual reports include financial statements
prepared in accordance with generally accepted accounting principles, except
as
disclosed therein. These annual financial statements are examined by our
independent registered public accounting firm. Our website address is
http://www.vFinance.com.
The
information on our website is not incorporated into this prospectus.
FINANCIAL
STATEMENTS
Index
to Financial Statements
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheet for each of the two years in the period ended December
31,
2006
|
F-3
|
Consolidated
Statements of Operations for each of the three years in the period
ended
December 31, 2006
|
F-4
|
Consolidated
Statements of Changes in Stockholders’ Deficit for each of the three years
in the period ended December 31, 2006
|
F-5
|
Consolidated
Statements of Cash Flows for each of the three years in the period
ended
December 31, 2006
|
F-7
|
Notes
to Consolidated Financial Statements
|
F-8
|
Report
of
Independent Registered Public Accounting Firm
To
the
Board of Directors and Shareholders vFinance Inc., &
Subsidiaries
We
have
audited the accompanying consolidated balance sheet of vFinance Inc., &
Subsidiaries, as of December 31, 2006 and 2005 (as restated) and the related
consolidated statements of operations, shareholders' equity and cash flows
for
the years ended December 31, 2006, 2005 (as restated) and 2004 (as restated).
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of vFinance Inc., &
Subsidiaries, at December 31, 2006 and 2005 (as restated), and the results
of
its operations and its cash flows for the years ended December 31, 2006, 2005
(as restated) and 2004 (as restated), in conformity with accounting principles
generally accepted in the United States.
|
|
/s/
Sherb &
Co., LLP |
|
|
Certified Public Accountants |
|
|
Boca
Raton, Florida
March
23, 2007
|
|
vFINANCE,
INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF
DECEMBER 31,
|
|
2006
|
|
2005
|
|
|
|
|
|
(Restated
and
|
|
|
|
|
|
Revised)
|
|
Assets:
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
4,205,200
|
|
|
4,427,400
|
|
Due
from clearing broker
|
|
|
299,900
|
|
|
705,100
|
|
Marketable
investment securities:
|
|
|
|
|
|
|
|
Trading
securities
|
|
|
1,009,400
|
|
|
596,000
|
|
Available-for-sale
securities
|
|
|
414,600
|
|
|
274.30
|
|
Accounts
receivable
|
|
|
123,800
|
|
|
408,800
|
|
Forgivable
loans - employees, current portion
|
|
|
58,800
|
|
|
0
|
|
Notes
receivable - employees
|
|
|
128,100
|
|
|
67,600
|
|
Prepaid
expenses and other current assets
|
|
|
184,000
|
|
|
130,000
|
|
Total
current assets
|
|
|
6,423,800
|
|
|
6,609,200
|
|
Property
and equipment, net
|
|
|
661,000
|
|
|
692,600
|
|
Customer
relationships, net
|
|
|
4,115,400
|
|
|
1,281,800
|
|
Other
assets
|
|
|
443,000
|
|
|
139,500
|
|
Due
to/from related parties
|
|
|
0
|
|
|
173,900
|
|
Total
assets
|
|
|
11,643,200
|
|
|
8,897,000
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity:
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
821,700
|
|
|
714,200
|
|
Accrued
compensation
|
|
|
2,394,600
|
|
|
1,678,600
|
|
Other
accrued liabilities
|
|
|
800,700
|
|
|
825,600
|
|
Securities
sold, not yet purchased
|
|
|
41,600
|
|
|
42,400
|
|
Capital
lease obligations, current portion
|
|
|
210,800
|
|
|
187,800
|
|
Other
|
|
|
348,500
|
|
|
248,800
|
|
Total
current liabilities
|
|
|
4,617,900
|
|
|
3,697,400
|
|
Capital
lease obligations, long term
|
|
|
125,600
|
|
|
225,100
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock 0.01 par value,
|
|
|
|
|
|
|
|
122,500
shares authorized, 0 shares issued and outstanding
|
|
|
0
|
|
|
0
|
|
Series
B Convertible Preferred Stock 0.01 par value,
|
|
|
|
|
|
|
|
50,000
shares authorized, 0 shares issued and outstanding
|
|
|
0
|
|
|
0
|
|
Common
stock 0.01 par value, 100,000,000 shares authorized
|
|
|
|
|
|
|
|
54,429,876
and 40,126,133 shares issued and outstanding
|
|
|
544,300
|
|
|
401,200
|
|
Additional
paid-in capital
|
|
|
31,147,400
|
|
|
27,175,000
|
|
Accumulated
deficit
|
|
|
(24,149,500
|
)
|
|
(22,016,000
|
)
|
Accumulated
other comprehensive income (loss)
|
|
|
(642,500
|
)
|
|
(585,700
|
)
|
Total
shareholders' equity
|
|
|
6,899,700
|
|
|
4,974,500
|
|
Total
liabilities and shareholders' equity
|
|
|
11,643,200
|
|
|
8,897,000
|
|
The
accompanying notes are an integral component of these financial
statements.
vFINANCE,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE
YEARS ENDED DECEMBER 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
(Restated
and
|
|
(Restated
and
|
|
|
|
|
|
Revised)
|
|
Revised)
|
|
Revenues:
|
|
|
|
|
|
|
|
Commissions
- agency
|
|
|
20,323,700
|
|
|
15,941,200
|
|
|
14,571,900
|
|
Trading
profits
|
|
|
9,606,000
|
|
|
4,177,400
|
|
|
5,156,800
|
|
Success
fees
|
|
|
4,523,500
|
|
|
2,250,500
|
|
|
3,395,600
|
|
Other
brokerage related income
|
|
|
3,546,000
|
|
|
2,837,600
|
|
|
2,567,500
|
|
Consulting
fees
|
|
|
375,400
|
|
|
523,600
|
|
|
370,800
|
|
Other
|
|
|
220,300
|
|
|
340,400
|
|
|
437,400
|
|
Total
revenues
|
|
|
38,594,900
|
|
|
26,070,700
|
|
|
26,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation,
commissions and benefits
|
|
|
31,232,000
|
|
|
20,313,300
|
|
|
19,791,000
|
|
Clearing
and transaction costs
|
|
|
4,337,200
|
|
|
2,977,200
|
|
|
2,239,300
|
|
General
and administrative costs
|
|
|
3,158,800
|
|
|
2,332,800
|
|
|
2,310,200
|
|
Occupancy
and equipment costs
|
|
|
1,166,600
|
|
|
743,300
|
|
|
475,600
|
|
Depreciation
and amortization
|
|
|
958,700
|
|
|
446,300
|
|
|
166,100
|
|
Goodwill
impairment
|
|
|
0
|
|
|
420,000
|
|
|
0
|
|
Total
operating costs
|
|
|
40,853,300
|
|
|
27,232,900
|
|
|
24,982,200
|
|
Income
(loss) from operations
|
|
|
(2,258,400
|
)
|
|
(1,162,200
|
)
|
|
1,517,800
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
Gain
on forgiveness of debt
|
|
|
0
|
|
|
0
|
|
|
1,500,000
|
|
Interest
income
|
|
|
85,300
|
|
|
82,600
|
|
|
35,100
|
|
Interest
expense
|
|
|
(59,700
|
)
|
|
(30,700
|
)
|
|
(394,400
|
)
|
Dividend
income
|
|
|
22,500
|
|
|
5,900
|
|
|
27,300
|
|
Other
income (expense), net
|
|
|
76,800
|
|
|
104,800
|
|
|
(231,000
|
)
|
Total
other income (expense)
|
|
|
124,900
|
|
|
162,600
|
|
|
937,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(2,133,500
|
)
|
|
(999,600
|
)
|
|
2,454,800
|
|
Income
tax benefit (provision)
|
|
|
0
|
|
|
0
|
|
|
(40,000
|
)
|
Net
income (loss)
|
|
|
(2,133,500
|
)
|
|
(999,600
|
)
|
|
2,414,800
|
|
Net
income (loss) per share: basic
|
|
|
(0.04
|
)
|
|
(0.02
|
)
|
|
0.07
|
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
outstanding:
basic
|
|
|
48,714,800
|
|
|
40,049,700
|
|
|
33,773,300
|
|
Net
income (loss) per share: diluted
|
|
|
(0.04
|
)
|
|
(0.02
|
)
|
|
0.07
|
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
outstanding:
diluted
|
|
|
48,714,800
|
|
|
40,049,700
|
|
|
35,840,200
|
|
The
accompanying notes are an integral component of these financial
statements.
vFINANCE,
INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED
DECEMBER 31, 2006, 2005 and
2004
|
|
|
Common
Stock Shares
|
|
Common
Stock Amount
|
|
Additional
Paid-In Capital
|
|
Deferred
Compensation
|
|
Accumulated
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003 (Restated and Revised)
|
|
|
29,851,600
|
|
|
298,500
|
|
|
24,601,800
|
|
|
(24,700
|
)
|
|
(23,431,200
|
)
|
Net
income (Restated and Revised)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
2,414,800
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable
securities (Note 2)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares in conjunction with acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Global Partners and EquityStation, Inc. (Note 4)
|
|
|
6,275,200
|
|
|
62,800
|
|
|
1,518,000
|
|
|
0
|
|
|
0
|
|
Promissory
note conversions (Note 8)
|
|
|
3,444,300
|
|
|
34,400
|
|
|
715,600
|
|
|
0
|
|
|
0
|
|
Conversion
premium on promissory note (Note 8)
|
|
|
0
|
|
|
0
|
|
|
231,600
|
|
|
0
|
|
|
0
|
|
Amortization
of deferred compensation
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
5,300
|
|
|
0
|
|
Balance
at December 31, 2004 (Restated and Revised)
|
|
|
39,571,100
|
|
|
395,700
|
|
|
27,067,000
|
|
|
(19,400
|
)
|
|
(21,016,400
|
)
|
Net
loss (Restated and Revised)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(999,600
|
)
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable
securities (Note 2)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
555,000
|
|
|
5,500
|
|
|
108,000
|
|
|
0
|
|
|
0
|
|
Amortization
of deferred compensation
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
19,400
|
|
|
0
|
|
Balance
at December 31, 2005 (Restated and Revised)
|
|
|
40,126,100
|
|
|
401,200
|
|
|
27,175,000
|
|
|
0
|
|
|
(22,016,000
|
)
|
Net
loss
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(2,133,500
|
)
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable
securities (Note 2)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
0
|
|
|
0
|
|
|
448,200
|
|
|
0
|
|
|
0
|
|
Issuance
of shares in conjunction with acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Sterling Financial Group (Note 4)
|
|
|
13,000,000
|
|
|
130,000
|
|
|
3,276,000
|
|
|
0
|
|
|
0
|
|
Issuance
of shares in arbitration settlements (Note 13)
|
|
|
1,303,800
|
|
|
13,100
|
|
|
248,200
|
|
|
0
|
|
|
0
|
|
Balance
at December 31, 2006
|
|
|
54,429,900
|
|
|
544,300
|
|
|
31,147,400
|
|
|
0
|
|
|
(24,149,500
|
)
|
The
accompanying notes are an integral component of these financial
statements.
vFINANCE,
INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
(CONTINUED)
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Other
|
|
|
|
Total
|
|
|
|
Comprehensive
|
|
Comprehensive
|
|
Shareholders'
|
|
|
|
Income
|
|
Income
|
|
Equity
|
|
Balance
at December 31, 2003 (Restated and Revised)
|
|
|
(170,500
|
)
|
|
|
|
|
1,273,900
|
|
Net
income (Restated and Revised)
|
|
|
0
|
|
|
2,414,800
|
|
|
2,414,800
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale
|
|
|
|
|
|
|
|
|
|
|
marketable
securities (Note 2)
|
|
|
(170,700
|
)
|
|
(170,700
|
)
|
|
(170,700
|
)
|
Comprehensive
income
|
|
|
|
|
|
224,410
|
|
|
|
|
Issuance
of shares in conjunction with acquisition
|
|
|
|
|
|
|
|
|
|
|
of
Global Partners and EquityStation, Inc. (Note 4)
|
|
|
0
|
|
|
|
|
|
1,580,800
|
|
Promissory
note conversions (Note 8)
|
|
|
0
|
|
|
|
|
|
750,000
|
|
Conversion
premium on promissory note (Note 8)
|
|
|
0
|
|
|
|
|
|
231,600
|
|
Amortization
of deferred compensation
|
|
|
0
|
|
|
|
|
|
5,300
|
|
Balance
at December 31, 2004 (Restated and Revised)
|
|
|
(341,200
|
)
|
|
|
|
|
6,085,700
|
|
Net
loss (Restated and Revised)
|
|
|
0
|
|
|
(999,600
|
)
|
|
(999,600
|
)
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale
|
|
|
|
|
|
|
|
|
|
|
marketable
securities (Note 2)
|
|
|
(244,500
|
)
|
|
(244,500
|
)
|
|
(244,500
|
)
|
Comprehensive
loss
|
|
|
|
|
|
(1,244,100
|
)
|
|
|
|
Exercise
of stock options
|
|
|
0
|
|
|
|
|
|
113,500
|
|
Amortization
of deferred compensation
|
|
|
0
|
|
|
|
|
|
19,400
|
|
Balance
at December 31, 2005 (Restated and Revised)
|
|
|
(585,700
|
)
|
|
|
|
|
4,974,500
|
|
Net
loss
|
|
|
0
|
|
|
(2,133,500
|
)
|
|
(2,133,500
|
)
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale
|
|
|
|
|
|
|
|
|
|
|
marketable
securities (Note 2)
|
|
|
(56,800
|
)
|
|
(56,800
|
)
|
|
(56,800
|
)
|
Comprehensive
loss
|
|
|
|
|
|
(2,190,300
|
)
|
|
|
|
Stock-based
compensation expense
|
|
|
0
|
|
|
|
|
|
448,200
|
|
Issuance
of shares in conjunction with acquisition
|
|
|
|
|
|
|
|
|
|
|
of
Sterling Financial Group (Note 4)
|
|
|
0
|
|
|
|
|
|
3,406,000
|
|
Issuance
of shares in arbitration settlements (Note 13)
|
|
|
0
|
|
|
|
|
|
261,300
|
|
Balance
at December 31, 2006
|
|
|
(642,500
|
)
|
|
|
|
|
6,899,700
|
|
The
accompanying notes are an integral component of these financial
statements.
