UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _____________ to _________________
Commission File Number 1-11454-03
vFinance, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 58-1974423
------------------------------- ------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3010 North Military Trail, Suite 300, Boca Raton, FL 33431
(Address of principal executive offices)
(561) 981-1000
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of November 9, 2006: 53,126,133 shares of Common Stock $0.01 par
value
vFinance, Inc.
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2006 (Unaudited) and
December 31, 2005 ................................................. 4
Consolidated Statements of Operations for the Three and Nine months
ended September 30, 2006 and 2005 (Unaudited) ......................... 5
Consolidated Statements of Cash Flows for the Nine months ended
September 30, 2006 and 2005 (Unaudited) ........................... 6
Notes to Unaudited Consolidated Financial Statements .................... 7
Item 2 - Management's Discussion and Analysis or Plan of Operation ..... 18
Item 3 - Quantitative & Qualitative Disclosures About Market Risk ...... 24
Item 4 - Controls and Procedures ....................................... 24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ............................................. 25
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds ... 25
Item 6 - Exhibits ...................................................... 25
Signatures ............................................................. 26
2
FORWARD-LOOKING STATEMENTS
This Form 10-Q for vFinance, Inc. (the "Company") includes statements that may
constitute "forward-looking" statements, usually containing the words "believe",
"estimate", "intend", "expect", or similar expressions. These statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements inherently involve risks and
uncertainties that could cause actual results to differ materially from the
forward-looking statements. Factors that would cause or contribute to such
differences include, but are not limited to, 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, our potential inability to implement our
growth strategy through acquisitions or joint ventures, our potential inability
to secure additional debt or equity financing to support our growth strategies
and other risks detailed in the Company's periodic report filings with the
Securities and Exchange Commission.
By making these forward-looking statements, the Company undertakes no obligation
to update these statements for revisions or changes after the date of this Form
10-Q.
3
vFinance, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
Assets: September 30, 2006 (December 31, 2005)
(Unaudited)
-------------------------------------------
Current Assets:
Cash and cash equivalents $ 4,682,253 $ 4,427,406
Due from clearing broker 819,813 705,097
Investments in trading securities 887,791 870,306
Accounts receivable less allowance for doubtful
accounts 256,679 408,841
Notes receivable - employees 152,017 67,588
Prepaid expenses and other current assets 118,158 130,033
-------------------- -------------------
Total current assets 6,916,711 6,609,271
Furniture and equipment, at cost:
Furniture and equipment 1,649,935 1,383,878
Software 206,781 173,890
-------------------- -------------------
1,856,716 1,557,768
Less accumulated depreciation (1,143,600) (865,130)
-------------------- -------------------
Furniture and equipment, net 713,116 692,638
Intangible assets, net of amortization 4,377,393 1,446,848
Other assets 541,610 313,327
-------------------- -------------------
Total assets $ 12,548,830 $ 9,062,084
==================== ===================
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 587,640 $ 714,197
Accrued payroll 2,164,551 1,678,632
Other accrued liabilities 662,523 825,594
Securities sold, not yet purchased 206,932 42,421
Capital lease obligations 239,411 187,775
Other 160,199 118,781
-------------------- -------------------
Total current liabilities 4,021,256 3,567,400
Capital lease obligations, long term 154,688 225,067
Stockholders' equity:
Common stock $0.01 par value, 75,000,000 shares
authorized, 53,126,133 and 40,126,133 shares
issued and outstanding 531,265 401,266
Additional paid-in-capital 30,450,853 26,821,557
Accumulated deficit (22,609,232) (21,953,206)
-------------------- -------------------
Total stockholders' equity 8,372,886 5,269,617
-------------------- -------------------
Total liabilities and stockholders' equity $ 12,548,830 $ 9,062,084
==================== ===================
See accompanying notes to unaudited consolidated financial statements.
4
vFinance, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------------------------------------------
Revenues: 2006 (Unaudited) 2005 (Unaudited) 2006 (Unaudited) 2005 (Unaudited)
--------------------------------------------------------------------------------
Commissions - agency $ 4,849,901 $ 4,037,698 $ 14,374,736 $ 11,439,286
Trading profits 2,794,541 938,700 6,798,574 3,362,562
Success fees 1,000,201 741,683 3,850,749 1,747,084
Other brokerage related income 847,947 686,639 2,393,985 2,084,409
Consulting fees 44,673 85,500 347,699 472,644
Other 8,273 103,576 361,109 341,560
----------------- ----------------- ------------------- -------------------
Total revenues 9,545,536 6,593,796 28,126,852 19,447,545
----------------- ----------------- ------------------- -------------------
Interest expense 14,315 9,941 44,443 22,475
----------------- ----------------- ------------------- -------------------
Net revenues 9,531,221 6,583,855 28,082,409 19,425,070
----------------- ----------------- ------------------- -------------------
Operating expenses:
Compensation, commissions and benefits 7,524,219 5,093,632 21,843,863 15,040,569
Clearing and transactions costs 1,025,803 749,836 3,036,643 2,273,180
General and administrative costs 660,143 588,478 1,890,355 1,698,127
Occupancy and equipment costs 335,524 185,275 860,352 533,107
Depreciation and amortization 346,870 82,611 753,926 217,410
Stock based compensation 117,266 16,765 353,295 19,412
----------------- ----------------- ------------------- -------------------
Total operating expenses 10,009,825 6,716,597 28,738,434 19,781,805
Loss from operations (478,604) (132,742) (656,025) (356,735)
Income tax benefit (provision) - - - -
----------------- ----------------- ------------------- -------------------
Net loss $ (478,604) $ (132,742) $ (656,025) $ (356,735)
================= ================= =================== ===================
Net loss per share: basic and diluted $ (0.01) $ (0.00) $ (0.01) $ (0.01)
================= ================= =================== ===================
Weighted average number of shares outstanding:
basic and diluted 53,126,133 40,123,134 46,912,898 40,023,880
================= ================= =================== ===================
See accompanying notes to unaudited consolidated financial statements.
