As filed with the Securities and Exchange Commission on November 13, 2006.
Registration No. 333-_________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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vFinance, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware 6200 58-1974423
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) 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
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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 Proposed maximum Proposed maximum
of Securities to be Amount to be offering price aggregate offering Amount of
Registered registered (1) per unit (2) price (2) registration fee (2)
---------------------------- ----------------- ---------------------- ----------------------- ------------------------
Common Stock, $.001 13,000,000 $0.21 $2,730,000 $293
par value per share
---------------------------- ----------------- ---------------------- ----------------------- ------------------------
(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 November
8, 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.
ii
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 NOVEMEBER 13, 2006
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 November 8, 2006, the last reported sale price for our common
stock was $0.22 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 _________________, 2006
iii
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..........................................26
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.....................38
DIRECTORS AND EXECUTIVE OFFICERS..............................................39
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................43
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................46
DESCRIPTION OF CAPITAL STOCK..................................................48
LEGAL MATTERS.................................................................50
EXPERTS.......................................................................50
WHERE YOU CAN FIND MORE INFORMATION...........................................50
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.
iv
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 under
the name Peachtree Fiberoptics, Inc. vFinance, Inc. 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 by offering services such as trading technology, routing software, hedge
fund incubation, capital introduction and custodial services.
Our principal activities are provided by four business units. The Retail
Brokerage unit offers securities brokerage services including the sale of
equities, mutual funds and fixed income products. The Investment Banking unit
assists emerging growth private and public companies develop sound strategic
plans and access capital. The Wholesale Trading unit provides wholesale
market-making services for over 2500 Over-the-Counter Bulletin Board and NASDAQ
Capital Market stocks to national and regional full-service broker-dealers,
electronic discount brokers, and institutional investors. The Institutional
Services unit provides investment, technology and research services to
institutional fund managers and other institutional investors.
In the execution of our business strategy, we have created a website,
www.vfinance.com, that reaches a worldwide audience of individuals looking to
create wealth through equity investments in both their personal portfolios and
their businesses. Our website is a leading destination for entrepreneurs, owners
of small and medium businesses looking for capital, venture capitalists and
private (i.e. Angel) and institutional investors seeking equity investments in
high growth companies. Each month our website attracts an estimated 80,000
business owners from over 100 countries and communicates to approximately 60,000
high net-worth individuals and institutional investors. Our website is typically
listed by search engines as one of the top sites for relevant content. In
addition, over 5,000 websites have links to our website including Microsoft
Network, Dow Jones, THE WALL STREET JOURNAL, ENTREPRENEUR MAGAZINE, INC.,
Stanford University, and Yahoo!. Our business model is scalable as: a) the
website provides sales leads to our Retail Brokerage, Investment Banking, and
Institutional Services units and b) we have structured our Investment Banking
and Retail Brokerage units to take advantage of an independent contractor model
allowing us to expand and contract without the costs and liabilities associated
with employees and offices. Due to our website's large, global audience of
entrepreneurs and venture investors, it serves as a vehicle to collect, measure
and analyze data on entrepreneurial activity.
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.
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.
1
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.
Risks Related to Our Company
In addition to other information in this report, the following risks should be
considered in evaluating our condition and prospects. These risks may have a
material effect on our operating results.
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. We commenced our broker-dealer operations
in mid-2000. In addition, we completely restructured our broker-dealer
operations in 2001 through the acquisition of two firms and their merger into a
single operation. In 2004, we acquired a second broker-dealer, EquityStation,
which has been in operation since mid-1999. 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, our results amounted to net income of $2,774,435, earning a
substantial profit for the first time in our history. For the year ended
December 31, 2005, however, our results amounted to a net loss of $1,137,398.
The loss generated in 2005 was largely the result of higher administrative costs
related to higher payroll and rent expense as a result of investment in
upgrading talent in certain senior level staff functions, the expansion of
leased facilities at our corporate headquarters in Boca Raton, Florida, and the
addition of an office in Mt. Laurel, New Jersey. Further, we incurred a non-cash
expense to impair goodwill and the impairment of an investment in an unrelated
entity in the amount of $420,000 and $80,000, respectively, with revenues that
remained relatively flat year after year. As of December 31, 2005 and June 30,
2006, we had an accumulated deficit of $21,953,206 and $22,130,628,
respectively. We expect 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 maintain our recent profitability and generate sufficient
working capital to fund our planned spending. Even if we do maintain
profitability, we may not be able to increase profitability on a quarterly or
annual basis. If we do not 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.