vFINANCE,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER
31,
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
(Restated
|
|
(Restated
|
|
|
|
|
|
and
Revised)
|
|
and
Revised)
|
|
CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(2,133,500
|
)
|
|
(999,600
|
)
|
|
2,414,800
|
|
Adjustments
to reconcile net income (loss) to
|
|
|
|
|
|
|
|
|
|
|
net
cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Non-cash
fees received
|
|
|
(1,974,100
|
)
|
|
(487,500
|
)
|
|
(419,400
|
)
|
Non-cash
compensation paid
|
|
|
1,350,500
|
|
|
158,100
|
|
|
286,300
|
|
Gain
on forgiveness of debt
|
|
|
0
|
|
|
0
|
|
|
(1,500,000
|
)
|
Depreciation
and amortization
|
|
|
958,700
|
|
|
446,300
|
|
|
166,100
|
|
Issuance
of equity in arbitration settlements
|
|
|
261,300
|
|
|
0
|
|
|
0
|
|
Provision
for doubtful accounts
|
|
|
0
|
|
|
69,700
|
|
|
79,800
|
|
Beneficial
conversion feature expense
|
|
|
0
|
|
|
0
|
|
|
360,400
|
|
Conversion
premium expense
|
|
|
0
|
|
|
0
|
|
|
231,600
|
|
Stock-based
compensation
|
|
|
448,200
|
|
|
19,400
|
|
|
5,300
|
|
Goodwill
impairment
|
|
|
0
|
|
|
420,000
|
|
|
0
|
|
Forgiveness
of amount due from unconsolidated affiliate
|
|
|
215,000
|
|
|
0
|
|
|
0
|
|
Impairment
of investment in unconsolidated affilitate
|
|
|
0
|
|
|
80,000
|
|
|
0
|
|
Amounts
forgiven under forgivable loans
|
|
|
36,300
|
|
|
6,600
|
|
|
80,200
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
285,000
|
|
|
(393,400
|
)
|
|
30,700
|
|
Forgivable
loans
|
|
|
(95,100
|
)
|
|
0
|
|
|
0
|
|
Due
from clearing broker
|
|
|
405,200
|
|
|
(38,000
|
)
|
|
(332,100
|
)
|
Notes
receivable - employees
|
|
|
(60,500
|
)
|
|
101,100
|
|
|
14,500
|
|
Investments
in trading securities
|
|
|
(413,400
|
)
|
|
95,700
|
|
|
(220,400
|
)
|
Other
current assets
|
|
|
(54,000
|
)
|
|
(32,100
|
)
|
|
(18,200
|
)
|
Other
assets and liabilities, net
|
|
|
(83,000
|
)
|
|
(79,600
|
)
|
|
189,400
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
798,600
|
|
|
(50,100
|
)
|
|
57,100
|
|
Securities
sold, not yet purchased
|
|
|
(800
|
)
|
|
(25,100
|
)
|
|
(16,300
|
)
|
Cash
provided by (used in) operating activities
|
|
|
(55,600
|
)
|
|
(708,500
|
)
|
|
1,409,800
|
|
CASH
USED IN INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(222,700
|
)
|
|
(125,700
|
)
|
|
(245,800
|
)
|
Proceeds
from sales of investments in securities available-for-sale
|
|
|
426,500
|
|
|
35,200
|
|
|
268,600
|
|
Cash
acquired in acquisition
|
|
|
0
|
|
|
0
|
|
|
56,200
|
|
Investment
in unconsolidated affiliate
|
|
|
(161,900
|
)
|
|
0
|
|
|
0
|
|
Cash
provided by (used in) investing activities
|
|
|
41,900
|
|
|
(90,500
|
)
|
|
79,000
|
|
CASH
PROVIDED BY (USED IN) FINANCING ACTIVTIES:
|
|
|
|
|
|
|
|
|
|
|
Repayments
of capital lease obligations
|
|
|
(208,500
|
)
|
|
(143,400
|
)
|
|
(16,300
|
)
|
Proceeds
from exercise of common stock options
|
|
|
0
|
|
|
113,500
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
used in financing activities
|
|
|
(208,500
|
)
|
|
(29,900
|
)
|
|
(16,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(222,200
|
)
|
|
(828,900
|
)
|
|
1,472,500
|
|
Cash
and cash equivalents at beginning of year
|
|
|
4,427,400
|
|
|
5,256,300
|
|
|
3,783,800
|
|
Cash
and cash equivalents at end of year
|
|
|
4,205,200
|
|
|
4,427,400
|
|
|
5,256,300
|
|
The
accompanying notes are an integral component of these financial
statements.
vFINANCE,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of Business
vFinance,
Inc. (the "Company") is a global financial services company which specializes
in
high growth opportunities. The Company's expertise into this marketplace flows
from three principal lines of business: providing investment banking and
advisory services to micro, small and mid-cap high growth companies; making
markets in over 3,000 micro and small cap stocks; and, offering information
services on its website, a leading destination for emerging companies seeking
capital and investors seeking opportunities. Due to its focus, the Company
believes it is uniquely positioned to offer alternative investments to
institutional and high net-work investors seeking to outperform market indices
in addition to offering a full range of investment options. With over 40 offices
in the U.S. and other parts of the world, the Company serves more than 12,000
corporate, institutional and high net worth clients. 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 National Association
of Securities Dealers ("NASD") and Securities Investor Protection Corporation
("SIPC"). vFinance Investments is also a member of the National Futures
Association ("NFA").
Basis
of
Presentation
The
Consolidated Financial Statements include the accounts of the Company and its
wholly owned subsidiaries. All intercompany accounts have been eliminated in
consolidation.
Reclassifications
Certain
amounts in the 2005 and 2004 Consolidated Financial Statements have been
reclassified to conform to the presentation in the 2006 Consolidated Financial
Statements. Such reclassifications did not have a material impact on the
presentation of the overall financial statements.
Restatement
and Revision
After
review of comments received from the staff of the SEC, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Consolidated
Balance Sheets as of December 31, 2005, 2004, 2003 and 2002 and the Consolidated
Statements of Operations and Shareholders' Equity for the years then ended
should no longer be relied upon because of certain errors in those Consolidated
Financial Statements, as reported on the Form 8-K filed by the Company with
the
SEC on March 6, 2007. Therefore, in accordance with Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 154, "Accounting Changes and Error Corrections -A Replacement of APB
Opinion
No. 20 and FASB Statement No. 3", these Consolidated Financial Statements
have
been restated for the following corrections of errors:
Reclassification
of Securities from Trading to Available-for-Sale
The
Company occasionally receives equity securities from small public companies
in
exchange for services the Company provides. The Company previously classified
these securities as trading securities because the Company's intent was to
sell
them in the near future. However, due to the absence of an active market
for and
frequent buying and selling of these securities, they have been reclassified
as
available-for-sale in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The Company has restated its
2005
and 2004 Consolidated Financial Statements to reflect this change in marketable
security classification, which resulted in the reclassification of unrealized
gains and losses on these securities from the determination of net income
to
accumulated other comprehensive loss, a component of shareholders'
equity.
vFINANCE,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS —
Continued
Amortization
of Customer Relationships
In
connection with the acquisition of certain assets of Global Partners Securities,
Inc. ("Global") and 100% of the issued and outstanding equity securities of
EquityStation, all of which were owned by Level2, a subsidiary of Global (the
"Global Acquisition") in November 2004, the Company recorded goodwill of $1.4
million. Subsequent to the preliminary purchase price allocation, the Company
determined that the purchase price should have been allocated to the acquired
customer relationships rather than goodwill. The Company did not record
amortization of this intangible asset from the date of acquisition through
December 31, 2005. The Company has restated its 2005 and 2004 Consolidated
Financial Statements to reflect amortization of this intangible asset since
the
acquisition date and to classify this intangible asset as customer relationships
rather than goodwill in the Consolidated Balance Sheets.
As
of
March 31, June 30 and September 30, 2006, the Company recorded amortization
of
the intangible asset related to customer lists using a useful life of 5 years.
However, management reconsidered this life based on factors including the
turnover rate of brokers, the expected longevity of the brokers' relationship
with the Company and retention of customer accounts after brokers terminate.
After this review, management determined that the intangible asset's useful
life
should be 10 years. The Company's restated Consolidated Financial Statements
reflect amortization expense from the date of acquisition using a useful life
of
10 years.
Amortization
of Beneficial Conversion Feature
The
Company allocated the proceeds from the SBI Note Purchase Agreement of $975,000
to an imputed interest factor of $563,000 and to a beneficial conversion
feature
of $412,000. The imputed interest factor was recognized over the term of
the SBI
Note, and the beneficial conversion feature was immediately expensed. The
Company has restated its 2004 Consolidated Financial Statements by reversing
all
imputed interest associated with the SBI Note and recording a beneficial
conversion feature of $975,000. Such beneficial conversion feature was
recognized over the term of the SBI Note in accordance with Emerging Issues
Task
Force ("EITF") Issue No. 00-27, "Application of Issue No. 98-5 to Certain
Convertible Instruments", and EITF Issue No. 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios".
Deferral
of Transition Payment
In
March,
2004, the Company entered into a five-year clearing agreement. Under this
agreement, the clearing firm made a $200,000 transition payment to the Company
to mitigate the costs of transitioning to the new firm. The Company recognized
this transition payment as a reduction to clearing and transaction costs
in the
year ended December 31, 2004. The Company has restated its 2004 and 2005
Consolidated Financial Statements to recognize the transition fee ratably
since
its receipt in 2004 through the end of the clearing agreement term, since
the
Company must repay a portion of the transition payment if the clearing agreement
is terminated. See Note 13 to the Consolidated Financial
Statements.
The
net
effect of the restatements on the beginning accumulated deficit, accumulated
other comprehensive income and total stockholders' equity are as
follows:
Beginning
Equity - December 31, 2003
Effect
of Restatements
|
|
|
|
|
Reclassification
of
Securities
from Trading to
Available-for-Sale
|
|
|
|
Beneficial
Conversion Feature
Expense
Recognition
|
|
|
|
|
|
|
|
As
Reported
|
|
2003
|
|
2002
|
|
Cumulative
Total
|
|
2003
|
|
2002
|
|
2001
|
|
Cumulative
Total
|
|
Cumulative
Net
Effect
|
|
Revised
&
Restated
|
|
Additional
paid-in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capital
|
|
|
24,376,800
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
225,000
|
|
|
0
|
|
|
225,000
|
|
|
225,000
|
|
|
24,601,800
|
|
Accumulated
deficit
|
|
|
(23,590,300
|
)
|
|
123,600
|
|
|
46,900
|
|
|
170,500
|
|
|
(114,600
|
)
|
|
(288,500
|
)
|
|
391,700
|
|
|
(11,400
|
)
|
|
159,100
|
|
|
(23,431,200
|
)
|
Accumulated
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
loss
|
|
|
0
|
|
|
(123,600
|
)
|
|
(46,900
|
)
|
|
(170,500
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(170,500
|
)
|
|
(170,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
1,060,300
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(114,600
|
)
|
|
(63,500
|
)
|
|
391,700
|
|
|
213,600
|
|
|
213,600
|
|
|
1,273,900
|
|
The
following tables present a summary of the effects from each of these adjustments
on the revised and restated Consolidated Financial Statements in 2005 and
2004:
2005
|
|
|
|
|
|
|
|
|
|
Effect
of Restatements
|
|
|
|
As
Reported
|
|
Reclassifications
|
|
As
Revised
|
|
Reclassification
of
Securities
Trading to
Available
for Intangible Sale
|
|
Amortization
of
Asset
|
|
Amortization
of Beneficial Conversion
Feature
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
25,826,300
|
|
|
0
|
|
|
25,826,300
|
|
|
244,400
|
|
|
0
|
|
|
0
|
|
Clearing
and transaction costs*
|
|
|
1,905,200
|
|
|
1,112,000
|
|
|
3,017,200
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Depreciation
and amortization
|
|
|
80,700
|
|
|
218,900
|
|
|
299,600
|
|
|
0
|
|
|
146,700
|
|
|
0
|
|
Total
operating expenses
|
|
|
27,021,500
|
|
|
104,700
|
|
|
27,126,200
|
|
|
0
|
|
|
146,700
|
|
|
0
|
|
Income
(loss) from operations
|
|
|
(1,195,200
|
)
|
|
(104,700
|
)
|
|
(1,299,900
|
)
|
|
244,400
|
|
|
(146,700
|
)
|
|
0
|
|
Other
income (expenses)
|
|
|
0
|
|
|
162,600
|
|
|
162,600
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Net
income (loss)
|
|
|
(1,137,300
|
)
|
|
0
|
|
|
(1,137,300
|
)
|
|
244,400
|
|
|
(146,700
|
)
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wt.
avg. shares outstanding - basic and diluted
|
|
|
40,049,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
securities
|
|
|
870,300
|
|
|
0
|
|
|
870,300
|
|
|
(274,300
|
)
|
|
0
|
|
|
0
|
|
Investment
securities available-for-sale
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
274,300
|
|
|
0
|
|
|
0
|
|
Customer
relationships, net
|
|
|
1,446,900
|
|
|
0
|
|
|
1,446,900
|
|
|
0
|
|
|
(165,100
|
)
|
|
0
|
|
Total
assets
|
|
|
9,062,100
|
|
|
0
|
|
|
9,062,100
|
|
|
0
|
|
|
(165,100
|
)
|
|
0
|
|
Other
current liabilities
|
|
|
118,800
|
|
|
0
|
|
|
118,800
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
current liabilities
|
|
|
3,567,400
|
|
|
0
|
|
|
3,567,400
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Additional
paid-in capital
|
|
|
26,821,600
|
|
|
0
|
|
|
26,821,600
|
|
|
0
|
|
|
0
|
|
|
353,400
|
|
Accumulated
deficit
|
|
|
(21,953,200
|
)
|
|
0
|
|
|
(21,953,200
|
)
|
|
585,700
|
|
|
(165,100
|
)
|
|
(353,400
|
)
|
Accumulated
other comprehensive loss
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(585,700
|
)
|
|
0
|
|
|
0
|
|
Total
stockholders' equity
|
|
|
5,269,600
|
|
|
0
|
|
|
5,269,600
|
|
|
0
|
|
|
(165,100
|
)
|
|
0
|
|
(2005
CONTINUED)
|
|
|
|
Effect
of Restatements
|
|
|
|
Deferral
of
Transition
Payment
|
|
Net
Effect Restatements
|
|
Restated
and Revised
|
|
|
|
|
|
|
|
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
-
|
|
$
|
244,400
|
|
|
26,070,700
|
|
Clearing
and transaction costs*
|
|
|
(40,000
|
)
|
|
(40,000
|
)
|
$
|
2,977,200
|
|
Depreciation
and amortization
|
|
|
-
|
|
|
146,700
|
|
$
|
446,300
|
|
Total
operating expenses
|
|
|
(40,000
|
)
|
|
106,700
|
|
$
|
27,232,900
|
|
Income
(loss) from operations
|
|
|
40,000
|
|
|
137,700
|
|
$
|
(1,162,200
|
)
|
Other
income (expenses)
|
|
|
-
|
|
|
-
|
|
$
|
162,600
|
|
Net
income (loss)
|
|
|
40,000
|
|
|
137,700
|
|
$
|
(999,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share
|
|
|
|
|
$ |
0.01
|
|
$
|
(0.02
|
)
|
Wt.
avg. shares outstanding - basic and diluted
|
|
|
|
|
|
|
|
|
40,049,700
|
|
Balance
Sheet:
|
|
|
|
|
|
|
|
|
|
|
Trading
securities
|
|
|
-
|
|
|
(274,300
|
)
|
$
|
596,000
|
|
Investment
securities
available-for-sale
|
|
|
-
|
|
|
274,300
|
|
$
|
274,300
|
|
Customer
relationships, net
|
|
|
-
|
|
|
(165,000
|
)
|
$
|
1,281,800
|
|
Total
assets
|
|
|
-
|
|
|
(165,100
|
)
|
$
|
8,897,000
|
|
Other
current liabilities
|
|
|
130,000
|
|
|
130,000
|
|
$
|
248,800
|
|
Total
current liabilities
|
|
|
130,000
|
|
|
130,000
|
|
$
|
3,697,400
|
|
Additional
paid-in capital
|
|
|
-
|
|
|
353,400
|
|
$
|
27,175,000
|
|
Accumulated
deficit
|
|
|
(130,000
|
)
|
|
(62,800
|
)
|
$
|
(22,016,000
|
)
|
Accumulated
other comprehensive loss
|
|
|
-
|
|
|
(585,700
|
)
|
$
|
(585,700
|
)
|
Total
stockholders' equity
|
|
|
(130,000
|
)
|
|
(295,100
|
)
|
$
|
4,974,500
|
|
*
The
Company reclassified certain amounts in the 2005 and 2004 Consolidated
Statements of Operations from general and administrative costs to clearing
and
transaction costs, to conform to the presentation in the 2006 Consolidated
Statement of Operations.