5
vFinance, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
----------------------------------
2006 2005
(Unaudited) (Unaudited)
---------------- ----------------
Cash flows from operating activities:
Net loss $ (656,025) $ (356,735)
Adjustments to reconcile net loss to
net cash provided (used) in operating activities:
Non-cash fees received (867,299) (434,011)
Depreciation and amortization 753,926 217,410
Provision for doubtful accounts 10,000 59,490
Non-cash compensation - 158,060
Impairment expense - 80,000
Unrealized loss (gain) on investments, net 253,444 (14,342)
Unrealized loss (gain) on warrants (54,414) 118,768
Amount forgiven under forgivable loans - 6,597
Imputed interest (1,983) -
Stock based compensation 353,295 19,412
Changes in operating assets and liabilities:
(Increase) decrease
Accounts receivable (27,622) (220,653)
Forgivable loans (47,083) -
Due from clearing broker (170,043) 24,137
Notes receivable - employees (51,929) (49,312)
Investments in trading securities 608,265 600,455
Other current assets - 12,795
Other assets and liabilities 295,073 85,177
Increase (decrease)
Accounts payable and accrued liabilities 172,343 (453,945)
Securities, sold not yet purchased 164,510 (285,632)
---------------- ----------------
Net cash provided by (used in) operating activities 734,458 (432,329)
Cash flows from investing activities:
Purchase of capital lease equipment (132,023) (367,952)
Purchase of equipment (166,923) (83,783)
Investment in unconsolidated affiliate (161,922) -
---------------- ----------------
Net cash used in investing activities (460,868) (451,735)
Cash flows from financing activities:
Proceeds from capital leases 132,023 367,951
Repayments on capital leases (150,766) (98,777)
Proceeds from exercise of common stock options - 113,550
---------------- ----------------
Net cash (used in) provided by financing activities (18,743) 382,724
Increase (decrease) in cash and cash equivalents 254,847 (501,340)
Cash and cash equivalents at beginning of year 4,427,406 5,256,308
---------------- ----------------
Cash and cash equivalents at end of period $4,682,253 $4,754,968
================ ================
See accompanying notes to unaudited consolidated financial statements.
6
vFinance, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
September 30, 2006
NOTE 1 - DESCRIPTION OF BUSINESS
vFinance, Inc. (the "Company") is a holding company engaged in the financial
services business where our strategic focus is on servicing the needs of high
net-worth and institutional investors and high growth companies. Through our
principal operating subsidiary, vFinance Investments, Inc.(vFinance
Investments), a licensed broker-dealer, we provide investment banking, retail
and institutional brokerage services in all 50 states and the District of
Columbia. The Company also operates a second broker-dealer, EquityStation, Inc.
("EquityStation") which offers institutional traders, hedge funds and
professional traders a suite of services designed to enhance their trading
capabilities by offering services such as trading and routing software, hedge
fund incubation, capital introduction and custodial services.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The unaudited consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts have been
eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results of operations for the three and nine month periods ended September 30,
2006 are not necessarily indicative of the results to be expected for the year
ended December 31, 2006. The interim financial statements should be read in
connection with the audited financial statements and notes contained in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2005.
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. Furthermore, the Company,
including its wholly owned subsidiary vFinance Investments, has been named as a
defendant in various customer arbitrations. These claims result from the actions
of brokers affiliated with vFinance Investments In addition, under the vFinance
Investments registered representative's contract, each registered representative
has indemnified the Company for these claims. In accordance with Statement of
Financial Accounting Standards ("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, we base our judgments on our
knowledge of the situations, consultations with legal counsel and our 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 our 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, we cannot predict with certainty the eventual loss or range
of loss related to such matters. If our judgments prove to be incorrect, our
liability for losses and contingencies may not accurately reflect actual losses
that result from these actions, which materially affect results in the period
when expenses are ultimately determined. As of September 30, 2006, the Company
has accrued approximately $105,000 for these matters. The Company has recently
acquired an errors and omissions
7
Use of estimates (Continued)
insurance policy, for certain future claims in excess of the policy's $75,000
per claim deductible up to an aggregate of $1 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.
Accounts receivable
Accounts receivable consist of receivables incurred in the ordinary course of
our 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 at
September 30, 2006 was approximately $10,000 and at December 31, 2005 was $0.
A receivable from one independent contractor in the amount of $112,731 accounted
for 40% of the Company's accounts receivable balance at September 30, 2006.