2
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 and in the amounts needed, or 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 that 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 Securities and Exchange Commission (the "SEC"), state securities regulators
and other governmental regulatory authorities. We are also regulated by industry
self-regulatory organizations, including the NYSE, the NASD 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:
o sales methods and supervision;
o trading practices among broker-dealers;
o use and safekeeping of customers' funds and securities;
o capital structure of securities firms;
o record keeping; and
o 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
the NASD Regulation, Inc. ("NASD Regulation"), the regulatory arm of the NASD,
and the NYSE, which are our primary regulatory agencies. NASD Regulation and the
NYSE adopt rules, subject to approval by the SEC, that govern their members and
conduct periodic examinations of member firms' operations.
3
If we are found to have violated any applicable regulation, formal
administrative or judicial proceedings may be initiated against us that may
result in:
o censure;
o fine;
o civil penalties, including treble damages in the case of insider
trading violations;
o the issuance of cease-and-desist orders;
o the deregistration or suspension of our broker-dealer activities;
o the suspension or disqualification of our officers or employees; or
o 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:
o the volatility of domestic and international financial, bond
and stock markets, as demonstrated by past disruptions in the
financial markets;
o extensive governmental regulation;
o litigation;
o intense competition;
o substantial fluctuations in the volume and price level of securities; and
o 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 in many other ways, including those described below.
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 in the future may 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.
4
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.
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 owe us money, securities or
other assets will not perform their obligations. These parties include:
o trading counterparties;
o customers;
o clearing agents;
o exchanges;
o clearing houses; and
o 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:
o holding securities of third parties;
o 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
o 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.
5
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 85% 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:
o difficulties and expenses incurred in connection with the
subsequent assimilation of the operations and services or
products of the acquired company;
o the potential loss of key employees of the acquired company; and
o 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 than we do and have greater name recognition and
a larger client base. 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:
o employees binding us to transactions that exceed authorized limits or present
unacceptable risks to us;
o employees hiding unauthorized or unsuccessful activities from us; or
o the improper use of confidential information.
6
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 had 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 and executive officers control approximately 23% of our common
stock and may have interests differing from those of other stockholders.
Our directors and executive officers control approximately 23% of our
outstanding common stock, directly as stockholders and indirectly through
control relationships with other stockholders. There is no supermajority vote in
our Certificate of Incorporation. 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 shareholders' 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:
o the success of our advertising and promotional efforts;
o an increase in the number of users and page views of our website; and
o the ability to continue to provide a website and services useful to our
clients.
7
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:
o effectively use new technologies;
o adapt our services to emerging industry or regulatory standards; or
o 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 future
system failures and degradations. We cannot assure you that we will be able to
prevent an extended system failure if any of the following events occur:
o human error;
o subsystem, component, or software failure;
o a power or telecommunications failure;
o an earthquake, fire, or other natural disaster or other act of God;
o hacker attacks or other intentional acts of vandalism; or
o terrorists acts or war.
Any computer system failure that interrupts our operations could seriously harm
our business. We currently have limited off-site data storage and disaster
recovery systems.
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 Chief Executive Officer and
President. Losing Mr. Sokolow or any of our subsidiaries' other key executives,
including Timothy E. Mahoney, our Chairman and Chief Operating Officer, 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.
8
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, and Merrill Lynch. 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 customers, which (a) is secured
by cash and securities in customer accounts, or (b) involve (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, the broker
dealers may be required to sell or buy securities at prevailing market prices
and incur losses to satisfy its 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.(R), vFinance.com, Inc.(R), and AngelSearch(R). 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:
o enforce our intellectual property rights;
o determine the validity and scope of the proprietary rights of others; or
o 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.
9
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 2,500,000 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:
o dividend rights;
o conversion rights;
o voting rights, which may be greater or lesser than the voting rights of the
common stock;
o rights and terms of redemption;
o liquidation preferences; and
o sinking fund terms.
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.
Risk 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:
o announcements regarding developments in our business, acquisitions and
financing transactions;
o announcements by us or our competitors of new contracts, technological
innovations or new products;
o changes in government regulations;
o fluctuations in our quarterly and annual operating results; and
o 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:
o limited release of the market prices of our securities;
o limited news coverage;
o limited interest by investors in our securities;
o volatility of our stock price due to low trading volume;
o increased difficulty in selling our securities in certain states due to
"blue sky" restrictions; and
o limited ability to issue additional securities or to secure additional
financing.