2004
|
|
|
|
|
|
|
|
|
|
Effect
of Restatements
|
|
|
|
As
Reported
|
|
Reclassifications
|
|
As
Revised
|
|
Reclassification
of
Securities
Trading to
Available
for Sale
|
|
Amortization
of
Intagible
Asset
|
|
Amortization
of
Beneficial
Conversion
Feature
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
26,329,300
|
|
|
0
|
|
|
26,329,300
|
|
|
170,700
|
|
|
0
|
|
|
0
|
|
Clearing
and transaction costs*
|
|
|
1,030,100
|
|
|
1,039,200
|
|
|
2,069,300
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Depreciation
and amortization
|
|
|
147,800
|
|
|
0
|
|
|
147,800
|
|
|
0
|
|
|
18,300
|
|
|
0
|
|
Total
operating expenses
|
|
|
24,793,000
|
|
|
900
|
|
|
24,793,900
|
|
|
0
|
|
|
18,300
|
|
|
0
|
|
Income
from operations
|
|
|
1,536,100
|
|
|
(700
|
)
|
|
1,535,400
|
|
|
170,700
|
|
|
(18,300
|
)
|
|
0
|
|
Other
income (expense)
|
|
|
1,278,300
|
|
|
(230,900
|
)
|
|
1,047,400
|
|
|
0
|
|
|
0
|
|
|
(110,400
|
)
|
Net
income (loss)
|
|
|
2,774,400
|
|
|
(231,600
|
)
|
|
2,542,800
|
|
|
170,700
|
|
|
(18,300
|
)
|
|
(110,400
|
)
|
Net
income per share - basic
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wt.
avg. shares outstanding - basic
|
|
|
33,773,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share - diluted
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wt.
avg. shares outstanding - diluted
|
|
|
35,840,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
6,713,600
|
|
|
0
|
|
|
26,713,600
|
|
|
0
|
|
|
0
|
|
|
353,400
|
|
Accumulated
deficit
|
|
|
(20,815,900
|
)
|
|
0
|
|
|
(20,815,900
|
)
|
|
341,200
|
|
|
(18,300
|
)
|
|
(353,400
|
)
|
Accumulated
other comprehensive
loss
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(341,200
|
)
|
|
0
|
|
|
0
|
|
Total
stockholders' equity
|
|
|
6,274,000
|
|
|
0
|
|
|
6,274,000
|
|
|
0
|
|
|
(18,300
|
)
|
|
0
|
|
2004
CONTINUED
|
|
|
|
Effect
of Restatements
|
|
|
|
Deferral
of
Transition
Payment
|
|
Net
Effect Restatements
|
|
Restated
and Revised
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
-
|
|
|
170,700
|
|
$
|
26,500,000
|
|
Clearing
and transaction costs*
|
|
|
170,000
|
|
|
170,000
|
|
$
|
2,239,300
|
|
Depreciation
and amortization
|
|
|
-
|
|
|
18,300
|
|
$
|
166,100
|
|
Total
operating expenses
|
|
|
170,000
|
|
|
188,000
|
|
$
|
24,982,200
|
|
Income
from operations
|
|
|
(170,000
|
)
|
|
(17,600
|
)
|
$
|
1,517,800
|
|
Other
income (expense)
|
|
|
-
|
|
|
(110,400
|
)
|
$
|
937,000
|
|
Net
income (loss)
|
|
|
(170,000
|
)
|
|
(128,000
|
)
|
$
|
2,414,800
|
|
Net
income per share - basic
|
|
|
|
|
$
|
(0.01
|
)
|
$
|
0.07
|
|
Wt.
avg. shares outstanding - basic
|
|
|
|
|
|
|
|
|
33,773,300
|
|
Net
income per share - diluted
|
|
|
|
|
|
|
|
$
|
0.07
|
|
Wt.
avg. shares outstanding - diluted
|
|
|
|
|
|
|
|
|
35,840,200
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
-
|
|
|
353,400
|
|
$
|
27,067,000
|
|
Accumulated
deficit
|
|
|
(170,000
|
)
|
|
(200,500
|
)
|
$
|
(21,016,400
|
)
|
Accumulated
other comprehensive
loss
|
|
|
-
|
|
|
(341,200
|
)
|
$
|
(341,200
|
)
|
Total
stockholders' equity
|
|
|
(170,000
|
)
|
|
(188,300
|
)
|
$
|
6,085,700
|
|
As
a
result of the reclassification of Securities from Trading to Available-for-Sale,
the Company also reclassified the proceeds from the sale of Securities
Available-for-Sale from Operating Activities to Investing Activities in the
Consolidated Statements of Cash Flows. As a result of this reclassification,
cash used in operating activities and investing activities increased (decreased)
from amounts previously reported by $(35,200) and $35,200, respectively,
in
2005. Additionally, cash provided by operating activities and investing
activities increased (decreased) from amounts previously reported by $(268,600)
and $268,600, respectively, in 2004.
In
May
2005, the FASB issued SFAS No. 154, which requires that a voluntary change
in
accounting principle be applied retroactively with all prior period financial
statements presented on the new accounting principle, unless it is impractical
to do so. This statement also provides that a change in method of depreciating
or amortizing a long-lived non-financial asset be accounted for as a change
in
estimate (prospectively) that was effected by a change in accounting principle.
Additionally, correction of errors in previously issued financial statements
should be termed a "restatements". The new standard is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company adopted SFAS No. 154 effective January 1, 2006, which
did
not have a material impact on the Company's Consolidated Financial
Statements.
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.
Cash
and
Cash Equivalents
Cash
and
cash equivalents include all highly liquid investments with maturities of three
months or less when purchased.
Accounts
and Notes Receivable
Accounts
receivable consist of receivables incurred in the ordinary course of business
including but not limited to investment banking and consulting fees. The Company
has a policy of establishing an allowance for uncollectible accounts based
on
its best estimate of the amount of probable credit losses in its existing
accounts receivable. The Company periodically reviews its accounts receivable
to
determine whether an allowance is necessary based on an analysis of past due
accounts and other factors that may indicate that the realization of an account
may be in doubt. The allowance for uncollectible receivables was $0 at December
31, 2006 and 2005.
Due
from
and Payable to Clearing Brokers
Receivables
from brokers and dealers consist primarily of amounts due from the Company's
clearing organization, which provides clearing and depository services for
brokerage transactions on a fully disclosed basis.
The
Company clears certain of its proprietary and customer transactions through
another broker-dealer on a fully disclosed basis. The amount payable to the
clearing broker relates to the aforementioned transactions and is collateralized
by securities owned by the Company. Due to Clearing Brokers totaled $30,700
and
$85,500 at December 31, 2006 and 2005, respectively, and is included in Other
Current Liabilities in the Consolidated Balance Sheets.
Investments
Investments
consist primarily of marketable equity securities the Company buys and sells
in
market-making activities and marketable equity securities received as
compensation for investment banking services. At December 31, 2006 and 2005,
investments consisted of common stock, corporate bonds, municipal securities,
collateralized mortgage-backed securities and common stock purchase warrants
held for resale.
Investments
the Company buys and sells in its market-making activities are classified as
investments in trading securities and are held for resale in anticipation of
short-term market movements or until such securities are registered or are
otherwise unrestricted. Trading securities, consisting primarily of marketable
equity securities, municipal securities, collateralized mortgages obligations
and corporate bonds, are stated at fair value, based on information obtained
from the Company's clearing firms. In cases where a stock is traded, but the
shares the Company holds are restricted, the Company reduces this fair value
by
25% to reflect this restriction. When a stock has not traded, its fair value
is
deemed to be zero until it begins to trade again. Unrealized gains or losses
are
recognized as trading profits in the Consolidated Statements of Operations,
based on changes in the fair value of the security. Realized gains or losses
are
recognized in the Consolidated Statement of Operations as trading profits when
the equity instruments are sold.
The
Company classifies marketable securities received as compensation for investment
banking services as investments available-for-sale. Available-for-sale
securities are stated at fair value, with unrealized gains or losses reflected
as Other Comprehensive Income (Loss), a component of Comprehensive Income (Loss)
and Accumulated Other Comprehensive Income (Loss) in the accompanying
Consolidated Statements of Shareholders' Equity.
The
fair
values of the Company's marketable securities are based on quoted market prices.
The fair value of trading securities and securities available-for-sale, which
are traded but restricted as to resale, is reduced by 25% to reflect this
restriction. When a stock has not traded, its fair value is deemed to be zero
by
the Company's clearing firms until it begins to trade again.
The
cost
of securities sold is based on the specific identification method. Proprietary
securities transactions in regular-way trades are accrued and recorded on the
trade date, as if they had settled. Profit and loss arising from all securities
and commodities transactions entered into for the account and risk of the
Company are recorded on a trade date basis. Customers' securities and
commodities transactions are reported on a settlement date basis with related
commission income and expense reported on a trade date basis. Amounts receivable
and payable for securities transactions that have not reached their contractual
settlement date are recorded net on the balance sheet.
Financial
Instruments with Off-Balance Sheet Risk
The
securities transactions of the Company's customers are introduced on a fully
disclosed basis with a clearing broker-dealer. The Company holds no customer
funds or securities. The clearing broker-dealer is responsible for execution,
collection of and payment of funds, and receipt and delivery of securities
relative to customer transactions. Off-balance sheet risk exists with respect
to
these transactions due to the possibility that customers may be unable to
fulfill their contractual commitments wherein the clearing broker-dealer may
charge any related losses to the Company. The Company seeks to minimize this
risk through procedures designed to monitor the creditworthiness of its
customers and to ensure that customer transactions are executed properly by
the
clearing broker-dealer.
Property
and Equipment
Property
and equipment are stated on the basis of cost less accumulated depreciation
and
consists primarily of computer equipment. Depreciation is computed using
the
straight-line method over the estimated useful lives of the assets, 3-7 years,
for financial reporting purposes. Included in Property and Equipment is
approximately $704,600 of computer equipment acquired under capital
leases.
The
cost
of repairs and maintenance is expensed as incurred. Major replacements and
improvements are capitalized. When assets are retired or disposed of, the cost
of the asset and related accumulated depreciation are removed from the accounts
and any resulting gains and losses are included in the determination of net
income in the period of disposition.
Leases
The
Company has three operating leases for its office space, at its corporate
headquarters in Boca Raton, Florida, a branch office in New York City, New
York
and its disaster recovery center in Mount Laurel, New Jersey. Additionally,
the
Company has an operating lease for additional office space in Boca Raton,
Florida, which is currently subleased through the end of the remaining lease
term. These leases generally require the Company to pay costs, such as real
estate taxes, common area maintenance costs and utilities. In addition, these
leases generally include scheduled rent increases and may include rent holidays.
The Company accounts for material escalations and rent holidays on a
straight-line basis over the initial terms of the leases, commencing on the
date
the Company can take possession of the leased facility. Resulting liabilities
are recorded as short-term or long-term deferred rent liabilities as
appropriate. These liabilities are then amortized as a reduction of rent expense
on a straight-line basis over the life of the related lease.
Intangible
Assets
The
Company accounts for business combinations using the purchase method of
accounting, in accordance with SFAS No. 141, "Business Combinations". Under
SFAS
No. 141, intangible assets are separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or
if
the intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the Company's intent to do so. The Company accounts for
acquisition of intangible assets, which are acquired individually or within
a
group of assets (but not those acquired in a business combination), in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS
No.
141 and SFAS No. 142 require acquired intangible assets to be initially
recognized and measured based on fair value, amortized over their expected
useful lives and examined for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", whenever
indications of impairment are present.
The
Company's principal identifiable intangible assets consist of acquired customer
relationships, which are amortized on a straight-line basis over their useful
lives, ranging from five to ten years.
Goodwill
During
2005, the final contributing brokers from First Level Capital, a prior period
acquisition, departed the firm. As a result, the discounted expected future
cash
flows associated with the goodwill no longer exceeded the book value of the
goodwill, resulting in goodwill impairment charges of $420,000 in 2005. There
was no goodwill included in the Consolidated Balance Sheets as of December
31,
2006 or 2005.
Impairment
of Long-Lived Assets
In
accordance with SFAS No. 144, the Company periodically reviews its long-lived
assets, including customer relationship intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
the assets may not be fully recoverable. The Company recognizes an impairment
loss when the sum of expected undiscounted future cash flows is less than
the
carrying amount of the asset. The amount of impairment is measured as the
difference between the asset's estimated fair value and its book
value.
Other
Accrued Liabilities
As
of
December 31, 2006 and 2005, other accrued liabilities were comprised primarily
of (i) $70,000 and $280,000, respectively, in settlement reserves for open
litigation, (ii) $306,000 and $185,000, respectively, in accrued bonus payable
and (iii) $76,000 and $93,600, respectively, in accrued audit
fees.
Revenue
Recognition
The
Company follows the guidance of the SAB 104 for revenue recognition. In general,
the Company records revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price
to
the customer is fixed or determinable, and collectibility is reasonably
assured.
The
Company earns brokerage commissions and trading profits, which are recognized
at
the time of transaction execution, along with related clearing and other costs.
The Company also earns revenue from investment banking and consulting. Monthly
consulting fees for investment banking are recognized as earned. Investment
banking success fees are revenues that are paid only upon successful completion
of a capital raise or other transaction and are generally based on a percentage
of the total transaction value. Success fees are recognized when earned as
a
result of successfully completing a transaction. Other brokerage related income
includes revenues related to various investment banking services, which is
recognized as services are provided.
The
Company does not require collateral from its customers. Revenues are not
concentrated in any particular region of the country or with any individual
or
group.
The
Company periodically receives equity instruments which include stock purchase
warrants and common and preferred stock from companies as part of compensation
for investment banking services, which are classified as available-for-sale
securities in the accompanying Consolidated Balance Sheets. Primarily all
such
equity instruments are received from small public companies and are typically
restricted as to resale, with the Company generally receiving registration
rights within one year. When the Company receives equity instruments as
compensation for investment banking services, revenue is recognized based
on the
fair value of these instruments, in accordance with SFAS No. 115 "Accounting
for
Certain Investments in Debt and Equity Securities" and EITF Issue No. 00-8
"Accounting by a Grantee for an Equity Instrument to be Received in Conjunction
with Providing Goods or Services." The Company recognizes revenue for stock
purchase warrants based on the Black Scholes valuation model. The revenue
recognized related to other equity instruments is determined based on available
market information, discounted by a factor reflective of the expected holding
period for those particular equity instruments.
Occasionally,
the Company receives equity instruments in private companies with no readily
available market value. Equity instruments for which there is not a public
market are valued based on factors such as significant equity financing by
sophisticated, unrelated new investors, history of positive cash flow from
operations, the market value of comparable publicly traded companies (discounted
for liquidity) and other pertinent factors. Management also considers recent
offers to purchase a company's securities and the filings of registration
statements in connection with a company's initial public offering when valuing
warrants.
The
Company also occasionally distributes equity instruments or the proceeds from
the sale of equity instruments to its employees, as compensation for their
investment banking success. The distributions are made in accordance with
individual compensation agreements, which vary on a banker by banker basis.
Accordingly, unrealized gains and losses recorded in the Consolidated Statements
of Operations related to securities held by us at the end of each period also
impact compensation expense and accrued compensation for the portion to be
distributed.