Property and equipment
Property and equipment are carried at cost and depreciated over estimated useful
lives of between 3 and 7 years. Equipment acquired under capital leases are
reported on the balance sheet and amortized over the life of the lease. 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
and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition.
Intangible assets
Intangible assets consist of customer relationships acquired in connection with
business combinations. The customer relationships are amortized using the
straight-line method over an expected useful life of five years in accordance
with SFAS No.142.
Impairment of long-lived assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company periodically reviews its long-lived 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.
8
Revenue recognition
The Company follows the guidance of the Commission's Staff Accounting Bulletin
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 revenue from brokerage and trading which are recognized at the
time of execution. 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 similar transaction. Success fees
are generally based on a percentage of the total value of the customers benefit
from the transaction. These fees are not accrued prior to completing the
transaction and are recorded when fees are earned as a result of completing a
successful transaction.
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 referred tock from companies as part of our
compensation for investment-banking services that are classified as investments
in trading securities on the balance sheet if still held at the financial
reporting date. These instruments are stated at fair value in accordance with
SFAS #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." Primarily all of the equity
instruments are received from small public companies. The stock and stock
purchase warrants received are typically restricted as to resale, though the
Company generally receives a registration right within one year. Company policy
is to sell these securities in anticipation of short-term market movements. The
Company recognizes 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. On a monthly basis, the Company recognizes
unrealized gains or losses in the statement of operations based on the changes
in value in the stock purchase warrants and other equity instruments. Realized
gains or losses are recognized in the statement of operations when the related
stock purchase warrant or other equity instrument is sold.
Occasionally, the Company receives 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.
On occasion, the Company distributes equity instruments or proceeds from the
sale of equity instruments to our employees as compensation for their investment
banking successes. These distributions comply with compensation agreements which
vary on a "banker by banker" basis. Accordingly, unrealized gains or losses
recorded in the statement of operations related to securities held by us at each
period end may also impact compensation expense and accrued compensation.
9
Concentrations of credit risk and Legal Proceedings
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 September 30, 2006, the Company had $4,682,253 in United
States bank deposits, which exceeded federally insured limits. The Company has
not experienced any losses in such accounts through September 30, 2006.
On or about July 26, 2006, Avalon Partners, Inc. and Vincent Vu (collectively
"Avalon") filed an arbitration action (NASD Case No. 06-3480) against Jovanne
Aquino, Devaugh Myles, Raschid Thompson, Jay Shaw, Melissa Rodriguez
(collectively, "Co-Defendants") and vFinance Investments, claiming that vFinance
Investments and the Co-Defendants defamed Avalon and that vFinance tortuously
interfered with a contract and a prospective economic advantage. Avalon is
seeking $1 million in damages plus punitive damages. vFinance Investments denies
any liability to Avalon and intends to vigorously defend against Avalon's
claims.
Stock-based compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share Based Payment ("SFAS No. 123R"). SFAS
No. 123R establishes the financial accounting and reporting standards for
stock-based compensation plans. As required by SFAS No. 123R, the Company
recognized the cost resulting from all stock-based payment transactions
including shares issued under its stock option plans in the financial
statements.
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 the Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123").
Income taxes
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards 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. Net
operating loss carry forwards totaled approximately $12.0 million at September
30, 2006 and $11.9 million at December 31, 2005. Each quarter the Company weighs
the available positive and negative evidence and determines the extent to which
the net operating loss carry forwards is realizable.
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.
Earnings per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS No. 128"). 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. The Company excluded 2,026,585 options and warrants
from the determination of diluted earnings per share, as inclusion of these
options and warrants would have been anti-dilutive because the Company had a net
loss.
10
Recent accounting pronouncements
In May 2005, the Financial Accounting Standards Board issued SFAS No. 154,
"Accounting Changes and Error Corrections" which replaces Accounting Principles
Board Opinion ("APB") No. 20, "Accounting Changes," and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion
No. 28." SFAS No. 154 provides guidance on the accounting for and reporting of
accounting changes and error corrections. SFAS No. 154 is effective for
accounting changes and correction of errors made in fiscal years beginning after
December 15, 2005. The adoption of SFAS No. 154 did not have an effect on the
Company's consolidated financial statements.
In February 2006, the Financial Accounting Standards Board issued SFAS No. 155,
"Accounting for Certain Hybrid Instruments: An Amendment of FASB Statements No.
133 and 140". Management does not believe that this statement will have a
significant impact as the Company does not use such instruments.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
No. 157 defines fair value and applies other accounting pronouncements that
require or permit fair value measurements and expands disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The Company is
currently evaluating the impact of adopting SFAS No. 157 on its consolidated
financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin ("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 Company is evaluating the
effect the adoption of SAB 108 will have on its consolidated financial
statements.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.
Reclassifications
Certain items in the 2005 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.