10
If 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:
o net tangible assets of at least $2,000,000, if the issuer has been in
continuous operation for at least three years;
o net tangible assets of at least $5,000,000, if the issuer has been in
continuous operation for less than three years; or
o average annual revenue of at least $6,000,000 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 of 1934. 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 November 6, we had 59,828,060 shares of common stock outstanding, options
to purchase a total of 13,115,002 shares of common stock and warrants to
purchase a total of 7,074,589 shares of common stock. We are authorized to issue
up to 75,000,000 shares of common stock. 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.
11
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:
o general economic conditions;
o our ability to obtain future financing or funds when needed;
o the inability of our broker-dealer operations to operate profitably in
the face of intense competition from larger full-service and discount
brokers;
o a general decrease in merger and acquisition activities and our
potential inability to receive success fees as a result of transactions
not being completed;
o increased competition from business development portals;
o technological changes;
o our potential inability to implement our growth strategy through
acquisitions or joint ventures;
o acquisitions, business combinations, strategic partnerships, divestures
and other significant transactions may involve additional
uncertainties; and
o 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.
12
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 November 8, 2006 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.
Number of Shares of Percent of Common
Number of Shares Percent of Common Stock To Be Stock to be Owned
of Common Stock Common Stock Shares Available Owned After After Completion of
Name of Owned Before Owned Before for Sale Under Completion of the Offering
Selling Stockholder the Offering ** the Offering This Prospectus the Offering
------------------- --------------- ------------ ---------------- ------------ ----------------------
Sterling Financial Group 13,000,000 23.5 % 13,000,000 -- *
of Companies, Inc. (1)
* Less than 1%.
** 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 November 8, 2006, 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 59,828,060 shares of common stock outstanding as of November 8,
2006.
(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.
13
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:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o 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;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with a Selling Stockholder to sell a specified
number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o 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.
14
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.
15
SELECTED FINANCIAL DATA
The selected historical financial information presented below is derived from
our audited consolidated financial statements for the years ended December 31,
2001, 2002, 2003, 2004 and 2005. The selected quarterly financial information
was derived from our unaudited consolidated financial statements for the periods
ended March 31 and June 30, 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. Operating results for
the three months periods ended March 31, or June 30, 2006 are not necessarily
indicative of results that may be expected for the fiscal year ending December
31, 2006.
The data set forth below should be read in conjunction with the financial
statements and accompanying notes incorporated by reference.
Selected Historical Financial Data
For the Years Ended
December 31,
------------------------------------------------------------------------------
2001 2002 2003 2004 2005
------------------------------------------------------------------------------
Income Statement Data:
Total revenue $ 15,769,223 $ 20,204,300 $ 24,478,466 $ 26,329,151 $ 25,826,250
Total operating expenses 32,882,090 22,210,661 24,063,784 24,793,012 27,021,459
Income (loss) from operations (17,112,867) (2,006,361) 414,682 1,536,139 (1,195,209)
Net income (loss) (17,199,360) (2,235,298) 311,415 2,774,435 (1,137,398)
Net income (loss) per share (0.89) (0.08) 0.01 0.08 (0.03)
Weighted average common shares used to compute
basic and diluted net income per share 19,810,285 26,716,408 29,963,446 35,840,248 40,049,654
Other Financial Data:
Net cash (used in) provided by operating
activities $ (3,987,415) $ (1,564,486) $ 1,484,387 $ 1,678,281 $ (673,187)
Net cash used in investing activities (1,084,892) (104,018) (57,734) (394,090) (493,804)
Net cash provided by financing activities 1,442,050 1,518,209 130,000 188,303 338,089
Balance Sheet Data:
Total Assets $ 6,405,812 $ 5,129,235 $ 6,378,388 $ 9,832,391 $ 9,062,084
16
Selected Quarterly Financial Data (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
Six months ended June 30, 2006:
Total revenue $ 8,925,806 $ 9,655,508 $ -- $ -- $ 18,581,314
Income (Loss) from operations 247,701 (425,124) -- -- (177,423)
Net income (loss) $ 247,701 $ (425,124) $ -- $ -- $ (177,423)
Year ended December 31, 2005:
Total revenue $ 6,533,075 $ 6,320,674 $ 6,552,670 $ 6,419,831 $ 25,826,250
Income (Loss) from operations (154,527) (69,462) (150,823) (820,397) (1,195,209)
Net income (loss) (154,528) (69,464) (132,743) (780,663) (1,137,398)
Year ended December 31, 2004:
Total revenue $ 7,812,570 $ 6,145,650 $ 4,629,023 $ 7,741,908 $ 26,329,151
Income (Loss) from operations 506,311 162,354 10,404 857,070 1,536,139
Net income (loss) $ 2,143,791 $ 171,895 $ 19,742 $ 439,007 $ 2,774,435
17
DESCRIPTION OF OUR BUSINESS
Our History
On January 4, 2001, we closed the merger of NW Holdings, Inc. ("NWH"), a Florida
corporation, with and into us with us as 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, Inc., 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. On June 22, 2002, our Board
of Directors approved a dividend to our Series A Preferred shareholders of all
of the common stock of Colonial Direct Financial Group, Inc. Although Colonial
Direct Financial Group, Inc. is no longer a subsidiary of the Company, the
majority of its personnel remain employed with vFinance Investments, Inc.