Stock
Based Compensation
The
Company has a stock option plan under which options to purchase shares of the
Company's common stock may be granted to key employees and directors of the
Company, which are more fully described in Note 9 below. Options granted under
the plans are non-qualified and are granted at a price equal to the closing
market price of the common stock on to the date of grant. Generally, options
granted have a term of 5 years from the date of grant and will vest in
increments of 25% per year over a 4-year period on the annual anniversary of
the
grant
date.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share Based
Payment" ("SFAS No. 123R") and in March 2005, the SEC issued SAB 107 regarding
its interpretation of SFAS No. 123R. The standard requires companies to expense
the grant-date fair value of stock options and other equity-based compensation
issued to employees and is effective for annual periods beginning after June
15,
2005. Effective January 1, 2006, the Company adopted SFAS No. 123R and related
interpretive guidance issued by the FASB and SEC using the modified prospective
transition method. Under the modified prospective transition method, SFAS
No.
123R applies to new awards modified, repurchased or cancelled after the required
effective date. Additionally, compensation cost for the portion of the awards
for which the requisite service period has not been rendered as of the required
effective date is recognized as the requisite service is rendered on or after
the required effective date. Accordingly, the Company's Consolidated Financial
Statements have not been restated for prior periods to reflect the adoption
of
SFAS No. 123R.
Prior
to
January 1, 2006, the Company accounted for stock-based employee compensation
plans (including shares issued under its stock option plans) in accordance
with
APB Opinion No. 25 and followed the pro forma net income, pro forma income
per
share, and stock-based compensation plan disclosure requirements set forth
in
SFAS No. 123, "Accounting for Stock-Based Compensation.”
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
income (loss), as reported
|
|
|
(999,600
|
)
|
|
2,414,800
|
|
Pro
forma stock-based compensation expense, net of taxes
|
|
|
(544,000
|
)
|
|
(167,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income (loss)
|
|
|
(1,543,600
|
)
|
|
2,247,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share, as reported
|
|
|
(0.02
|
)
|
|
0.07
|
|
Pro
forma stock-based compensation expense
|
|
|
(0.02
|
)
|
|
0
|
|
Pro
forma net income earnings (loss) per share
|
|
|
(0.04
|
)
|
|
0.07
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share, as reported
|
|
|
(0.02
|
)
|
|
0.07
|
|
Pro
forma stock-based compensation expense
|
|
|
(0.02
|
)
|
|
(0.01
|
)
|
Pro
forma diluted net income (loss) per share
|
|
|
(0.04
|
)
|
|
0.06
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
4.25
|
%
|
|
3.31
|
%
|
Expected
dividend yield
|
|
|
0
|
|
|
0
|
|
Expected
term
|
|
|
4-5
years
|
|
|
4-5
years
|
|
Expected
volatility
|
|
|
72
|
%
|
|
112
|
%
|
Forgivable
Loans
In
order
to remain competitive in the marketplace, the Company has granted forgivable
loans to certain employees, primarily registered representatives, as part of
their compensation package in order to attract them to join the firm. The terms
of the loans generally range from one to three years. For each year the employee
is in good standing with the Company, the Company forgives a ratable portion
of
the loan and charges this amount to compensation expense. If the employee is
terminated, the principal balance is due and payable immediately.
The
Company makes every effort to collect any monies due on forgivable loans. The
loans do not bear interest and interest is not imputed because the amounts
of
imputed interest would be immaterial to the Company's Consolidated Financial
Statements and because the Company's ability to collect such interest would
not
be probable. As of December 31, 2006 and 2005, the balance of the forgivable
loans was $58,800 and $0, respectively.
Income
Taxes
The
Company accounts for income taxes under the liability method in accordance
with
SFAS No. 109, "Accounting for Income Taxes". Under this method, deferred
income
tax assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Fair
Value of Financial Instruments
The
carrying amounts of the Company's financial instruments, which include cash
and
cash equivalents, accounts and notes receivable, accounts payable and accrued
expenses approximate their fair values. The fair values of the Company's
marketable securities is primarily based on quoted market prices.
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
September 2006, the SEC issued SAB 108, to address diversity in practice in
quantifying financial statement misstatements and the potential for the build
up
of improper amounts on the balance sheet. SAB 108 identifies the approach that
registrants should take when evaluating the effects of unadjusted misstatements
on each financial statement, the circumstances under which corrections of
misstatements should result in a revision to financial statements, and
disclosures related to the correction of misstatements. SAB 108 is effective
for
any report for an interim period of the first fiscal year ending after November
16, 2006. The adoption of SAB 108 did not have a material impact on the
Company's Consolidated Financial Statements.
In
June
2006, the FASB issued FASB Interpretation No. ("FIN") 48, "Accounting for
Uncertainty in Income Taxes". This interpretation applies to all tax positions
accounted for in accordance with SFAS No. 109, Accounting for Income Taxes.
FIN
48 clarifies the application of FASB Statement No. 109 by defining the criteria
that an individual tax position must meet in order for the position to be
recognized within the financial statements. It also provides guidance on
measurement, de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition for tax positions. This
interpretation is effective for fiscal years beginning after December 15,
2006,
with earlier adoption permitted. The adoption of FIN 48 is not expected to
have
a material impact on the Company's Consolidated Financial
Statements.
In
February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments" which amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS
No.
155 simplifies the accounting for certain derivatives embedded in other
financial instruments by allowing them to be accounted for as a whole if
the
holder elects to account for the whole instrument on a fair value basis.
SFAS
No. 155 also clarifies and amends certain other provisions of SFAS No.133
and
SFAS No.140. SFAS No.155 is effective for all financial instruments acquired,
issued or subject to a remeasurement event occurring in fiscal years beginning
after September 15, 2006. The adoption of SFAS No. 155 is not expected to
have a
material impact on the Company's Consolidated Financial
Statements.
2.
INVESTMENTS
Net
realized and unrealized gains (losses) related to investments in trading
securities were $9.6 million, $4.2 million and $5.2 million in 2006, 2005 and
2004, respectively.
Investments
in marketable securities classified as available-for-sale are comprised of
equity securities and warrants received in connection with investment banking
services. The cost basis of the equity securities classified as
available-for-sale at December 31, 2006 and 2005 was $1,057,100 and $860,000,
respectively, and the net unrealized losses were $642,500 and $585,700,
respectively. The estimated fair value of these securities was $414,600 and
$274,300 at December 31, 2006 and 2005, respectively. Net unrealized losses
related to available-for-sale securities are classified as Other Comprehensive
Income, a component of Comprehensive Income (Loss) and Accumulated Other
Comprehensive Loss in the accompanying Consolidated Statements of Shareholders'
Equity.
At
December 31, 2006, substantially all equity securities classified as
available-for-sale were restricted.
3.
PROPERTY AND EQUIPMENT
At
December 31, 2006 and 2005, property and equipment, net, consisted of the
following:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Furniture
and fixtures
|
|
$
|
90,800
|
|
$
|
85,100
|
|
Equipment
|
|
|
727,500
|
|
|
559,500
|
|
Capital
leases - computer equipment
|
|
|
704,500
|
|
|
572,500
|
|
Leasehold
improvements
|
|
|
174,800
|
|
|
166,700
|
|
Software
|
|
|
214,800
|
|
|
173,900
|
|
|
|
|
|
|
|
|
|
|
|
|
1,912,400
|
|
|
1,557,700
|
|
Less:
accumulated depreciation
|
|
|
(1,251,400
|
)
|
|
(865,100
|
)
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
661,000
|
|
$
|
692,600
|
|
The
Company recorded depreciation expense of $386,300, $299,600 and $147,800
in the
years ended December 31, 2006, 2005 and 2004, respectively.
4.
ACQUISITIONS
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.
Purchase
price consideration consisted of 13.0 million shares of the Company's common
stock, to which the Company has granted certain registration rights. The
assets
acquired in this transaction were the Sterling Financial customer relationships,
which were capitalized as an intangible asset, customer relationships, at
the
time of acquisition in accordance with SFAS No. 142. This allocation is
preliminary and subject to final adjustments. The purchase price of the customer
relationships was determined to be $3.4 million, based on the average closing
price of the Company's stock for the five days prior to completing the
acquisition, to be amortized over an expected useful life of five years.
The
results of operations derived from the acquired customer relationships are
included in the Company's results of operations since the acquisition in
May
2006.
Global
Acquisition
On
November 2, 2004, vFinance Investments completed its acquisition of certain
assets of Global Partners Securities, Inc. ("Global") and 100% of the issued
and
outstanding equity securities of EquityStation, Inc. ("EquityStation"), all
of
which were owned by Level2, a subsidiary of Global (the
"Global Acquisition").
Purchase
price consideration consisted of 6.3 million shares of the Company's common
stock, to which the Company has granted certain registration rights. The
transaction was accounted for as a business combination, in accordance with
SFAS
No. 141. The purchase price of the customer relationships was determined
to be
$1.4 million, based on the average closing price of the Company's stock for
the
five days prior to completing the acquisitions, and the warrants were valued
based upon a Black-Scholes valuation model. The customer relationships were
assigned a ten year useful life and the results of operations of the acquired
business are included in the Company's results of operations since the
acquisition in November 2004.
In
accordance with Financial Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" the Company has included vested
stock
options issued by the Company in exchange for outstanding awards held by
employees of acquired companies as part of the purchase
price.
Pro
Forma
Financial Information
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, 2005. 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:
|
|
2006
|
|
|
|
vFinance
|
|
Sterling
|
|
Adjustments
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
38,594,900
|
|
$
|
3,759,000
|
|
$
|
-
|
|
$
|
42,354,300
|
|
Income
(loss) from operations
|
|
|
(2,258,400
|
)
|
|
48,000
|
|
|
(340,600
|
)
|
|
(2,551,000
|
)
|
Net
income (loss)
|
|
|
(2,133,500
|
)
|
|
48,000
|
|
|
(340,600
|
)
|
|
(2,426,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share - basic and diluted
|
|
$
|
(0.04
|
)
|
|
|
|
$
|
(0.03
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wt.
avg. shares outstanding - basic and diluted
|
|
|
48,528,000
|
|
|
|
|
|
13,000,000
|
|
|
61,528,000
|
|
|
|
2005
|
|
|
|
vFinance
|
|
Sterling
|
|
Adjustments
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
26,070,700
|
|
$
|
9,954,500
|
|
$
|
-
|
|
$
|
36,025,200
|
|
Loss
from operations
|
|
|
(1,162,200
|
)
|
|
447,600
|
|
|
(681,200
|
)
|
|
(1,395,800
|
)
|
Net
loss
|
|
|
(999,600
|
)
|
|
447,600
|
|
|
(681,200
|
)
|
|
(1,233,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share - basic and diluted
|
|
$
|
(0.02
|
)
|
|
|
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wt.
avg. shares outstanding - basic and diluted
|
|
|
40,049,700
|
|
|
|
|
|
13,000,000
|
|
|
53,049,700
|
|
5.
CUSTOMER RELATIONSHIPS
At
December 31, 2006 and 2005, customer relationships totaled $4.1 million and
$1.3
million, net of accumulated amortization of $737,400 and $165,000,
respectively.
Acquired
customer relationships are amortized using the straight-line method over
their
estimated useful lives, which coincide with their expected revenue-generating
lives, which range from five to ten years. The Company recorded amortization
expense of $572,400, $146,700 and $18,300 in the years ended December 31,
2006,
2005 and 2004, respectively.
6.
NET
CAPITAL REQUIREMENT
Both
vFinance Investments and EquityStation are subject to the Securities and
Exchange Commission Uniform Net Capital Rule (rule 15c3-1), which requires
the
maintenance of minimum net capital and requires that the ratio of aggregate
indebtedness to net capital, both as defined, shall not exceed 15 to 1 (and
the
rule of the "applicable" exchange also provides that equity capital may not
be
withdrawn or cash dividends paid if the resulting net capital ratio would
exceed
10 to 1). At December 31, 2006, vFinance Investments had net capital of $1.5
million, which was $514,500 in excess of its required net capital of $1.0
million. EquityStation had net capital of $427,300 that was $327,300 in excess
of its required net capital of $100,000.
vFinance
Investments' aggregate indebtedness to net capital ratio was to 2.01 to 1 in
2006. Equity Station's aggregate indebtedness to net capital ratio was 1 to
2.84. vFinance Investments and EquityStation qualify under the exemptive
provisions of Rule 15c3-3 under Section (k)(2)(ii) of the Rule, as they do
not
carry security accounts of customers or perform custodial functions related
to
customer securities.
7.
RELATED PARTY TRANSACTIONS
Employment
Agreements
On
November 16, 2004, the Company entered into new agreements ("Employment
Agreements") amending and restating employment agreements dated November 8,
1999
with the Company's current Chairman and Chief Executive Officer and the
Company's former Chief Operating Officer and Chairman. Under the terms of the
Employment Agreements, which have three year terms and automatically extend
for
a one year period on each anniversary date thereafter unless the Company has
provided a non-renewal notice thirty (30) days prior to an anniversary date
as
directed by a majority vote of the Board of Directors, each individual shall
receive (i) an initial base salary of $257,000 per annum which shall increase
5%
per annum beginning January 1, 2005 and each year thereafter and will be
reviewed by the Board at least annually and may be increased (but not decreased)
from time to time as Board may determine; (ii) discretionary bonuses and/or
interim cash bonuses and/or other bonuses when and in such amounts as may be
determined by the Company's Board of Directors based on each individuals
performance, the Company's performance and/or other factors; provided that
the
Board shall meet at least annually to review employees' bonus entitlements;
and
(iii) incentive compensation paid quarterly no later than the 45th day following
the end of quarter primarily based on performance of the Company and its
respective subsidiaries. The Primary Employment Agreements also contain
provisions related to change of control.
On
May
12, 2006, the Company an Mr. Sokolow entered into an amendment to Mr. Sokolow's
Employment Agreement to provide a base salary of $343,511. On December 29,
2006,
the Company and Mr. Sokolow entered into another amendment to the Mr. Sokolow's
Employment Agreement, pursuant to which Mr. Sokolow serves as the Chairman
of
the Company's Board of Directors and the Company's Chief Executive Officer.
Mr.
Sokolow's base salary was increased from $343,511 per annum to $396,750 per
annum, subject to an annual increase based on the reported cost of living
adjustment beginning January 1, 2008. None of the other terms of the Sokolow
Employment Agreement were modified in any material respect.
On
December 29, 2006, the Company and Mr. Mahoney entered into a Resignation
Agreement (the "Resignation Agreement"), pursuant to which Mr. Mahoney resigned
from his positions as the Chairman of the Company's Board of Directors and
the
Company's Chief Operating Officer effective January 3, 2007. In accordance
with
the Resignation Agreement, the Company agreed to pay to Mr. Mahoney, upon a
Change in Control anytime from January 3, 2007 up to and including January
3,
2010 an amount equal to: (a) twice the sum of Mr. Mahoney's highest annual
base
salary during his employment with us, and (b) twice the greater of (i) the
highest bonus, incentive or other compensation payment actually received by
Mr.
Mahoney during the three years preceding the Change in Control and (ii) the
highest bonus, incentive or other compensation payment Mr. Mahoney was entitled
to receive during the three years preceding the Change in Control. In the event
of a Change in Control, all stock options, warrants, stock appreciation rights
and other similar securities held by Mr. Mahoney will become immediately and
fully vested.
In
connection with Mr. Mahoney's resignation, on December 29, 2006, the Company
and
Mr. Mahoney jointly terminated Mr. Mahoney's Amended and Restated Employment
Agreement dated November 16, 2004, which termination was effective January
3,
2007. The termination of the employment agreement prior to the expiration of
its
term will not cause the Company to incur any early termination penalties of
any
kind, and all post-employment matters between Mr. Mahoney and the Company are
governed by the Resignation Agreement.