11
NOTE 3 - PROPERTY AND EQUIPMENT
At September 30, 2006 and December 31, 2005 respectively, property and equipment
consisted of the following:
Description Useful September 30, December 31,
Life 2006 2005
Years (Unaudited)
----------------------------------- -------------------------------------------
Furniture & fixtures 5 $ 89,699 $ 85,132
Equipment 5 683,471 559,504
Capital leases - computer equipment 3 704,558 572,535
Leasehold improvements 4 172,207 166,707
Software 5 206,781 173,890
Less: accumulated depreciation (1,143,600) (865,130)
------------------ --------------
Total fixed assets $ 713,116 $ 692,638
================== ==============
The Company recorded depreciation expense of $278,471 and $217,410 in the nine
months ended September 30, 2006 and September 30, 2005, respectively.
NOTE 4 - INTANGIBLE ASSETS
At September 30, 2006 and December 31, 2005 respectively, intangible assets
consisted of the following:
Description Useful September 30, December 31,
Life 2006 2005
Years (Unaudited)
-------------------------------- ----------------------------------------------
Customer relationships 5 $ 4,872,700 $ 1,466,700
Less: accumulated amortization (495,307) (19,852)
------------------ --------------
Total intangible assets $ 4,377,393 $ 1,446,848
================== =============
The Company recorded amortization expense of $475,455 and $0 in the nine months
ended September 30, 2006 and September 30, 2005, respectively.
NOTE 5 - ACQUISITION OF CUSTOMER RELATIONSHIPS
On May 11, 2006, the Company's wholly-owned subsidiary, 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"). The assets acquired from Sterling include Sterling's Institutional
Fixed Income and Latin American businesses as a going concern, comprised
principally of client accounts. These transactions were approved by the National
Association of Securities Dealers, Inc. on April 28, 2006.
Purchase price consideration consisted of 13 million shares of the Company's
common stock, to which the Company has granted certain registration rights.
Additionally, certain shares are subject to a standstill agreement and a voting
and lockup agreement.
12
NOTE 5 - ACQUISITION OF CUSTOMER RELATIONSHIPS (Continued)
The assets acquired in this transaction were the Sterling customer
relationships, which were capitalized as an intangible asset, customer
relationships, at the time of acquisition in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets". Under the provisions of SFAS No. 142,
identifiable intangible assets are recorded at cost, amortized over their
expected useful lives, and are required to be examined for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", whenever indicators of impairment exist.
The purchase price of the customer relationships was determined to be
$3,406,000, based on the average closing price of the Company's stock for the
five days prior to completing the business combination. Customer relationships
are amortized over their estimated useful lives, which coincide with their
expected revenue-generating lives, generally 5 years. The results of operations
of the acquired business are included in the Company's results of operations
since the acquisition in May 2006.
The following tables summarize statement of operations data for the nine months
ended September 30, 2006 and 2005, after giving effect to this business
combination as though the transactions occurred as of the beginning of the
period presented. This pro forma information is presented for informational
purposes, based upon available data and assumptions that management believes are
reasonable, and is not necessarily indicative of future results:
Nine Months Ended September 30, 2006
----------------------------------------------------------------------------
vFinance Sterling Adjustments Pro Forma
------------------ ----------------- ----------------- ------------------
Net revenues $ 28,082,409 $ 8,082,546 $ - $ 36,164,955
(Loss) income from operations $ (656,025) $ 689,109 $ (227,067) $ (193,983)
Net (loss) income $ (656,025) $ 689,109 $ (227,067) $ (193,983)
Loss per share - basic and diluted $ (0.01) $ (0.04) $ (0.00)
================== ================= ==================
Wtd. avg. shares outstanding
- basic and diluted 46,912,989 6,238,095 53,151,084
================== ================= ==================
Nine Months Ended September 30, 2005
----------------------------------------------------------------------------
vFinance Sterling Adjustments Pro Forma
------------------ ----------------- ----------------- ------------------
Net revenues $ 19,425,070 $ 8,082,546 $ - $ 27,507,616
(Loss) income from operations $ (356,735) $ 689,109 $ (510,900) $ (178,526)
Net (loss) income $ (356,735) $ 689,109 $ (510,900) $ (178,526)
Loss per share - basic and diluted $ (0.01) $ (0.04) $ (0.00)
================== ================= ==================
Wtd. avg. shares outstanding - basic and diluted 40,023,880 13,000,000 53,023,880
================== ================= ==================
Pro forma adjustments consist of amortization of the acquired customer
relationships and an increase in the number of weighted average shares to give
effect to the 13 million shares of common stock issued as purchase price
consideration, as if they were issued as of the beginning of the period
presented.
13
NOTE 6 - STOCKHOLDERS' EQUITY
The pro forma net earnings per share amounts as if the fair value method had
been used are presented below for the three and nine months ended September 30,
2005, in accordance with the Company's adoption of SFAS 123(R) effective January
1, 2006.
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 the Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123").
During the quarter ended September 30, 2006, the Company issued 3,416,250
options to purchase common stock for compensation to employees and independent
contractors. The fair market value of these options was valued on the grant date
using the Black-Scholes option-pricing model using the following weighted
average assumptions: dividend yield of 0%, expected volatility of 74.5%, risk
free interest rate of 5.25% and a term of five years. For the quarter ended
September 30, 2006, the net income and earnings per share reflect a non cash
compensation expense of $117,266.