On August 20, 2001, we entered into a Securities Exchange Agreement by means of
which we acquired the membership interests in two related companies, Critical
Investments, LLC, a Delaware limited liability company ("Critical Investments"),
and Critical Advisors, L.L.C., a Virginia limited liability company ("Critical
Advisors"). Critical Investments manages Critical Infrastructure Fund, L.P.
("Critical Infrastructure LP"), a Delaware limited partnership. Critical
Advisors manages Critical Infrastructure Fund, Ltd. ("Critical Infrastructure
Ltd."), an international business company organized and existing under the laws
of the British Virgin Islands and receives (i) a management fee equal to 1% of
the net asset value of Critical Infrastructure Ltd. and (ii) a performance fee
equal to 20% of the increase in net asset value of Critical Infrastructure Ltd.
Critical Infrastructure LP and Critical Infrastructure Ltd. are the sole general
partners in, owning 96% and 4%, respectively, and conduct their investment and
trading activity through, Critical Infrastructure Fund (BVI), LP, a limited
partnership organized and existing under the laws of the British Virgin Islands,
which holds a portfolio of securities. A determination has been made to
liquidate the funds. The funds are nearly liquidated, and we believe they will
be fully liquidated by December 31, 2006.
On May 29, 2002, we entered into a select asset purchase agreement (the
"Agreement"), as amended on June 17, 2002 (the "Amendment"), with Somerset
Financial Partners, Inc., ("Somerset"), a Delaware corporation, to acquire
certain of its assets. Through its subsidiaries, Somerset acted as a registered
broker-dealer and was engaged in other financial services. Pursuant to the
Agreement, we received the transfer of all agreed upon brokerage customers and
client accounts as well as the registration of approximately 25 registered
personnel of Somerset. As of June 17, 2002, we began reflecting in our financial
statements the applicable revenue production and other associated costs. Under
the escrow agreement signed in conjunction with the Agreement and Amendment, we
instructed our transfer agent to deliver to and in the name of our escrow agent
a total of 3,000,000 shares of common stock (the "Escrowed Shares"). The
Escrowed Shares were to be delivered to Somerset when Somerset achieved all the
closing conditions. In August 2002, all of the closing conditions of the
Agreement and Amendment were not met by Somerset and we issued a default letter
to Somerset (the "Default Letter"). Among other things, the Default Letter
provided formal notice to Somerset of its default under the Agreement and
Amendment. In October 2002, a formal termination notice was executed by us and
Somerset and the Escrowed Shares were returned to us and cancelled.
We, as part of our strategic focus to operate our retail brokerage business
using an independent contractor (IC) model, on January 1, 2003, entered into a
joint venture agreement with JSM Capital Holding Corp. ("JSM"), a retail
brokerage independent contractor headquartered in New York and founded by John
S. Matthews (who was also, at the same time, named the President of our Retail
Brokerage Unit). Effective May 1, 2003, we merged our Retail Brokerage unit into
JSM, in exchange for a 19% equity position in JSM's common stock. Effective upon
such mergers, JSM became an independent contractor of the Company. This joint
venture was terminated for cause in July 2005, and the investment in JSM was
fully impaired.