Two
of
the principals of Global and Equity Station each entered into employment
agreements with the Company, which provided an annual base salary of $144,000,
certain incentive bonuses, and options to purchase 350,000 shares of the
Company's common stock. The options are exercisable at $0.19 per share, and
vest
ratably over a three year period.
JSM
Capital Holding Corp.
On
January 1, 2003, the Company entered into an agreement with JSM Capital Holding
Corp. ("JSM"), a retail brokerage operations headquartered in New York and
founded by John S. Matthews (who was also, at the same time, named the President
of the Company's Retail Brokerage Division). The Company issued JSM 1,000,000
warrants to purchase its common stock at an exercise price of $0.20 in exchange
for a 19% equity position in JSM. The warrants were valued using the
Black-Scholes valuation method which calculated the value to be $0.08 per
warrant, or $80,000. The Company accounted for this investment using the cost
method. In August 2005, the relationship between the Company and JSM was
terminated, and the Company fully impaired the investment in JSM in the fourth
quarter of 2005, when it was determined that JSM has no remaining material
assets or operations.
8.
SHAREHOLDERS' EQUITY
Common
Stock
In
2006,
the Company increased its authorized number of shares of common stock from
75.0
million to 100.0 million.
Preferred
Stock
The
Company is authorized to issue up to 2.5 million shares of Preferred Stock.
122,500 shares were designated as Series A Convertible Preferred Stock, par
value $0.01 per share, and 50,000 shares were designated as Series B Convertible
Preferred Stock, par value $0.01 per share. As of December 31, 2006 and 2005,
there was no Preferred Stock outstanding.
SBI
Note
Conversion
In
November 2001, the Company entered into a Note Purchase Agreement, as amended,
(the "Agreement") with SBI Investments (USA) Inc. ("SBI"). Under the terms
of
the Agreement, SBI provided a loan to the Company in the amount of $975,000
in
the form of a 48-month non-interest bearing, convertible note (the "SBI Note"),
the proceeds of which were allocated to beneficial conversion feature and
amortized over the term of the note. The SBI Note was convertible at SBI's
option into as many as 3.4 million shares of the Company's common stock at
$0.285 per share. During 2002, the SBI Note was reduced by $225,000 when
a
portion of the SBI Note was converted into 789,500 shares of the Company's
common stock. During 2004, the remaining balance on the SBI Note was converted
into 3.4 million shares of the Company's common stock. Of this amount, $545,000
was converted into 2.7 million shares of the Company's common stock at a
discounted rate of $0.20 per share under a special arrangement offered by
the
Company, resulting in $231,600 of conversion premium expense at the time
of
conversion. The Company recorded $360,400 of beneficial conversion feature
expense in the Consolidated Statements of Operations in 2004, including $47,000
of amortization and $313,400 written off upon final
conversion.
Warrants
The
Company has issued warrants to purchase shares of the Company's common stock,
primarily in connection with financing transactions, acquisitions and litigation
settlement. A summary of the warrant activity for the years ended December
31,
2006 and 2005 is as follows:
|
|
Number
of Shares
|
|
Weighted
Average Exercise Price
|
|
Range
of Exercise Prices
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2003
|
|
|
5,398,500
|
|
$
|
1.70
|
|
|
0.65
- 7.20
|
|
|
5,388,500
|
|
Issued
|
|
|
2,927,900
|
|
$
|
0.16
|
|
|
0.15
- 0.16
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
Expired
|
|
|
(230,000
|
)
|
$
|
0.44
|
|
|
0.35
- 2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2004
|
|
|
8,096,400
|
|
$
|
1.18
|
|
|
0.15
- 7.20
|
|
|
8,086,400
|
|
Issued
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
Expired
|
|
|
(436,800
|
)
|
$
|
2.21
|
|
|
0.35
- 6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
7,659,600
|
|
$
|
1.12
|
|
|
0.15
- 7.20
|
|
|
7,649,600
|
|
Issued
|
|
|
3,299,700
|
|
$
|
0.11
|
|
|
0.11
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
Expired
|
|
|
(6,999,600
|
)
|
$
|
1.18
|
|
|
0.15
- 7.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
3,959,700
|
|
$
|
0.16
|
|
|
0.11
- 0.63
|
|
|
3,949,700
|
|
The
following table summarizes information concerning warrants outstanding at
December 31, 2006:
Exercise
Prices
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual Life
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
$
0.11
|
|
|
3,299,700
|
|
|
2.84
|
|
|
|
|
$
0.15
|
|
|
250,000
|
|
|
1.03
|
|
|
|
|
$
0.625
|
|
|
400,000
|
|
|
4.63
|
|
|
|
|
$
2.250
|
|
|
10,000
|
|
|
0.83
|
|
|
|
|
|
|
|
3,959,700
|
|
|
2.90
|
|
$
|
0.16
|
|
There
were 3.3 million and 2.9 million warrants issued in 2006 and 2004, respectively.
There were no warrants issued in 2005. The weighted average issue-date fair
value of warrants issued equaled $0.13 and $0.16 in 2006 and 2004, respectively.
As of December 31, 2006, the aggregate intrinsic value of the Company's
outstanding and exercisable warrants was $38,500.
9.
STOCK
OPTIONS
During
2006, the Company recorded $448,200 of compensation expense (included as
Compensation, commission and benefits costs in the 2006 Consolidated Statement
of Operations) attributable to stock options granted or vested subsequent
to
December 31, 2005.
The
Company uses the Black-Scholes valuation model to determine compensation expense
and amortizes compensation expense over the requisite service period of the
grants on a straight-line basis. The following table summaries the assumptions
used:
Risk-free
interest rate
|
|
|
4.25%
- 5.25%
|
|
|
|
|
|
|
Expected
dividend yield
|
|
|
-
|
|
|
|
|
|
|
Expected
term
|
|
|
Five
years
|
|
|
|
|
|
|
Expected
volatility
|
|
|
72.4%
- 80.7%
|
|
The
risk
free investment rate is based on the U.S. Treasury yield curve at the time
of
grant. The expected term of stock options grated is derived from historical
data
and represents the period of time that stock options are expected to be
outstanding. The expected volatility is based on historical volatility, implied
volatility and other factors impacting the Company.
The
following table summarizes the stock option activity during 2006:
|
|
Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining Contractual Term (Years)
|
|
Aggregate
Intrinsic Value
|
|
Options
outstanding at beginning of year
|
|
|
14,614,800
|
|
$
|
0.23
|
|
|
|
|
|
|
|
Granted
|
|
|
7,215,000
|
|
$
|
0.21
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
Forfeited
and expired
|
|
|
(6,251,100
|
)
|
$
|
0.29
|
|
|
|
|
|
|
|
Options
outstanding at end of year
|
|
|
15,578,700
|
|
$
|
0.20
|
|
|
4.0
|
|
$
|
59,100
|
|
Options
exercisable at end of year
|
|
|
4,532,300
|
|
$
|
0.19
|
|
|
3.1
|
|
$
|
25,200
|
|
Options
available for future grants
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
The
weighted-average grant-date fair value of stock options granted during 2006,
2005 and 2004 was $0.14, $0.13 and $0.16, respectively. The total intrinsic
value of stock options exercised during 2005 was $113,500. There were no stock
options exercised in 2006 or 2004.
A
summary
of non-vested stock option transactions is as follows for 2006:
|
|
Shares
|
|
Weighted-Average
Grant-Date Fair Value (per share)
|
|
|
|
|
|
|
|
Nonvested
at beginning of period
|
|
|
10,688,400
|
|
$
|
0.13
|
|
Granted
|
|
|
7,215,000
|
|
$
|
0.21
|
|
Vested
|
|
|
(3,245,800
|
)
|
$
|
0.11
|
|
Forfeited
and expired
|
|
|
(3,611,200
|
)
|
$
|
0.32
|
|
Nonvested
at end of period
|
|
|
11,046,400
|
|
$
|
0.13
|
|
As
of
December 31, 2006, there was $1.4 million of total unrecognized compensation
cost related to non-vested stock options, which is expected to be recognized
over a period of four years. The total fair value of shares vested during
2006
was $357,000.
During
2005 proceeds from the exercise of stock options were $113,500. There were
no
stock options exercised in 2006 or 2004.
10.
EARNINGS PER SHARE
The
Company calculates earnings per share in accordance with SFAS No. 128, "Earnings
per Share". In accordance with SFAS No. 128, basic earnings 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:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
48,714,800
|
|
|
40,049,700
|
|
|
33,773,300
|
|
Effect
of dilutive stock options and warrants
|
|
|
-
|
|
|
-
|
|
|
2,066,900
|
|
Weighted
average shares outstanding - diluted
|
|
|
48,714,800
|
|
|
40,049,700
|
|
|
35,840,200
|
|
As
of
December 31, 2006 and 2005, the Company had 19.5 million and 22.3 million stock
options and warrants outstanding, respectively, none of which have been included
in diluted earnings per share since they would have been anti-dilutive as a
result of the net losses in 2006 and 2005. As of December 31, 2004, 2.3 million
options and warrants were not included in diluted earnings per share because
they would have been anti-dilutive.
11.
DEBT
AND CAPITAL LEASE OBLIGATIONS
Capital
lease obligations at December 31, 2006 consisted of the following:
Obligations
under capital leases
|
|
|
336,400
|
|
Less:
current maturities
|
|
|
(210,800
|
)
|
|
|
$
|
125,600
|
|
Future
minimum lease payments for equipment under capital leases at December 31, 2006
are as follows:
Year
Ending December 31:
|
|
Amount
|
|
|
|
|
|
2007
|
|
$
|
242,400
|
|
2008
|
|
|
87,800
|
|
2009
|
|
|
31,600
|
|
2010
|
|
|
-
|
|
2011
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
minimum lease payments
|
|
|
361,800
|
|
Less:
amounts representing interest
|
|
|
(25,400
|
)
|
Present
value of net minimum lease payments
|
|
|
336,400
|
|
Less:
current portion
|
|
|
(210,800
|
)
|
|
|
$
|
125,600
|
|
Debt
Forgiveness
On
January 25, 2002, the Company entered into a Credit Agreement, as amended on
April 12, 2002, with UBS Americas, Inc. ("UBS"). Under the terms of the Credit
Agreement, UBS provided the Company with a revolving credit facility for up
to
$3.0 million for the purpose of supporting the expansion of the Company's
brokerage business or investments in infrastructure to expand the Company's
operations and broker-dealer operations. The loan had a term of 4 years, was
required to be repaid in full by January 2005, and accrued interest at LIBOR
plus a LIBOR margin of 2% if the loan was repaid within a month or 5% if it
was
outstanding more than a month. The Company borrowed $1.5 million under the
credit facility on January 28, 2002 leaving an additional $1.5 million
available.
In
June
2003, Fidelity Investments, on behalf of its clearing division, National
Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company
("NFS"), announced that it had acquired Correspondent Services Clearing ("CSC"),
an affiliate of UBS and vFinance Investments' clearing firm at the time. In
connection with this transaction, the Company believed certain actions
constituted breaches under the Credit Agreement, including the Company's
preclusion from borrowing the $1.5 million remaining available under the credit
facility.
In
March
2004, NFS agreed to extinguish the $1.5 million owed by the Company under the
Credit Agreement, pursuant to a guaranty Fidelity Investments made to UBS as
part of their original acquisition of the CSC clearing division. In connection
with this forgiveness, the Company recorded a $1.5 million gain on debt
forgiveness, relinquished any right to borrow the remaining $1.5 million that
should have been available under the Credit Agreement and waived any lender
liability claims for actual or consequential damages it may have had against
UBS. Additionally, the Company entered into a clearing agreement with NFS.
See
Note 13 to the Consolidated Financial Statements.
12.
INCOME TAXES
The
components of the Company's tax provision for the years ended December 31,
2006,
2005 and 2004 were as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Current
income tax expense
|
|
$
|
-
|
|
$
|
-
|
|
$
|
40,000
|
|
Deferred
income tax (benefit)
|
|
|
-
|
|
|
-
|
|
|
(40,000
|
)
|
|
|
$
|
- |
|
$
|
-
|
|
$
|
-
|
|
The
reconciliation of the income tax computed at the U.S. Federal statutory rate
to
income tax expense for the period ended December 31, 2006, 2005 and
2004:
|
|
2006
|
|
%
|
|
2005
|
|
%
|
|
2004
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
expense (benefit) at statutory rate of 35%
|
|
|
(766,600
|
)
|
|
35,000
|
|
$
|
(349,800
|
)
|
|
(35,000
|
) |
$
|
845,200
|
|
|
35,000
|
|
Nondeductible
expenses
|
|
|
66,900
|
|
|
|
|
|
2,916,900
|
|
|
|
|
|
2,916,800
|
|
|
|
|
Alternative
minimum tax
|
|
|
— |
|
|
|
|
|
-
|
|
|
|
|
|
40,000
|
|
|
|
|
Change
in valuation allowance
|
|
|
699,700
|
|
|
|
|
|
(2,567,100
|
)
|
|
|
|
|
(3,802,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income tax expense (benefit)
|
|
$
|
-
|
|
|
|
|
$
|
-
|
|
|
|
|
$
|
0
|
|
|
|
|
The
Company was not subject to any alternative minimum tax for the tax year ending
December 31, 2006 or 2005.
Deferred
income taxes reflect the net income tax effect of temporary differences between
the carrying amounts of the assets and liabilities for financial reporting
purposes and amounts used for income taxes. The Company's deferred income tax
assets and liabilities consist of the following:
|
|
2006
|
|
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
Net
operating loss carry-forwards
|
|
$
|
4,828,000
|
|
$
|
4,688,700
|
|
Deferred
rent
|
|
|
66,000
|
|
|
-
|
|
Stock
options
|
|
|
171,000
|
|
|
-
|
|
Impairment
of investment in JSM
|
|
|
30,000
|
|
|
30,900
|
|
Accrued
bonuses
|
|
|
117,000
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
49,000
|
|
|
(97,300
|
)
|
Deferred
revenue
|
|
|
34,000
|
|
|
-
|
|
Reserve
for settlements
|
|
|
37,000
|
|
|
-
|
|
|
|
|
5,332,000
|
|
|
4,622,300
|
|
Valuation
allowance
|
|
|
(5,332,000
|
)
|
|
(4,622,300
|
)
|
Net
deferred tax asset
|
|
$
|
-
|
|
$
|
-
|
|
Net
operating loss carry-forwards totaled approximately $12.6 million at December
31, 2006. The net operating loss carry-forwards can be utilized or expire if
not
utilized through the tax years 2021 through 2026. After consideration of all
the
evidence, both positive and negative, management has recorded a valuation
allowance at December 31, 2006 and 2005, due to the uncertainty of realizing
the
deferred tax assets.
Utilization
of the Company's net operating loss carry-forwards are limited based on changes
in ownership as defined in Internal Revenue Code Section 382.
13.
COMMITMENTS AND CONTINGENCIES
Clearing
Agreement
vFinance
Investments entered into a clearing agreement with NFS in 2004 (the "Clearing
Agreement"). NFS acquired the vFinance Investment's prior clearing firm and
made
a payment to extinguish $1.5 million owed by the Company under a credit facility
in connection with that acquisition. See Note 11 to the Consolidated Financial
Statements.
The
new
Clearing Agreement requires NFS to pay a monthly incentive bonus to the Company
up to $25,000 per month over the five-year term of the Clearing Agreement
(to an
aggregate of $1.5 million). The Company also received a $200,000 payment
from
NFS in 2004, as compensation for the transition costs associated with migrating
to a new clearing firm. As consideration for these incentives, NFS required
a
termination fee of $1.7 million 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 December 31, 2006, the
contingent obligation of the Company associated with this Clearing Agreement
was
$1.0 million.