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
-------------------------------------------------
Net loss - as reported $ (132,742) $ (356,735)
Less: stock based compensation determined under
the Fair value method, net of income tax effect (116,028) (369,531)
------------------------- ------------------------
Pro forma net loss $ (248,770) $ (726,266)
========================= ========================
Basic earnings (loss) per share - as reported $ (0.00) $ (0.01)
Basic earnings (loss) per share - pro forma $ (0.01) $ (0.02)
Weighted average shares outstanding: basic
and diluted 40,123,134 40,023,880
14
NOTE 6 - STOCKHOLDERS' EQUITY (Continued)
A summary of the stock option activity for the nine months ended
September 30, 2006 is as follows:
Weighted Average Number of Exercise Price
Exercise Price Shares Per Option
---------------------------------------- ----------------------
Outstanding options at December 31, 2005 $ 0.23 14,614,839 $ 0.15 - $ 2.25
--------------------- ----------------- -------- ------------
Granted $ 0.21 3,416,250 $ 0.17 - $ 0.25
Exercised $ - - - -
Cancelled $ 0.31 (5,016,087) $ 0.15 - $ 2.25
--------------------- ----------------- -------- ------------
Outstanding options at September 30, 2006 $ 0.19 13,015,002 $ 0.15 - $ 0.50
===================== ================== ======= ============
The following table summarizes information concerning stock options outstanding
at September 30, 2006.
Exercise Options
Price Outstanding
---------------------------------
0.150 235,000
0.155 3,985,000
0.170 1,630,000
0.180 665,000
0.190 1,667,502
0.200 930,000
0.205 320,000
0.210 601,250
0.220 150,000
0.230 1,667,500
0.250 263,750
0.260 405,000
0.270 5,000
0.280 97,500
0.330 2,500
0.350 170,000
0.363 120,000
0.500 100,000
-------------------
13,015,002
===================
As of September 30, 2006, the Company had 13,015,002 exercisable common stock
options, of which 9,127,502 are vested and 3,887,500 are unvested.
15
NOTE 6 - STOCKHOLDERS' EQUITY (Continued)
A summary of the stock purchase warrant activity for the six months ended
September 30, 2006 is as follows:
Weighted Average Number of Exercise Price
Exercise Price Warrants Per Warrant
--------------------------------------- ------------------------
Outstanding warrants at December 31, 2005 $ 1.12 7,659,589 $0.15 - $ 7.20
---------------------- --------------- ----------- -----------
Granted $ - - - - -
Exercised $ - - - - -
Cancelled $ 2.25 (585,000) $2.25 - $ 2.25
---------------------- --------------- ----------- -----------
Outstanding warrants at September 30, 2006 $ 1.02 7,074,589 $0.15 - $ 7.20
====================== =============== =========== ===========
The following table summarizes information concerning warrants outstanding at
September 30, 2006.
Exercise Warrants
Price Outstanding
---------------------------------
0.150 750,000
0.160 2,427,923
0.200 1,000,000
0.350 1,673,500
0.630 400,000
6.000 103,166
7.200 700,000
-------------------
7,054,589
===================
As of September 30, 2006 all of the Company's common stock warrants were
exercisable.
16
NOTE 7 - SUBSEQUENT EVENTS
In October 2006, the Company combined the operations conducted in the leased
facility assumed in connection with the Sterling acquisition with the Company's
corporate headquarters. In connection with this consolidation, the Company
sublet the former Sterling facility, with the sublease effective December 1,
2006 through the end of the assumed lease term. Beginning in December 2006, the
future sublease payments the Company will receive will approximate the future
rental payments the Company assumed.
On November 7, 2006, the Company resolved a disagreement related to the 2004
acquisition of assets from EquityStation, Inc. ("EquityStation") and Global
Partners Securities, Inc. ("Global"). In connection with the resolution of the
dispute, the Company: (a) canceled 8,324,690 shares of its common stock and
warrants to purchase, at an exercise price of $0.11 per share, 3,299,728 shares
of common stock which were being held in escrow to be issued to Global and
Level2.com, Inc. ("Level2"), the parent company of EquityStation, and (b) agreed
to issue to each of Global and Level2 3,288,253 shares and 3,288,252 shares,
respectively, of its common stock and warrants to purchase 1,303,393 shares and
1,303,392 shares, respectively, of the Company's common stock at an exercise
price of $0.11 per share
On October 16, 2006, the Company settled a lawsuit initiated by two customers by
agreeing to issue 1,000,000 shares of the Company's common stock to the
customers. The common stock will be 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.
17
vFinance, Inc. and Subsidiaries
September 30, 2006
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table and discussion summarizes the changes in the major revenue
and expense categories for the past two years.