18
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, all
of which were owned by Level2.com, Inc. ("Level2"), a subsidiary of Global.
The assets acquired from Global included certain intellectual property, customer
accounts, computer equipment, and certain clearance and trading agreements
relating to emerging market debt trading, wholesale market-making in selected
equities for institutional clients, and direct-access equity trading. vFinance
Investments assumed no liabilities in connection with the acquisition of
Global's assets. Two of the principals of Global and EquityStation 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.
Our Company
We are a diversified financial services company committed to meeting the
financial needs of high net-worth investors, institutions focused on portfolio
growth and management strategies, and high growth emerging companies seeking
capital.
Financial Arrangement with Clearing Broker
On January 25, 2002, we 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 us with a revolving credit facility for up to $3,000,000 for the
purpose of supporting the expansion of our brokerage business or investments in
infrastructure to expand our operations and our 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.
We borrowed $1,500,000 under the credit facility on January 28, 2002, leaving an
additional $1,500,000 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. The credit facility stayed with UBS
subsequent to the acquisition giving rise to potential breaches under such
credit facility as well as precluding us from drawing an additional $1,500,000
thereunder. During March 2004, NFS agreed to directly pay down the UBS credit
facility in the amount of $1,500,000 pursuant to a guaranty Fidelity Investments
made to UBS as part of their original acquisition of the CSC clearing division.
As a result, we were relieved from $1,500,000 in debt, but no longer had the
ability to obtain an additional $1,500,000 under the credit facility or assert
any claims against UBS or NFS regarding this transaction and credit facility.
During March 2004, we entered into a clearing agreement with NFS. The new
clearing agreement required NFS to pay us, over a five year period beginning
January 2004, a monthly incentive bonus not to exceed $25,000 per month up to
$1,500,000, based on a formula that we believe is very achievable. Accordingly,
NFS has been paying $25,000 per month related to this incentive calculation and
such amount, $300,000 through December 31, 2005. The new clearing agreement also
required NFS to provide us with $200,000 to assist the Company with transition
costs related to the conversion from CSC to NFS. This amount was paid to us in
March 2004. In consideration for these incentives, NFS required a termination
fee of $1,700,000 should we discontinue using NFS' services. This fee is
reduced, pro rata, annually over the five year term of the agreement. We began
clearing through NFS during May 2004.
Our Business
Retail and Trading Business
The largest portion of our revenues, 89% in 2005 and 85% in 2004, was
attributable to commissions generated by our brokerage and trading activities
through our wholly owned broker-dealer subsidiary, vFinance Investments.
vFinance Investments' Retail Brokerage and Trading units buy and sell securities
for its customers from other dealers on an agency basis, and charges its
customers a commission for its services. Such commission revenue is derived from
brokerage transactions in listed and over-the-counter securities and mutual fund
securities. vFinance Investments has agreements with numerous mutual fund
management companies pursuant to which it sells shares in a variety of mutual
funds. Mutual fund commissions are derived from standard dealers' discounts that
are a small percentage of the purchase price of the shares depending upon the
terms of the dealer agreement and the size of the transaction. In addition, most
funds permit vFinance Investments to receive additional periodic fees based upon
the customer's investments maintained in particular funds.
19
Investment Banking
We derived a significant portion of our revenues in our last fiscal year from
the success fees generated by vFinance Investments' Investment Banking unit, 8%
in 2005 and 12% in 2004. We assist emerging growth, private and public companies
by (i) developing sound strategic plans, (ii) obtaining equity, mezzanine,
bridge, or acquisition capital, (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
underwriters or selling group members 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.
Wholesale Trading Business
In support of our retail brokerage, banking and institutional services units, we
offer wholesale market-making services. vFinance Investments makes markets in
over 2,500 Over-the-Counter Bulletin Board, National Market System, Pink Sheet,
and NASDAQ Capital Market stocks. 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.
Market makers use our capital, retail 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.
Institutional Services
A critical element of our business strategy is to identify institutional quality
investments that offer above market returns. The Institutional Services Division
("ISD") supports 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. ISD accomplishes its mission
by offering fund managers access to 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. ISD has 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.
20
Internet Strategy
The Center for Innovative Entrepreneurship, a non-profit corporation, 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 3.4 million 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 search phrase "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 80,000 "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 Equity Station have agreed to indemnify
the clearing brokers for losses they incur on these credit arrangements.