Operating
Lease Commitments
The
Company leases office space under the terms of operating leases. The following
chart shows lease obligations including rental of real property and
equipment.
Year
Ending December 31:
|
|
Amount
|
|
|
|
|
|
2007
|
|
$
|
1,356,400
|
|
2008
|
|
|
1,271,400
|
|
2009
|
|
|
703,500
|
|
2010
|
|
|
611,100
|
|
2011
|
|
|
635,100
|
|
Thereafter
|
|
|
1,286,600
|
|
Total
|
|
|
5,864,100
|
|
Less:
sublease rentals
|
|
|
(3,992,800
|
)
|
|
|
$
|
1,871,300
|
|
Total
rent expense under operating leases, including space rental, totaled $1,026,800,
$726,300 and $690,400 for the years ended December 31, 2006, 2005 and 2004,
respectively.
Litigation
The
Company, including its wholly owned subsidiary vFinance Investments, has
been
named as a defendant in various lawsuits and customer arbitrations. These
claims
result from the actions of brokers affiliated with vFinance Investments.
In
addition, under the vFinance Investments registered representatives' contract,
each registered representative has indemnified the Company for these claims.
In
accordance with SFAS No. 5 "Accounting for Contingencies," the Company has
established liabilities for potential losses from such complaints, legal
actions, investigations and proceedings. In establishing these liabilities,
the
Company's management uses its judgment to determine the probability that
losses
have been incurred and a reasonable estimate of the amount of losses. In
making
these decisions, the Company bases its judgments on knowledge of the situations,
consultations with legal counsel and historical experience in resolving similar
matters. In many lawsuits, arbitrations and regulatory proceedings, it is
not
possible to determine whether a liability has been incurred or to estimate
the
amount of that liability until the matter is close to resolution. However,
accruals are reviewed regularly and are adjusted to reflect the Company's
estimates of the impact of developments, rulings, advice of counsel and any
other information pertinent to a particular matter. Because of the inherent
difficulty in predicting the ultimate outcome of legal and regulatory actions,
the Company cannot predict with certainty the eventual loss or range of loss
related to such matters. If the Company's judgments prove to be incorrect,
its
liability for losses and contingencies may not accurately reflect actual
losses
that result from these actions, which could materially affect results in
the
period other expenses are ultimately determined. As of December 31, 2006,
the
Company has accrued approximately $70,000 for these matters. In 2005 the
Company
acquired an errors and omissions policy for certain future claims in excess
of
the policy's $75,000 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.
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 other 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
October 16, 2006, the Company settled a lawsuit initiated by two customers
by
agreeing to issue 1.0 million shares of the Company's common stock to the
customers. The common stock issuance was accounted for as general and
administrative expense, based on the average closing price of the Company's
common stock for the five days prior to issuance of these shares. As part of
the
settlement, the Company agreed that if the customers sold the common stock
after
October 16, 2007 at a sales price of less than $0.175 per share, the Company
would pay the customers the difference between $0.175 per share and the actual
net sales price of the common stock in a transaction with a bona fide third
party.
On
or
about February 28, 2005, Knight Equity Markets, LP ("Knight") filed an
arbitration action (NASD Case No. 05-01069) against vFinance Investments,
Inc.
("vFinance"), claiming that vFinance received roughly $6.5 million in dividends
that rightfully belong to Knight. vFinance asserts that the dividends actually
went to two of its clients, Pearl Securities LLC ("Pearl Securities") and
Michael Balog, and that vFinance has no liability. vFinance filed third party
claims against Pearl Securities and Michael Balog to bring all of the parties
into the action. vFinance's motion to amend the third party claim to include
these two clients is currently pending. Pearl and Balog have filed motions
to
dismiss vFinance's claims and the motions are scheduled for hearing on April
17,
2006. Knight is seeking approximately $6.5 million in damages plus costs,
attorney fees and punitive damages. vFinance 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 vFinance, claiming that vFinance wrongfully
terminated his independent contact with vFinance and that vFinance "stole"
his
clients and brokers. Mr. Matthews has obtained a temporary restraining order
and
an agreed upon injunction was issued by the NASD panel. Matthews and JMS
Capital
Holding Corp., a plaintiff in the arbitration action also request unspecified
damages resulting from vFinance's alleged improper activity. The full hearing
on
the merits was currently scheduled for August 30 through September 1, 2006,
but
was postponed and has not been rescheduled. vFinance intends to vigorously
defend this matter. In addition to contesting and defending against JSM's
and
Mr. Matthews claims, vFinance filed a counterclaim for indemnity based upon
the
contractual agreement between the parties.
The
Company engaged in a number of other legal proceedings incidental to the conduct
of its business. These claims aggregate a range of $28,000 to $260,000.
14.
DEFINED CONTRIBUTION PLAN
The
Company maintains a defined contribution savings plan in which substantially
all
employees are eligible to participate. The Company may match up to 25% of the
employee's salary. The Company made no contributions to the plan for the years
ended December 31, 2006, 2005 and 2004, respectively.
15.
CASH
FLOW INFORMATION
Supplemental
disclosure of cash flow information and non-cash items affecting the statement
of cash flows are as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest during the year
|
|
$
|
59,700
|
|
$
|
30,700
|
|
$
|
34,000
|
|
Cash
paid for income taxes during the year
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
items affecting investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of computer equipment under capital leases
|
|
$
|
132,000
|
|
$
|
368,000
|
|
$
|
204,600
|
|
Common
stock issued for acquisition
|
|
$
|
3,406,000
|
|
$
|
-
|
|
$
|
1,580,800
|
|
Common
stock issued for payment of note
|
|
$
|
-
|
|
$
|
-
|
|
$
|
750,000
|
|
Common
stock issued to settle arbitration
|
|
$
|
261,300
|
|
$
|
-
|
|
$
|
-
|
|
16.
CONCENTRATIONS OF CREDIT RISK
The
Company maintains its cash in bank and brokerage deposit accounts, the majority
of which, at times, are either uninsured or may exceed federally insured limits.
At December 31, 2006, the Company had $3.4 million in United States bank
deposits, which exceeded federally insured limits. The Company places its cash
with high quality insured financial institutions and has not experienced any
losses in such accounts through December 31, 2006.
The
Company and its subsidiaries are engaged in various trading and brokerage
activities in which counterparties primarily include broker-dealers, banks,
and
other financial institutions. The Company clears a substantial portion of its
retail, wholesale and market-making transactions through a single clearing
broker. Similarly, the Company clears most of its fixed income security
transactions through another clearing broker. In the event these or other such
counterparties do not fulfill their obligations, the Company may be exposed
to
risk. The risk of default depends on the creditworthiness of the counterparty
or
issuer of the instrument. It is the Company's policy to review, as necessary,
the credit standing of each counterparty.
18.
QUARTERLY FINANCIAL DATA
As
discussed in Note 1 to the Consolidated Financial Statements, the Company's
Consolidated Financial Statements have been restated in accordance with SFAS
No.
154 to correct certain errors. The following tables present certain items in
the
Company's Consolidated Statements of Income for each of the quarterly periods
in
2006 and 2005.
|
|
Three
Months Ended
March 31, 2005
|
|
Three
Months Ended
June 30, 2005
|
|
Three
Months Ended
September 30, 2005
|
|
Three
Months
Ended
December 31,
2005
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
Revenues,
as reported (1)
|
|
$
|
8,754,800
|
|
$
|
9,655,500
|
|
$
|
9,545,500
|
|
|
|
|
Reclassifications
to other income (expense), net (2)
|
|
|
141,100
|
|
|
(36,600
|
)
|
|
(62,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
revised
|
|
|
8,895,900
|
|
|
9,618,900
|
|
|
9,483,200
|
|
|
|
|
Restatement
to reclassify securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
|
|
|
111,700
|
|
|
35,600
|
|
|
46,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
- restated and revised
|
|
$
|
9,007,600
|
|
$
|
9,654,500
|
|
$
|
9,529,400
|
|
$
|
10,403,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations, as reported (1)
|
|
|
234,000
|
|
|
(425,100
|
)
|
|
(478,600
|
)
|
|
|
|
Reclassifications
from revenue to other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(expense),
net (2)
|
|
|
141,100
|
|
|
(36,600
|
)
|
|
(62,300
|
)
|
|
|
|
Reclassifications
from operating expenses to other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
(expense), net (2)
|
|
|
(145,100
|
)
|
|
17,900
|
|
|
14,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations, revised
|
|
|
230,000
|
|
|
(443,800
|
)
|
|
(526,700
|
)
|
|
|
|
Restatement
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of securities available-for-sale
|
|
|
111,700
|
|
|
35,600
|
|
|
46,200
|
|
|
|
|
Amortization
of customer relationships
|
|
|
36,700
|
|
|
36,700
|
|
|
36,700
|
|
|
|
|
Recognition
of transition payment
|
|
|
10,000
|
|
|
10,000
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
effect of restatement adjustments
|
|
|
158,400
|
|
|
82,300
|
|
|
92,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations - restated and revised
|
|
$
|
388,400
|
|
$
|
(361,500
|
)
|
$
|
(433,800
|
)
|
$
|
(1,851,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss), as reported (1)
|
|
|
253,200
|
|
|
(425,100
|
)
|
|
(478,600
|
)
|
|
|
|
Restatement
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of securities available-for-sale
|
|
|
111,700
|
|
|
35,600
|
|
|
46,200
|
|
|
|
|
Amortization
of customer relationships
|
|
|
36,700
|
|
|
36,700
|
|
|
36,700
|
|
|
|
|
Recognition
of transition payment
|
|
|
10,000
|
|
|
10,000
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
effect of restatements
|
|
|
158,400
|
|
|
82,300
|
|
|
92,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) - restated and revised
|
|
$
|
411,600
|
|
$
|
(342,800
|
)
|
$
|
(385,700
|
)
|
$
|
(1,816,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - basic, as reported (1)
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
|
|
|
Net
effect of adjustments
|
|
|
0.00
|
|
|
0.00
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - basic -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restated
and revised
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
avg. shares outstanding
|
|
|
40,126,100
|
|
|
47,269,000
|
|
|
53,126,100
|
|
|
53,357,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - diluted as reported (1)
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
|
|
|
Net
effect of adjustments
|
|
|
0.00
|
|
|
0.00
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - diluted -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restated
and revised
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
avg. shares outstanding - diluted
|
|
|
42,231,200
|
|
|
47,269,000
|
|
|
53,126,100
|
|
|
53,357,600
|
|
(1)
Amounts labeled "as reported" represent amounts reported in the Company's
quarterly reports on Form 10-Q for the quarterly periods ended March 31, June
30
and September 30, 2006.
(2)
We
reclassified certain amounts from revenues and operating expenses to other
income and expense, net during 2006.
(3)
Revenues and operating expenses increased in the second, third and fourth
quarters of 2006 compared to the first quarter of 2006, primarily as a result
of
the Sterling Financial acquisition.
(4)
The
Company's loss from operations and net loss increased during the quarter
ended
December 31, 2006, primarily as a result of $261,300 of expenses recorded
in
connection with arbitration settlements, the forgiveness of $215,000 due
from an
unconsolidated affiliate, the accrual of incentive compensation to be paid
in
2007 and a decrease in success fee revenues derived from investment banking
services compared to prior quarters.
vFINANCE,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS —
Continued
|
|
Three
Months Ended
March 31, 2005
|
|
Three
Months Ended
June 30,2005
|
|
Three
Months Ended
September 30, 2005
|
|
Three
Months
Ended
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
as reported (1)
|
|
$
|
6,491,200
|
|
$
|
6,320,700
|
|
$
|
6,593,900
|
|
$
|
6,420,500
|
|
Reclassifications
to other income (expense), net (2)
|
|
|
(200
|
)
|
|
(19,500
|
)
|
|
(41,200
|
)
|
|
60,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
revised
|
|
|
6,491,000
|
|
|
6,301,200
|
|
|
6,552,700
|
|
|
6,481,400
|
|
Restatement
to reclassify securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
|
|
|
119,900
|
|
|
10,400
|
|
|
38,500
|
|
|
75,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
- restated and revised
|
|
$
|
6,610,900
|
|
$
|
6,311,600
|
|
$
|
6,591,200
|
|
$
|
6,557,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations, as reported (1)
|
|
|
(173,600
|
)
|
|
(69,500
|
)
|
|
(132,700
|
)
|
|
(819,400
|
)
|
Reclassifications
from revenue to other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(expense),
net (2)
|
|
|
(200
|
)
|
|
(19,500
|
)
|
|
(41,200
|
)
|
|
60,900
|
|
Reclassifications
from operating expenses to other
|
|
|
|
|
|
|
|
|
|
income
(expense), net (2)
|
|
|
(18,400
|
)
|
|
8,300
|
|
|
10,100
|
|
|
(104,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations, revised
|
|
|
(192,200
|
)
|
|
(80,700
|
)
|
|
(163,800
|
)
|
|
(863,200
|
)
|
Restatement
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of securities available-for-sale
|
|
|
119,900
|
|
|
10,400
|
|
|
38,500
|
|
|
75,600
|
|
Amortization
of customer relationships
|
|
|
(36,700
|
)
|
|
(36,700
|
)
|
|
(36,700
|
)
|
|
(36,600
|
)
|
Recognition
of transition payment
|
|
|
10,000
|
|
|
10,000
|
|
|
10,000
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
effect of restatement adjustments
|
|
|
93,200
|
|
|
(16,300
|
)
|
|
11,800
|
|
|
49,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations - restated and revised
|
|
$
|
(99,000
|
)
|
$
|
(97,000
|
)
|
$
|
(152,000
|
)
|
$
|
(814,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss), as reported (1)
|
|
|
(154,500
|
)
|
|
(69,500
|
)
|
|
(132,700
|
)
|
|
(780,600
|
)
|
Restatement
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of securities available-for-sale
|
|
|
119,900
|
|
|
10,400
|
|
|
38,500
|
|
|
75,600
|
|
Amortization
of customer relationships
|
|
|
(36,700
|
)
|
|
(36,700
|
)
|
|
(36,700
|
)
|
|
(36,600
|
)
|
Recognition
of transition payment
|
|
|
10,000
|
|
|
10,000
|
|
|
10,000
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
effect of restatements
|
|
|
93,200
|
|
|
(16,300
|
)
|
|
11,800
|
|
|
49,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) - restated and revised
|
|
$
|
(61,300
|
)
|
$
|
(85,800
|
)
|
$
|
(120,900
|
)
|
$
|
(731,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - basic & diluted, as reported (1)
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
(0.02
|
)
|
Net
effect of adjustments
|
|
|
0.00
|
|
|
0.00
|
|
|
0.00
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - basic & diluted -
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
avg. shares outstanding basic & diluted
|
|
|
39,816,000
|
|
|
40,126,000
|
|
|
40,123,100
|
|
|
40,049,700
|
|
(1)
Amounts labeled "as reported" represent amounts reported in the Company's
quarterly reports on Form 10-QSB for the quarterly periods ended March 31,
June
30 and September 30, 2005.
(2)
We
reclassified certain amounts from revenues and operating expenses to other
income and expense, net to conform to the 2006 Statement of Operations
presentation. Included in those reclassification was approximately $70,000
received in connection with a legal settlement, formerly classified as a
reduction in operating expenses.
(3)
The
Company's loss from operations and net loss increased during the quarter
ended
December 31, 2005, primarily as a result of $420,000 of goodwill impairment
recorded during the quarter ended December 31, 2005.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13. Other Expenses of Issuance and Distribution.