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- -------------------------------------
Revenues: 2006 (Unaudited) 2005 (Unaudited) % Chg 2006 (Unaudited) 2005 (Unaudited) % Chg
----------------- ------------------------------ ------------------ ------------------ --------
Commissions - agency $4,849,901 $ 4,037,698 20.1 % $ 14,374,736 $ 11,439,286 25.7%
Trading profits 2,794,541 938,700 197.7 % 6,798,574 3,362,562 102.2%
Success fees 1,000,201 741,683 34.9 % 3,850,749 1,747,084 120.4%
Other brokerage related income 847,947 686,639 23.5 % 2,393,985 2,084,409 14.9%
Consulting fees 44,673 85,500 (47.8)% 347,699 472,644 (26.4)%
Other 8,273 103,576 (92.0)% 361,109 341,560 5.7%
----------------- -------------- ------------ ------------------ ------------------ -----------
Total revenues 9,545,536 6,593,796 44.8 % 28,126,852 19,447,545 44.6%
----------------- -------------- ------------ ------------------ ------------------ -----------
Interest expense 14,315 9,941 44.0 % 44,443 22,475 97.7%
----------------- -------------- ------------ ------------------ ------------------ -----------
Net revenues 9,531,221 6,583,855 44.8 % 28,082,409 19,425,070 44.6%
----------------- -------------- ------------ ------------------ ------------------ -----------
Operating expenses:
Compensation, commissions and
benefits 7,524,219 5,093,632 47.7 % 21,843,863 15,040,569 45.2%
Clearing and transactions costs 1,025,803 749,836 36.8 % 3,036,643 2,273,180 33.6%
General and administrative costs 660,143 588,478 12.2 % 1,890,355 1,698,127 11.3%
Occupancy and equipment costs 335,524 185,275 81.1 % 860,352 533,107 61.4%
Depreciation and amortization 346,870 82,611 319.9 % 753,926 217,410 246.8%
Stock based compensation 117,266 16,765 599.5 % 353,295 19,412 1720.0%
----------------- -------------- ------------ ------------------ ------------------ -----------
Total operating expenses 10,009,825 6,716,597 49.0 % 28,738,434 19,781,805 45.3%
Loss from operations (478,604) (132,742) 260.6 % (656,025) (356,735) 83.9%
Income tax benefit (provision) - - - - - -
----------------- -------------- ------------ ------------------ ------------------ -----------
Net loss $ (478,604) $(132,742) 260.6 % $ (656,025) $ (356,735) 83.9%
================= ============== ============ ================== ================== ===========
18
vFinance, Inc. and Subsidiaries
September 30, 2006
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2005
STATEMENTS OF OPERATIONS
Revenues
Net revenues increased $2,947,366 or 45% to $9,531,221 for the three months
ended September 30, 2006 compared to $6,583,855 for the three months ended
September 30, 2005. Approximately 63% of this increase is attributable to the
trading profits derived from the customer relationships acquired from Sterling
in May 2006 and generally more favorable trading conditions in our market making
activities. Additionally, another 28% of this increase resulted from higher
agency commissions due to the addition of new brokers, through both the
acquisition of Sterling and other brokers hired independently of the
acquisition. The majority of the remaining increase was due to higher revenues
from success fees relating to investment banking transactions.
Operating Expenses
Compensation, commissions and benefits increased 48% to $7,524,219 for the three
months ended September 30, 2006 compared to $5,093,632 for the three months
ended September 30, 2005, primarily as a result of the Sterling acquisition and
a 45% increase in net revenues.
Clearing and transaction costs increased 37% to $1,025,803 for the three months
ended September 30, 2006 compared to $749,836 for the three months ended
September 30, 2005, primarily as a result of an increase in transaction volume
partially due to the Sterling acquisition as well as higher average transaction
costs associated with our trading activities.
General and administrative expenses increased $71,665 or 12% to $660,143 for the
three months ended September 30, 2006 compared to $588,478 for the three months
ended September 30, 2005. This increase is primarily due to expenses related to
legal matters.
Occupancy and equipment costs increased $150,249 to $335,524 for the three
months ended September 30, 2006 compared to $185,275 for the three months ended
September 30, 2005. This increase relates primarily to the occupancy and
equipment costs associated with the Sterling acquisition. In October 2006, the
Company combined the operations conducted in the leased facility assumed in
connection with the Sterling acquisition with the Company's corporate
headquarters. In connection with this consolidation, the Company sublet the
former Sterling facility, with the sublease effective December 1, 2006 through
the end of the assumed lease term. Beginning in December 2006, the future
sublease payments the Company will receive will approximate the future rental
payments the Company assumed.
Depreciation and amortization increased $264,259 to $346,870 for the three
months ended September 30, 2006 compared to $82,611 for the three months ended
September 30, 2005. The increase was primarily attributable to the Company's
amortization of customer relationships from the Equity Station / Global
Securities and Sterling acquisitions.
Stock based compensation was $117,266 for the three months ended September 30,
2006 compared to $16,765 for the three months ended September 30, 2005, due to
the Company's adoption of the Statement of Financial Accounting Standards No.
123 (revised 2004), Share Based Payment ("SFAS No. 123R") on January 1, 2006.
19
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2005
STATEMENTS OF OPERATIONS
Revenues
Net revenues increased $8,657,339, or 45% to $28,082,409 for the nine months
ended September 30, 2006 compared to $19,425,070 for the nine months ended
September 30, 2005. Approximately 40% of this increase is attributable to the
trading profits derived from the customer relationships acquired from Sterling
in May 2006 and generally more favorable trading conditions in our market making
activities. Additionally, another 34% of this increase resulted from increases
in agency commissions due to the addition of new brokers, through both the
acquisition of Sterling and other brokers hired independently of the
acquisition. The majority of the remaining increase was due to higher revenues
from success fees from investment banking transactions.