Competition
vFinance Investments and EquityStation encounter competition in all aspects of
their business. Many of their competitors have significantly greater financial,
technical, marketing and other resources. National retail firms such as Merrill
Lynch Pierce Fenner & Smith Incorporated, Salomon Smith Barney, Inc. and Morgan
Stanley/Dean Witter dominate the industry. Our subsidiaries also compete with
numerous regional and local firms. In addition, a number of firms offer discount
brokerage services to retail customers and generally effect transactions at
substantially lower commission rates on an "execution only" basis, without
offering other services such as investment recommendations and research.
Moreover, there is substantial commission discounting by full-service
broker-dealers competing for institutional and retail brokerage business. The
emergence of online trading has further intensified the competition for
brokerage customers. With the exception of offering certain trading platforms to
institutional clients and portfolio managers, our subsidiaries do not offer
online trading services to retail customers. The continued expansion of discount
brokerage firms and online trading could adversely affect our retail business.
Other financial institutions, notably commercial banks and savings and loan
associations, offer customers some of the same services and products presently
provided by securities firms. While it is not possible to predict the type and
extent of competing services that banks and other institutions ultimately may
offer to customers, our subsidiaries may be adversely affected to the extent
those services are offered on a large-scale basis. We compete through our
advertising and recruiting programs for registered representatives interested in
potentially joining us.
21
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 and (iii) First Colonial
Securities Group, Inc. 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 Commission 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 the date of this prospectus, 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 Securities Investor Protection Corporation ("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' clients' accounts are carried on the
books and records of NFS and Jefferies. NFS has obtained additional insurance
from a private insurer in an amount equal to $4,500,000 for the benefit of our
clients' accounts with vFinance Investments that is supplemental to SIPC
protection. The client accounts for Equity Station are carried on the books and
records of Merrill Lynch, Pierce, Fenner & Smith.
22
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, 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
report, vFinance Investments, EquityStation and our non-broker dealer
subsidiaries are qualified to do business as a foreign corporation in only a few
jurisdictions. Failure to qualify as an out-of-state or foreign corporation in a
jurisdiction where it is 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.(R),
vFinance.com, Inc.(R), AngelSearch(R).
Employees
As of the date of this prospectus, we employed the following personnel:
Position Salaried Contract Total
-------------------------------------- ------------- ------------- -----------
Officers 11 0 11
Administration 26 17 43
Brokers 33 110 143
Traders 22 3 25
Investment Bankers 3 14 17
Web Operations 2 0 2
------------- ------------- -----------
Totals 97 144 241
============= ============= ===========
None of our personnel is 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 of employment.
23
Description of Property
The Company leases office space in four locations. The following chart provides
information related to these lease obligations:
Office Location Approximate Lease Rental Expiration
Square Footage 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 7/31/2006
1200 N. Federal Highway, Boca Raton FL 16,250 $ 581,050 7/22/2014
Our corporate headquarters are located at 3010 North Military Trail, Boca Raton,
Florida 33431, where we lease 15,756 square feet. We terminated the original
lease and entered into a new lease in January 2003, as amended on October 31,
2003 and March 26, 2004. The January 2003 lease reduced the size of the leased
space to approximately 9,877 square feet. On November 12, 2004, we entered into
a new amendment in which we expanded the size of our premises to include an
additional 5,879 rentable square feet of space effective January 1, 2005 (the
"effective date"). As of the effective date, the lease was amended such that the
premises shall be deemed to contain a total of 15,756 rentable square feet. The
lease expiration date was also extended to February 28, 2009.
On December 15, 2004, we entered into a new lease at 880 Third Avenue, New York,
New York to replace our two previous leases in the same building, which expired
on December 31, 2005. We now have offices on the twelfth floor with an annual
rental 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 rental 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 rental 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 we, 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.
24
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 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. vFinance's motion to
amend the third party claim to include these two clients is currently pending.
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. In June 2005, the SEC
advised vFinance Investments that the Division of Enforcement staff intended to
recommend that the Commission take enforcement action against vFinance, Inc. for
various reasons. The SEC stated that it intends to file a civil action in
Federal District Court seeking: a permanent injunction in connection with offers
and sales of the securities of Sedona Software Solutions and SHEP Technologies,
the imposition of civil penalties, and disgorgement of approximately $40,000 in
commissions. vFinance Investments continues to engage in settlement discussions
with the staff and, so far, has been unable to reach a resolution. While
vFinance Investments will continue to present a vigorous defense, a prediction
of the likely outcome cannot be made.