The
following table sets forth the estimated costs and expenses of the Registrant
in
connection with the offering described in the registration statement.
SEC
Registration Fee
|
|
$
|
92
|
|
Accounting
Fees and Expenses
|
|
|
5,000
|
|
Legal
Fees and Expenses
|
|
|
32,000
|
|
Miscellaneous
|
|
|
5,000
|
|
|
|
|
|
|
Total
|
|
$
|
40,092
|
|
ITEM
14. Indemnification of Directors and Officers.
Section
102(b)(7) of the Delaware General Corporation Law grants the Registrant the
power to limit the personal liability of its directors to the Registrant or
its
stockholders for monetary damages for breach of a fiduciary duty. Article VII
of
the Registrant’s Certificate of Incorporation, as amended, provides for the
limitation of personal liability of the directors of the Registrant as follows:
“To
the
fullest extent permitted by the General Corporation Law of the State of
Delaware, as the same presently exists or may hereafter be amended, no director
of the Corporation shall be liable to the Corporation or any of its stockholders
for monetary damages for breach of fiduciary duty as a director.”
Article
XII, of the Registrant’s Bylaws, as amended and restated, provide for
indemnification of directors and officers to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law.
The
Registrant has a directors’ and officers’ liability insurance policy.
The
above
discussion is qualified in its entirety by reference to the Registrant’s
Certificate of Incorporation and Bylaws.
ITEM
15. Recent Sales of Unregistered Securities
On
October 16, 2006, we entered into a settlement agreement with Henry S. Snow,
Sandra L. Snow, Michael Golden and Ben Lichtenberg to settle a suit filed
against us alleging breach of contract and unjust enrichment and seeking damages
of $250,000 plus interest and court costs. Pursuant to the terms of the now
settlement agreement, we issued 1,000,000 shares of our common stock to Henry
S.
Snow and Sandra L. Snow. The closing price of our common stock on October 16,
2006 was $0.20 per share. The transaction was exempt from registration under
Section 4(2) of the Securities Act.
In
November 2004, in accordance with the terms of the Global Acquisition
agreements, we delivered into escrow 8,324,690 shares of our common stock,
and
warrants to purchase 3,299,728 shares of our common stock at a price of $0.11
per share. After the shares and warrants were deposited in escrow, a dispute
arose among the parties over the amount of the shares and warrants that were
deposited in escrow and the value of such securities. On November 7, 2006,
we
and vFinance Investments entered into a settlement and escrow release agreement,
pursuant to which the securities issued in the name of Global and Level2 were
cancelled. In lieu thereof, we issued 3,288,253 and 3,288,252 shares of our
common stock to Global and Level2, respectively. We also issued warrants to
purchase 1,303,393 and 1,303,392 shares of our common stock at a price of $0.11
per share to Global and Level2, respectively. The closing price of our common
stock on November 7, 2006 was $0.22 per share. We issued the shares and warrants
to Global and Level2 pursuant to the transactional exemption under Section
4(2)
of the Securities Act of 1933.
On
May
11, 2006, under the terms of the asset purchase agreement with Sterling
Financial, we issued 13 million shares of our common stock to SFGC in exchange
for the acquired assets. The closing price of our common stock on May 11, 2006
was $0.25 per share. Such securities were issued pursuant to an exemption
provided by Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D promulgated thereunder.
ITEM
16. Exhibits
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
2.1
|
|
Share
Exchange Agreement among the Company, vFinance Holdings, Inc.,
certain
shareholders of vFinance Holdings, Inc. and Union Atlantic, dated
November
8, 1999 (incorporated by reference to Exhibit 2.1 to the Company's
Current
Report on Form 8-K filed with the SEC on November 8,
1999).
|
|
|
|
2.2
|
|
Amendment
to Share Exchange Agreement dated November 29, 1999 (incorporated
by
reference to Exhibit 2.2 to the Company's Annual Report on Form
10-KSB
filed with the SEC on March 30, 2000).
|
|
|
|
2.3
|
|
Agreement
and Plan of Merger dated as of December 22, 2000, by and among
the
Company, NW Holdings, Inc., and Alvin S. Mirman, Ilene Mirman,
Marc N.
Siegel, Richard L. Galterio, Vincent W. Labarbara, Eric M. Rand,
and Mario
Marsillo, Jr. (incorporated by reference to Exhibit 2.1 to the
Company's
Current Report on Form 8-K filed with the SEC on January 17,
2001).
|
|
|
|
2.4
|
|
Agreement
and Plan of Merger, dated as of January 3, 2001, by and among the
Company,
Colonial Acquisition Corp., Colonial Direct Financial Group, Inc.,
and
Michael Golden and Ben Lichtenberg (incorporated by reference to
Exhibit
2.2 to the Company's Current Report on Form 8-K filed with the
SEC on
January 17, 2001).
|
|
|
|
2.5
|
|
Securities
Exchange Agreement, dated as of August 15, 2001, among Kathleen
Wallman,
Steven Wallman, Joseph Daniel and vFinance.com, Inc. (n/k/a vFinance,
Inc.) (Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB filed with the SEC on November
14,
2001).
|
|
|
|
3.1
|
|
Certificate
of Incorporation as filed with the Delaware Secretary of State
on February
12, 1992 (incorporated by reference to the Company's Registration
Statement on Form S-18 filed with the SEC on July 24,
1992).
|
|
|
|
3.2
|
|
Certificate
of Renewal and Revival of Certificate of Incorporation as filed
with the
Delaware Secretary of State on March 15, 1996 (incorporated by
reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-KSB filed
with
the SEC on March 30, 2000).
|
|
|
|
3.3
|
|
Certificate
of Amendment to the Certificate of Incorporation as filed with
the
Delaware Secretary of State on April 28, 1999 (incorporated by
reference
to Exhibit 3.3 to the Company's Annual Report on Form 10-KSB filed
with
the SEC on March 30, 2000).
|
|
|
|
3.4
|
|
Certificate
of Amendment to Certificate of Incorporation as filed with the
Delaware
Secretary of State on March 13, 2000 (incorporated by reference
to Exhibit
3.4 to the Company's Annual Report on Form 10-KSB filed with the
SEC on
March 30, 2000).
|
|
|
|
3.5
|
|
Certificate
of Amendment to Certificate of Incorporation as filed with the
Delaware
Secretary of State on November 28, 2001 (incorporated by reference
to
Exhibit 3.5 to the Company's Annual Report on Form 10-KSB filed
with the
SEC on April 16, 2002).
|
|
|
|
3.6
|
|
Certificate
of Designation of Series A Convertible Preferred Stock of the Company
as
filed with the Delaware Secretary of State on January 3, 2001
(incorporated by reference to Exhibit 3(i).1 to the Company's Current
Report on Form 8-K filed with the SEC on January 17,
2001).
|
3.7
|
|
Certificate
of Designation of Series B Convertible Preferred Stock of the Company
as
filed with the Delaware Secretary of State on January 3, 2001
(incorporated by reference to Exhibit 3(i).2 to the Company's Current
Report on Form 8-K filed with the SEC on January 17,
2001).
|
|
|
|
3.8*
|
|
Certificate
of Renewal and Revival of Charter as filed with the Delaware Secretary
of
State on November 30, 2006.
|
|
|
|
3.9*
|
|
Amended
and Restated Certificate of Incorporation of the Company as filed
with the
Delaware Secretary of State on November 30, 2006.
|
|
|
|
3.10
|
|
Bylaws
of the Company (incorporated by reference to the Company's Registration
Statement on Form S-18 filed with the SEC on July 24,
1992).
|
|
|
|
3.11
|
|
Unanimous
Written Consent of the Company's Board of Directors dated January
24,
1994, amending the Bylaws (incorporated by reference to Exhibit
3.6 to the
Company's Annual Report on Form 10-KSB filed with the SEC on March
30,
2000).
|
|
|
|
3.12
|
|
Unanimous
Written Consent of the Company's Board of Directors, effective
as of
January 24, 1999, amending the Bylaws (incorporated by reference
to
Exhibit 3.7 to the Company's Annual Report on Form 10-KSB filed
with the
SEC on March 30, 2000).
|
|
|
|
4.1
|
|
Form
of Warrant issued to AMRO International, S.A. (to purchase 100,000
shares), CALP II Limited Partnership, a Bermuda limited partnership
(to
purchase 350,000 shares), Celeste Trust Reg (to purchase 5,000 shares),
Balmore SA (to purchase 35,000 shares), Sallee Investments LLLP
(to
purchase 25,000 shares), World Ventures Fund I, LLC (to purchase
25,000
shares), RBB Bank Aktiengesellschaft (to purchase 130,000 shares)
and
Thomas Kernaghan & Co., Ltd. (to purchase 58,333 shares) (incorporated
by reference to Exhibit 4.2 to the Company's Current Report on
Form 8-K
filed with the SEC on April 13, 2000).
|
|
|
|
4.2
|
|
Stock
Purchase Warrant, dated August 15, 2001, issued to Kathleen Wallman
(incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-QSB filed with the SEC on November 14,
2001).
|
|
|
|
4.3
|
|
Stock
Purchase Warrant, dated August 15, 2001, issued to Joseph Daniel
(incorporated by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-QSB filed with the SEC on November 14,
2001).
|
|
|
|
4.4
|
|
Form
of Common Stock Purchase Warrant (incorporated by reference to
Exhibit 4.2
to the Company's Current Report on Form 8-K filed with the SEC
November 8,
2004).
|
|
|
|
4.5
|
|
Warrant
to Purchase Common Stock dated November 7, 2006 issued to Global
Partners
Securities, Inc. (incorporated by reference to Exhibit 10.2 to
the
Company's Current Report on Form 8-K filed with the SEC on November
13,
2006.).
|
|
|
|
4.6
|
|
Warrant
to Purchase Common Stock dated November 7, 2006 issued to Level2.com,
Inc.
(incorporated by reference to Exhibit 10.3 to the Company's Current
Report
on Form 8-K filed with the SEC on November 13, 2006).
|
|
|
|
5.1*
|
|
Opinion
of Edwards Angell Palmer & Dodge LLP.
|
|
|
|
10.1
|
|
Purchase
Agreement between the Company and Steven Jacobs and Mauricio Borgonovo,
dated December 24, 1999, for the purchase of Pinnacle Capital Group,
LLC
(incorporated by reference to Exhibit 10.9 to the Company's Annual
Report
on Form 10-KSB filed with the SEC on March 30,
2000).
|
10.2
|
|
Asset
Purchase Agreement among the Company, Steven Jacobs and Mauricio
Borgonovo
dated January 3, 2000 (incorporated by reference to Exhibit 10.10
to the
Company's Annual Report on Form 10-KSB filed with the SEC on March
30,
2000).
|
|
|
|
10.3
|
|
Asset
Purchase Agreement dated November 17, 1999 among the Company, Andrew
Reckles, Paul T. Mannion and Vincent Sbarra (incorporated by reference
to
Exhibit 10.11 to the Company's Annual Report on Form 10-KSB filed
with the
SEC on March 30, 2000).
|
|
|
|
10.4
|
|
Stock
Purchase Agreement between the Company and River Rapids Ltd., dated
September 27, 1999 (incorporated by reference to Exhibit 10.14
to the
Company's Annual Report on Form 10-KSB filed with the SEC on March
30,
2000).
|
|
|
|
10.5
|
|
Amendment
to Stock Purchase Agreement between the Company and River Rapids
Ltd.
dated December 22, 1999 (incorporated by reference to Exhibit 10.15
to the
Company's Annual Report on Form 10-KSB filed with the SEC on March
30,
2000).
|
|
|
|
10.6
|
|
Common
Stock and Warrants Purchase Agreement among the Company, AMRO
International, S.A., CALP II Limited Partnership, a Bermuda Limited
partnership, Celeste Trust Reg, Balmore SA, Sallee Investments
LLLP, World
Ventures Fund I, LLC and RBB Bank Aktiengesellschaft, dated March
31, 2000
(incorporated by reference to Exhibit 2.1 to the Company's Current
Report
on Form 8-K filed with the SEC on April 13, 2000).
|
|
|
|
10.7
|
|
Registration
Rights Agreement among the Company, AMRO International, S.A., CALP
II
Limited Partnership, a Bermuda limited partnership, Celeste Trust
Reg,
Balmore SA, Sallee Investments LLLP, World Ventures Fund I, LLC,
RBB Bank
Aktiengesellschaft and Thomas Kernaghan & Co., Ltd., dated March 31,
2000 (incorporated by reference to Exhibit 4.1 to the Company's
Current
Report on Form 8-K filed with the SEC on April 13,
2000).
|
|
|
|
10.8
|
|
Escrow
Agreement among the Company, AMRO International, S.A., CALP II
Limited
Partnership, a Bermuda limited partnership, Celeste Trust Reg,
Balmore SA,
Sallee Investments LLLP, World Ventures Fund I, LLC, RBB Bank
Aktiengesellschaft and Epstein Becker & Green, P.C., dated March 31,
2000 (incorporated by reference to Exhibit 10.21 to Amendment N0.
1 to the
Company's Registration (Statement on Form SB-2 filed with the SEC
on July
14, 2000).
|
|
|
|
10.9
|
|
Amended
and Restated Employment Letter Agreement dated December 18, 2000,
between
the Company and David Spector (incorporated by reference to Exhibit
10.24
to the Company's Annual Report on Form 10-KSB filed with the SEC
on March
20, 2001).
|
|
|
|
10.10
|
|
Registration
Rights Agreement, dated as of August 15, 2001, among Kathleen Wallman,
Joseph Daniel and vFinance.com, Inc. (n/k/a vFinance, Inc.) (Incorporated
by reference to Exhibit 10.2 to the Company's Quarterly Report
on Form
10-QSB filed with the SEC on November 14, 2001).
|
|
|
|
10.11
|
|
Note
Purchase Agreement by and between vFinance.com, Inc. d/b/a vFinance,
Inc.