Operating Expenses
Compensation, commissions and benefits increased 45% to $21,843,863 for the nine
months ended September 30, 2006 compared to $15,040,569 for the nine months
ended September 30, 2005, primarily as a result of the Sterling acquisition and
a 45% increase in net revenues.
Clearing and transaction costs increased 34% to $3,036,643 for the nine months
ended September 30, 2006 compared to 2,273,180 for the nine months ended
September 30, 2005, primarily as a result of an increase in transaction volume
partially due to the Sterling acquisition and the addition of other independent
brokers, as well as higher average transaction costs associated with our trading
activities.
General and administrative expenses increased 11% to $1,890,355 for the nine
months ended September 30, 2006 compared to $1,698,127 for the nine months ended
September 30, 2005. This increase is primarily due to expenses related to legal
matters.
Occupancy and equipment expenses increase 61% to $860,352 for the nine months
ended September 30, 2006 compared to $533,107 for the nine months ended
September 30, 2005. This increase relates primarily to the occupancy and
equipment costs associated with the Sterling acquisition.
Depreciation and amortization increased $536,516 to $753,926 for the nine months
ended September 30, 2006 compared to $217,410 for the nine months ended
September 30, 2005. The increase was primarily attributable to the Company's
amortization of customer relationships from the Equity Station / Global
Securities and Sterling acquisitions.
Stock based compensation was $353,295 for the nine months ended September 30,
2006 compared to $19,412 for the nine months ended September 30, 2005, due to
the Company's adoption of the Statement of Financial Accounting Standards No.
123 (revised 2004), Share Based Payment ("SFAS No. 123R") on January 1, 2006.
20
LIQUIDITY AND CAPITAL RESOURCES
The Company had $4,682,253 of unrestricted cash at September 30, 2006 as
compared to $4,427,406 of unrestricted cash at December 31, 2005.
Net cash provided by operating activities for the nine months ended September
30, 2006 was $734,458 compared to net cash used in operating activities of
$432,329 for the nine months ended September 30, 2005. This increase of
approximately $1.2 million is primarily attributable to an increase of
approximately $475,000 in amortization expense associated with acquired customer
relationships, and an increase of approximately $334,000 in stock based
compensation expense as a result of the adoption of SFAS 123R. Additionally,
accounts payable, accrued liabilities and securities sold not yet purchased
increased by approximately $337,000 compared to a decrease of approximately
$740,000 in the nine months ended 2005. Partially offsetting these items were a
$433,000 increase in non-cash fees received as a result of increased investment
banking activity and non cash compensation and impairment expenses of
approximately $158,000 and $80,000 respectively during the nine months ended
September 30, 2005.
Net cash used in investing activities for the nine months ending September 30,
2006, was $460,868 compared to $451,735 for the nine months ending September 30,
2005. Net cash used in investing activities for the nine months ended September
30, 2006 included $161,922 for an investment in an unconsolidated affiliate.
Partially offsetting this use of cash was as decrease in the additions to our
fixed assets under capital leases during the first nine months of 2006 compared
to the first nine months of 2005. In the first nine months of 2005, the Company
invested in its disaster recovery plan by implementing communication redundancy
systems that enables us to continuously service our clients.
Net cash used in financing activities for the nine months ending September 30,
2006, was $18,743 as compared to net cash provided by financing activities of
$382,724 for the nine months ending September 30, 2005. In 2005 the Company
entered into approximately $368,000 of new capital lease agreements related to
its investment in its disaster recovery plan.
The Company believes that its cash on hand is sufficient to meet its working
capital requirements over the next 12 months. However, the Company anticipates
that it may need additional debt or equity financing in order to carry out its
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 of the foregoing. We do not have any material commitments for
capital expenditures over the course of the next fiscal year.
The Company's operations are not affected by seasonal fluctuations but they are
affected by the overall performance of the U.S. economy and to some extent
reliant on the continued execution of the Company's mergers and acquisitions
strategy and related financings.
21
CRITICAL ACCOUNTING ESTIMATES
This discussion and analysis of financial condition and results of operations is
based on the Company's consolidated financial statements, which have been
prepared in accordance with U.S. 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. The Company evaluates our estimates on an ongoing basis and the
Company bases its estimates on historical experience and various other
assumptions the Company 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 2 to our audited consolidated financial statements dated December 31, 2005
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, the Company considers our
critical accounting policies and estimates to be:
REVENUE RECOGNITION. The Company periodically receives equity instruments which
include stock purchase warrants and common and preferred stock from companies as
part of our compensation for investment-banking services that are classified as
investments in trading securities on the balance sheet if still held at the
financial reporting date. These instruments are stated at fair value in
accordance with SFAS #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." Primarily all of
the equity instruments are received from small public companies. The stock and
stock purchase warrants received are typically restricted as to resale, though
the Company generally receives a registration right within one year. Company
policy is to sell these securities in anticipation of short-term market
movements. The Company recognizes 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. On a monthly basis, the Company
recognizes unrealized gains or losses in the statement of operations based on
the changes in value in the stock purchase warrants and other equity
instruments. Realized gains or losses are recognized in the statement of
operations when the related stock purchase warrant or other equity instrument is
sold.
Occasionally, the Company receives 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.