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 contact 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. Matthews and JMS Capital Holding Corp.,
a plaintiff in the arbitration action, also request unspecified damages
resulting from our alleged improper activity. The full hearing on the merits is
currently scheduled for August 30 through September 1, 2006. 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.
We are engaged in a number of other legal proceedings incidental to the conduct
of our business. These claims aggregate a range of $17,500 to $260,000.
Seasonality and Backlog
Our business is not subject to significant seasonal fluctuations, and there are
no material backlogs in our business.
25
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, 2005,
2004 and 2003, respectively, and the six months ended June 30, 2006. The
discussion should be read in conjunction with our audited consolidated financial
statements and the notes related thereto which appear elsewhere in this
prospectus.
Critical Accounting Policies
Financial Reporting Release No. 60, released by the SEC, requires all companies
to include a discussion of critical accounting policies or methods used in the
preparation of financial statements. Note 2 to our consolidated financial
statements includes a summary of the significant accounting policies and methods
used in the preparation of our consolidated financial statements. The following
is a brief discussion of the more significant accounting policies and methods
used by us.
General
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, disclosure of contingent
assets and liabilities and the reported amounts of revenues and expenses. Actual
results could differ from those estimates.
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 this stock purchase warrants when received based
on the Black Sholes 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 warrants 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.
As of December 31, 2005, certain transactions in process may result in the
Company receiving equity instruments or stock purchase warrants in subsequent
periods as discussed above. In such event, the Company will recognize revenue
related to the receipt of such equity instruments consistent with the
aforementioned policies.
Clearing Arrangement
We do not carry accounts for customers or perform custodial functions related to
customers' securities. We introduce all of their customer transactions, which
are not reflected in these financial statements, to their respective clearing
brokers, which maintain the customers' accounts and clear such transactions.
Additionally, our clearing firms provide the clearing and depository operations
for our proprietary securities transactions. These activities may expose our
broker dealer to off-balance-sheet risk in the event that customers do not
fulfill their obligations with the clearing broker; in this event, our broker
dealers have agreed to indemnify our clearing firms.
26
Net Capital Requirement
As of December 31, 2005, the minimum amount of net capital required to be
maintained by vFinance Investments was $1,000,000. The minimum amount of capital
required to be maintained by EquityStation was $100,000 pursuant to NASD
requirements. However, EquityStation has agreed to maintain a minimum of
$250,000 in net capital pursuant to its agreement with its clearing agent,
Merrill Lynch.
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.
Stock Based Compensation
Upon the consummation of an advisory, consulting, capital or other similar
transactions the Company may distribute equity instruments or proceeds from the
sale of equity instruments to its employees. These distributions are made at the
Company's discretion on a case-by-case basis as determined by the role of the
employee and the nature of the transaction. At December 31, 2005 and 2004, no
amounts were owed to employees of the Company in connection with equity
investments received as compensation.
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.
Six Months Ended June 30, 2006 Compared to the Six Months Ended June 30, 2005
Statements of Operations
Revenues
Revenues increased $5,727,565, or 45% to $18,581,314 for the six months ended
June 30, 2006 compared to $12,853,749 for the six months ended June 30, 2005.
Approximately 28% 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. Additionally, another 31%
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. The majority of
the remaining increase was due to higher revenues from success fees from
investment banking transactions.
27
Operating Expenses
Compensation, commissions and benefits increased 43% to $14,208,788 for the six
months ended June 30, 2006 compared to $9,946,936 for the six months ended June
30, 2005, primarily as a result of the Sterling acquisition and a 44% increase
in net revenues. Clearing and transaction costs increased 32% to $2,007,589 for
the six months ended June 30, 2006 compared to $1,523,343 for the six months
ended June 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 21% to $1,344,319 for the six
months ended June 30, 2006 compared to $1,109,647 for the six months ended June
30, 2005. This increase is primarily due to approximately a $177,000 increase in
professional fees driven primarily by accruals for legal matters.
Occupancy and equipment expenses increase 54% to $554,957 for the six months
ended June 30, 2006 compared to $360,366 for the six months ended June 30, 2005.