(n/k/a vFinance, Inc.) and Best Finance Investments Limited (n/k/a
SBI
Investments (USA), Inc.) dated November 28, 2001 (incorporated
by
reference to Exhibit 10.18 to the Company's Annual Report on Form
10-KSB
filed with the SEC April 16, 2002).
|
|
|
|
10.12
|
|
Letter
Agreement dated November 30, 2001 amending Note Purchase Agreement
(incorporated by reference to Exhibit 10.19 to the Company's Annual
Report
on Form 10-KSB filed with the SEC April 16, 2002).
|
|
|
|
10.13
|
|
Letter
Agreement dated December 14, 2001 amending Note Purchase Agreement
(incorporated by reference to Exhibit 10.20 to the Company's Annual
Report
on Form 10-KSB filed with the SEC April 16,
2002).
|
10.14
|
|
Letter
Agreement dated December 28, 2001 amending Note Purchase Agreement
(incorporated by reference to Exhibit 10.21 to the Company's Annual
Report
on Form 10-KSB filed with the SEC April 16, 2002).
|
|
|
|
10.15
|
|
Letter
Agreement dated February 13, 2002 amending Note Purchase Agreement
(incorporated by reference to Exhibit 10.22 to the Company's Annual
Report
on Form 10-KSB filed with the SEC April 16, 2002).
|
|
|
|
10.16
|
|
Letter
Agreement dated March 4, 2002 amending Note Purchase Agreement
(incorporated by reference to Exhibit 10.23 to the Company's Annual
Report
on Form 10-KSB filed with the SEC April 16, 2002).
|
|
|
|
10.17
|
|
Credit
Facility by and between the Company and UBS Americas, Inc. dated
as of
January 25, 2002 (incorporated by reference to Exhibit 10.24 to
the
Company's Annual Report on Form 10-KSB filed with the SEC April
16,
2002).
|
|
|
|
10.18
|
|
Subordination
Agreement by and among the Company, UBS Americas, Inc., and SBI
Investments (USA), Inc. dated as of January 25, 2002 (incorporated
by
reference to Exhibit 10.25 to the Company's Annual Report on Form
10-KSB
filed with the SEC April 16, 2002).
|
|
|
|
10.19
|
|
Consulting
Agreement effective as of August 20, 2001 by and between vFinance.com,
Inc. and Insight Capital Consultants Corporation (incorporated
by
reference to Exhibit 10.34 to the Company's Annual Report on Form
10- KSB
filed with the SEC April 16, 2002).
|
|
|
|
10.20
|
|
Amendment
to Credit Agreement dated April 12, 2002 by and between the Company
and
UBS Americas Inc. (incorporated by reference to Exhibit 10.36 to
the
Company's Annual Report on Form 10-KSB filed with the SEC April
16,
2002).
|
|
|
|
10.21
|
|
Selected
Asset Purchase Agreement dated as of May 29, 2002 among vFinance
Investments, Inc., Somerset Financial Partners, Inc., Somerset
Financial
Group, Inc., Douglas Toth and Nicholas Thompson (the "Select Asset
Purchase Agreement") (incorporated by reference to Exhibit 10.1
to the
Company's Quarterly Report on Form 10-QSB filed with the SEC August
14,
2002).
|
|
|
|
10.22
|
|
Amendment
to Select Asset Purchase Agreement dated June 17, 2002 among vFinance
Investments, Inc., Somerset Financial Partners, Inc., Somerset
Financial
Group, Inc. Douglas Toth and Nicholas Thompson (incorporated by
reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB
filed
with the SEC August 14, 2002).
|
|
|
|
10.23
|
|
Escrow
Agreement dated June 19, 2002 among vFinance Investments, Inc.,
Somerset
Financial Partners, Inc., Somerset Financial Group, Inc. Douglas
Toth,
Nicholas Thompson and Krieger & Prager LLP (incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-QSB
filed
with the SEC August 14, 2002).
|
|
|
|
10.24
|
|
Termination
Agreement (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB/A filed with the SEC November 14,
2002).
|
|
|
|
10.25
|
|
Branch
Agreement between the Company and JSM Holding Corp (incorporated
by
reference to Exhibit 10.41 to the Company's Annual Report on Form
10-KSB
filed with the SEC March 31, 2003).
|
|
|
|
10.26
|
|
Lease
agreement on the Company's headquarters in Boca Raton, FL, dated
January
1, 2003 between the Company and Zenith Professional Center, LTD.
(incorporated by reference to Exhibit 10.44 to the Company's Annual
Report
on Form 10-KSB filed with the SEC March 30, 2004).
|
|
|
|
10.27
|
|
Stock
purchase warrant agreement between the Company and Zenith Professional
Center, LTD. (incorporated by reference to Exhibit 10.45 to the
Company's
Annual Report on Form 10-KSB filed with the SEC March 30,
2004).
|
10.28
|
|
Asset
Purchase Agreement, dated November 2, 2004, by and between vFinance
Investments Holdings, Inc. and Global Partners Securities, Inc.
(incorporated by reference to Exhibit 2.1 to the Company's Current
Report
on Form 8-K filed with the SEC November 8, 2004).
|
|
|
|
10.29
|
|
Stock
Purchase Agreement, dated November 2, 2004, by and between vFinance
Investments Holdings, Inc. and Level2.com, Inc. (incorporated by
reference
to Exhibit 2.2 to the Company's Current Report on Form 8-K filed
with the
SEC November 8, 2004).
|
|
|
|
10.30
|
|
Registration
Rights Agreement, dated November 2, 2004, by and among vFinance,
Inc.,
Global Partners Securities, Inc. and Level2.com, Inc. (incorporated
by
reference to Exhibit 4.1 to the Company's Current Report on Form
8-K filed
with the SEC November 8, 2004).
|
|
|
|
10.31
|
|
Stock
Escrow Agreement, dated November 2, 2004, by and among vFinance
Investments Holdings, Inc., the Company, Global Partners Securities,
Inc.,
Level2.com, Inc., and Edwards & Angell, LLP (incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K filed
with the
SEC November 8, 2004).
|
|
|
|
10.32
|
|
Standstill
Agreement, dated November 2, 2004, by and among vFinance, Inc.
and each of
Marcus Konig, Harry Konig and Salomon Konig (incorporated by reference
to
Exhibit 10.2 to the Company's Current Report on Form 8-K filed
with the
SEC November 8, 2004).
|
|
|
|
10.33
|
|
Amended
and Restated Letter Agreement dated January 14, 2005 between the
Company
and Sheila C. Reinken (incorporated by reference to Exhibit 10.1
to the
Company's Current Report on Form 8-K filed with the SEC January
21,
2005).
|
10.34
|
|
CIE
Master Services Agreement dated May 13, 2005 by and between the
Company
and Center for Innovative Entrepreneurship, Inc. (incorporated
by
reference to Exhibit 10.1 to the Company's Quarterly Report of
Form 10-QSB
filed with the SEC on May 16, 2005).
|
|
|
|
10.35
|
|
vFinance
Management Services Agreement dated May 13, 2005 by and between
the
Company and Center for Innovative Entrepreneurship, Inc. (incorporated
by
reference to Exhibit 10.2 to the Company's Quarterly Report of
Form 10-QSB
filed with the SEC on May 16,
2005).
|
10.36
|
|
License
and Website Agreement dated June 8, 2005 by and between the Company
and
vFinance Holdings, Inc. and Center for Innovative Entrepreneurship,
Inc.
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report of Form 10-QSB filed with the SEC on August 15,
2005).
|
|
|
|
10.37
|
|
Asset
Purchase Agreement, dated January 10, 2006, by and among the Company,
vFinance Investments, Inc., Sterling Financial Investment Group,
Inc., and
Sterling Financial Group of Companies, Inc. (incorporated by reference
to
Exhibit 2.1 to the Company's Current Report on Form 8-K filed with
the SEC
on January 17, 2006).
|
|
|
|
10.38
|
|
Registration
Rights Agreement, dated January 10, 2006, by and among vFinance,
Inc., and
Sterling Financial Group of Companies, Inc. (incorporated by reference
to
Exhibit 4.1 to the Company's Current Report on Form 8-K filed with
the SEC
on January 17, 2006).
|
|
|
|
10.39
|
|
Standstill
Agreement, dated January 10, 2006, by and among vFinance, Inc.
and each of
Sterling Financial Investment Group, Inc., Sterling Financial Group
of
Companies, Inc., Charles Garcia and Alexis Korybut (incorporated
by
reference to Exhibit 10.1 to the Company's Current Report on Form
8-K
filed with the SEC on January 17, 2006).
|
|
|
|
10.40
|
|
Voting
and Lockup Agreement, dated January 10, 2006, by and among vFinance,
Inc.,
vFinance Investments, Inc., Sterling Financial Investment Group,
Inc.,
Sterling Financial Group of Companies, Inc., Charles Garcia Leonard
Sokolow and Timothy Mahoney (incorporated by reference to Exhibit
10.2 to
the Company's Current Report on Form 8-K filed with the SEC on
January 17,
2006).
|
10.41
|
|
Management
Agreement, dated January 10, 2006, by and among vFinance Investments,
Inc., Sterling Financial Investment Group, Inc. and Sterling Financial
Group of Companies, Inc. (incorporated by reference to Exhibit
10.3 to the
Company's Current Report on Form 8-K filed with the SEC on January
17,
2006).
|
|
|
|
10.42
|
|
Amendment
to Asset Purchase Agreement, dated May 11, 2006, by and between
vFinance,
Inc., vFinance Investments, Inc., Sterling Financial Investment
Group,
Inc., and Sterling Financial Group of Companies, Inc. (incorporated
by
reference to Exhibit 2.2 to the Company's Current Report on Form
8-K filed
with the SEC on May 16, 2006).
|
|
|
|
10.43
|
|
Second
Amendment to Asset Purchase Agreement, dated May 11, 2006, by and
between
vFinance, Inc., vFinance Investments, Inc., Sterling Financial
Investment
Group, Inc., and Sterling Financial Group of Companies, Inc. (incorporated
by reference to Exhibit 2.3 to the Company's Current Report on
Form 8-K
filed with the SEC on May 16, 2006).
|
|
|
|
10.44
|
|
Amendment
to Registration Rights Agreement, dated May 11, 2006, by and among
vFinance, Inc., and Sterling Financial Group of Companies, Inc.
(incorporated by reference to Exhibit 4.2 to the Company's Current
Report
on Form 8-K filed with the SEC on May 16, 2006).
|
|
|
|
10.45
|
|
Amendment
to Voting and Lockup Agreement, dated May 11, 2006, by and among
vFinance,
Inc., vFinance Investments, Inc., Sterling Financial Investment
Group,
Inc., Sterling Financial Group of Companies, Inc., Charles Garcia
Leonard
Sokolow and Timothy Mahoney (incorporated by reference to Exhibit
10.3 to
the Company's Current Report on Form 8-K filed with the SEC on
May 16,
2006).
|
|
|
|
10.46
|
|
Amendment
to Management Agreement, dated May 11, 2006, by and among vFinance
Investments, Inc., Sterling Financial Investment Group, Inc. and
Sterling
Financial Group of Companies, Inc. (incorporated by reference to
Exhibit
10.5 to the Company's Current Report on Form 8-K filed with the
SEC on May
16, 2006).
|
|
|
|
10.47
|
|
Stock
Escrow Agreement dated May 11, 2006, by and among vFinance, Inc.,
vFinance
Investments, Inc., Sterling Financial Investment Group, Inc., Sterling
Financial Group of Companies, Inc., and Edwards Angell Palmer & Dodge,
LLP (incorporated by reference to Exhibit 10.6 to the Company's
Current
Report on Form 8-K filed with the SEC on May 16, 2006).
|
|
|
|
10.48
|
|
Employment
Agreement Amendment N0. 1 dated May 12, 2006 by and among vFinance,
Inc.
and Leonard Sokolow (incorporated by reference to Exhibit 10.7
to the
Company's Current Report on Form 8-K filed with the SEC on May
16,
2006).
|
|
|
|
10.49
|
|
Employment
Agreement dated July 24, 2006 between vFinance, Inc. and Alan B.
Levin
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report
on Form 8-K filed with the SEC on July 26, 2006).
|
|
|
|
10.50
|
|
Settlement
Agreement dated October 16, 2006 by and among vFinance, Inc., Henry
S.
Snow, Sandra S. Snow, Michael Golden and Ben Lichtenberg (incorporated
by
reference to Exhibit 10.1 to the Company's Current Report on Form
8-K
filed with the SEC on November 13, 2006).
|
|
|
|
10.51
|
|
Settlement
and Escrow Release Agreement dated as of November 7, 2006 by and
among
vFinance, Inc., vFinance Investments, Inc., Global Partners Securities,
Inc., Level2.com, Inc. and Edwards Angell Palmer & Dodge LLP
(incorporated by reference to Exhibit 10.4 to the Company's Current
Report
on Form 8-K filed with the SEC on November 13, 2006).
|
|
|
|
10.52
|
|
Resignation
Agreement dated December 29, 2006 by and between vFinance, Inc.
and
Timothy E. Mahoney (incorporated by reference to Exhibit 10.1 to
the
Company's Current Report on Form 8-K filed with the SEC on January
8,
2007).
|
10.53
|
|
Employment
Agreement Amendment #2 dated December 29, 2006 by and between vFinance,
Inc. and Leonard J. Sokolow (incorporated by reference to Exhibit
10.2 to
the Company's Current Report on Form 8-K filed with the SEC on
January 8,
2007).
|
10.54
|
|
Voting
Agreement dated December 29, 2006 by and between Timothy E. Mahoney
and
Leonard J. Sokolow (incorporated by reference to Exhibit 10.3
to the
Company's Current Report on Form 8-K filed with the SEC on January
8,
2007).
|
21
|
|
List
of Subsidiaries (incorporated by reference to Exhibit 21 to the
Company’s
Annual Report on Form 10-K filed with the SEC on April 2,
2007).
|
|
|
|
23.1*
|
|
Consent
of Sherb & Co., LLP, independent registered public accounting
firm.
|
|
|
|
23.2*
|
|
Consent
of Edwards Angell Palmer & Dodge LLP (contained in its opinion filed
as Exhibit 5.1).
|
ITEM
17. Undertakings
(a)
The
undersigned Registrant hereby undertakes as follows:
(1) To
file,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement:
(i) to
include any prospectus required by Section 10(a)(3) of the Securities Act;
|
|
(ii) to
reflect in the prospectus any facts or events, which individually
or
together, represent a fundamental change in the information set forth
in
this registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar
value of
securities offered would not exceed that which was registered) and
any
deviation from the low or high end of the estimated maximum offering
range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in
the effective registration statement;
|
|
|
(iii) to
include any additional or changed material information on the plan
of
distribution.
|
|
(2)
|
That,
for the purpose of determining any liability under the Securities
Act,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein,
and the
offering of such securities at that time shall be deemed to be the
initial
bona fide offering thereof.
|
|
(3)
|
To
remove from registration by means of a post-effective amendment any
of the
securities being registered which remain unsold at the termination
of this
offering.
|
|
(4)
|
That,
for the purpose of determining liability under the Securities Act
to any
purchaser, each prospectus filed pursuant to Rule 424(b) as part
of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed
in
reliance on Rule 430A, shall be deemed to be part of and included
in the
registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement
or made
in a document incorporated or deemed incorporated by reference into
the
registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale
prior to
such first use, supersede or modify any statement that was made in
the
registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such
date of
first use.
|
(b)
|
Insofar
as indemnification for liabilities arising under the Securities Act
may be
permitted to directors, officers or controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant
has
been advised that in the opinion of the Commission such indemnification
is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such
liabilities (other than the payment by the Registrant of expenses
incurred
or paid by a director, officer or controlling person of the Registrant
in
the successful defense of any action, suit or proceeding) is asserted
by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of
our counsel the matter has been settled by controlling precedent,
submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Act and
will be governed by the final adjudication of such issue.
|
(c)
|
The
undersigned Registrant hereby undertakes that:
|
|
(1)
|
For
purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of
this
registration statement in reliance upon Rule 430A and contained in
a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
|
|
(2)
|
For
the purpose of determining any liability under the Securities Act,
each
post-effective amendment that contains a form of prospectus shall
be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be
deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boca Raton, State
of
Florida, on the 8th
day of
May
2007.
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VFINANCE,
INC.
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By: |
/s/ Leonard
J. Sokolow |
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Leonard
J. Sokolow
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Chief
Executive Officer and President
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Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signature
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Title
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Date
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/s/
Leonard J. Sokolow
Leonard
J. Sokolow
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Director,
Chairman and Chief Executive Officer
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May
8, 2007
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/s/
Charles R. Modica
Charles
R. Modica
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Director
and Chief Operating Officer
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May
8, 2007
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INDEX
TO EXHIBITS
Exhibit
Number
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Exhibit
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3.8
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Certificate
of Renewal and Revival of Charter as filed with the Delaware Secretary
of
State on November 30, 2006.
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3.9
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Amended
and Restated Certificate of Incorporation of the Company as filed
with the
Delaware Secretary of State on November 30, 2006.
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5.1
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Opinion
of Edwards Angell Palmer & Dodge LLP.
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23.1
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Consent
of Sherb & Co., LLP, independent registered public accounting
firm.
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