22
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 our 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 had mishandled
customer accounts. Based on our historical experience and consultation with
counsel, the Company typically reserves an amount the Company believes will be
sufficient to cover any damages assessed against us. However, the Company has in
the past been assessed damages that exceeded our reserves. If the Company
misjudged the amount of damages that may be assessed against us from pending or
threatened claims or if the Company is 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 sheet 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 firm 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, the Company further adjusts
the fair values of securities received to reflect the restrictions.
23
vFinance, Inc. and Subsidiaries
September 30, 2006
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk, and does periodically hedge against
that risk. The Company does not hold or issue any derivative financial
instruments for trading or other speculative purposes. The Company is exposed to
market risk associated with changes in the fair market value of the marketable
securities that it holds. The Company's revenue and profitability may be
adversely affected by declines in the volume of securities transactions and in
market liquidity, which generally result in lower revenues from trading
activities and commissions. Lower securities price levels may also result in a
reduced volume of transactions, as well as losses from declines in the market
value of securities held by the Company in trading and investment positions.
Sudden sharp declines in market values of securities and the failure of issuers
and counterparts to perform their obligations can result in illiquid markets in
which the Company may incur losses in its principal trading activities.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and
principal financial officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this quarterly report (the
"Evaluation Date"). Based on such evaluation, our principal executive officer
and principal financial officer have concluded that, as of the Evaluation Date,
our disclosure controls and procedures are effective.
Changes in Internal Controls
There was no change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in
connection with the evaluation of our internal controls that occurred during our
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, such controls.
24
vFinance, Inc. and Subsidiaries
September 30, 2006
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On August 14, 2002, Henry S. Snow and Sandra L. Snow filed a complaint against
Colonial Direct and vFinance, Inc. in the Circuit Court of the 15th Judicial
Circuit in Palm Beach County, Florida. The claim alleged breach of contract and
unjust enrichment and sought damages of $250,000 plus interest and court costs.
On October 16, 2006, the Company settled the litigation by agreeing to issue
1,000,000 shares of its common stock to the Snows by November 16, 2006. In
addition, the Company agreed that if the Snows sold their shares of common stock
after October 16, 2007 at a price per share of less than $0.175, the Company
would pay them the difference between $0.175 and the actual net sale price of
the shares sold to any bona fide third party.
On or about July 26, 2006, Avalon Partners, Inc. and Vincent Vu (collectively
"Avalon") filed an arbitration action (NASD Case No. 06-3480) against Jovanne
Aquino, Devaugh Myles, Raschid Thompson, Jay Shaw, Melissa Rodriguez
(collectively, "Co-Defendants") and vFinance Investments, claiming that vFinance
Investments and the Co-Defendants defamed Avalon and that vFinance tortuously
interfered with a contract and a prospective economic advantage. Avalon is
seeking $1 million in damages plus punitive damages. vFinance Investments denies
any liability to Avalon and intends to vigorously defend against Avalon's
claims.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 16, 2006, the Company agreed to issue 1,000,000 shares of its common
stock to Henry S. Snow and Sandra L. Snow in connection with the settlement of a
lawsuit. The transaction was negotiated with the attorneys for the Snows and was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended (the "1933 Act"). For more details relating to the transaction, see Item
1, Part II of this Form 10-Q.
On November7, 2006, the Company settled a dispute with Global and Level2 over
8,324,690 shares of the Company's common stock and warrants to purchase
3,299,728 shares of common stock held in escrow in connection with a 2004
acquisition by the Company. Pursuant to the settlement, the Company: (a)
canceled the escrowed common stock and warrants and (b) agreed to issue to
Global and Level2 an aggregate of 6,576,505 shares of common stock and warrants
to purchase 2,606,785 shares of common stock. The transaction was entered into
with sophisticated and accredited investors as defined in Rule 501 of Regulation
D promulgated under the 1933 Act and is therefore exempt from registration under
Section 4(2) of the 1933 Act and Regulation D of the 1933 Act.
ITEM 6. EXHIBITS.
(a) EXHIBITS
10.1 - Employment Agreement dated July 24, 2006 between vFinance, Inc.
and Alan B. Levin (incorporated by reference to the Exhibit filed as
part of vFinance, Inc.'s Form 8-K dated July 26, 2006, Commission File
No. 1-11454).
10.2 - 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 the Exhibit filed as part of
vFinance Inc.'s Form 8-K dated November 13, 2006, Commission File No.
1-11454).
10.3 - 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 the Exhibit filed as part of
vFinance, Inc.'s Form 8-K dated November 13, 2006, Commission File No.
1-11454).
10.4 - Warrant to Purchase Common Stock dated November 7, 2006 issued
to Global Partners Securities, Inc.
10.5 - Warrant to Purchase Common Stock dated November 7, 2006 issued
to Level2.com, Inc.
31.1 - Certification by Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 - Certification by Interim Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 - Certification by Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 - Certification by Interim Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Signature Title Date
By: /s/ Leonard J. Sokolow Chief Executive Officer
and President
----------------------- (Principal Executive Officer) November 14, 2006
Leonard J. Sokolow
By: /s/ Alan B. Levin Interim Chief Financial
Officer November 14, 2006
---------------------- (Principal Financial and
Alan B. Levin Accounting Officer)
26