This increase relates primarily to the occupancy and equipment costs associated
with the Sterling acquisition.
Depreciation and amortization increased $272,256 to $407,055 for the six months
ended June 30, 2006 compared to $134,799 for the six months ended June 30, 2005.
The increase was primarily attributable to the Company's amortization of
customer relationships resulting from the Sterling acquisition and the
reclassification of goodwill to customer relationships in the second half of
2005.
Stock based compensation was $236,029 for the six months ended June 30, 2006
compared to $2,647 for the six months ended June 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.
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 June 30, 2006 Six months ended June 30, 2006
2006 2005 %Chg 2006 2005 %Chg
Unaudited Unaudited Unaudited Unaudited
Revenues:
Commissions - agency $4,769,502 $3,590,197 33% $9,524,835 $7,401,588 29%
Trading profits 2,502,998 1,055,096 137% 4,004,032 2,423,861 65%
Success fees 1,331,579 661,460 101% 2,850,548 1,005,401 184%
Other brokerage related income 753,601 759,373 -1% 1,546,037 1,397,770 11%
Consulting fees 151,625 173,850 -13% 303,026 387,144 -22%
Other 146,203 80,698 81% 352,836 237,985 48%
--------------- ---------------- -------- --------------- ---------------- --------
Total revenues 9,655,508 6,320,674 53% 18,581,314 12,853,749 45%
--------------- ---------------- -------- --------------- ---------------- --------
Operating expenses:
Compensation, commissions and 7,592,248 4,717,283 61% 14,208,788 9,946,936 43%
benefits
Clearing and transactions costs 1,060,288 787,604 35% 2,007,589 1,523,343 32%
General and administrative costs 717,665 633,955 13% 1,344,319 1,109,647 21%
Occupancy and equipment costs 339,060 175,878 102% 554,957 360,366 54%
Depreciation and amortization 248,411 74,092 235% 407,055 134,799 202%
Stock based compensation 122,960 1,324 9187% 236,029 2,647 8817%
--------------- ---------------- -------- --------------- ---------------- --------
Total operating expenses: 10,080,632 6,390,136 58% 18,758,737 13,077,738 43%
--------------- ---------------- -------- --------------- ---------------- --------
Loss from operations (425,124) (69,462) 512% (177,423) (223,989) -21%
Income tax benefit (provision) - - - -
--------------- ---------------- -------- --------------- ---------------- --------
Net loss $(425,124) $ (69,462) 512% $(177,423) $(223,989) -21%
=============== ================ ======== =============== ================ ========
28
Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
Statements of Operations
Business Environment
The securities industry is highly competitive and sensitive to many factors and
is directly affected by general economic and market conditions, including the
volatility and price level of securities markets; the trading volume, size, and
timing of securities transactions; the demand for investment banking services
and changes in interest rates. All such conditions have an impact on
commissions, trading and investment income as well as on liquidity. In addition,
a significant portion of the Company's expenses are relatively fixed and do not
vary with market activity. Consequently, substantial fluctuations can occur in
the Company's revenues and net income from period to period due to these and
other factors.
In addition, the Company continues to face increasing competition from
commercial banks and other large financial services firms as they begin to offer
more investment banking and financial services traditionally provided by
securities firms. The effect of the consolidation of the securities industry of
recent years means that a variety of financial services companies have merged to
offer a broader spectrum of investment products and such competitors have
substantially greater financial resources than the Company. The Company is
incurring additional expenses to comply with increased regulation from the
securities industry, particularly in the over-the-counter markets. At present,
the Company is unable to predict the extent of the changes, or their potential
effect on the Company's business.
Outlook
The Company will continue executing its plan for growth and profitability by
investing in its core businesses and through mergers and acquisitions. Due to
the many complexities of purchasing companies, the Company cannot predict its
success in executing this strategy. The Company will leverage the substantial
investments in technology and infrastructure made in 2004 and 2005 by adding
independent contractors to its retail brokerage and investment banking
businesses. The Company will expand its institutional sales business by focusing
on providing a full range of investment, research and trading services to the
Hedge Fund Industry. Furthermore, the Company plans to find opportunities to
expand its newly acquired emerging markets fixed income securities trading
business. In January 2006, the Company entered into an Asset Purchase Agreement
whereby it agreed to purchase certain select assets of the Sterling Financial
Investment Group and the Group of Companies of Sterling. The Company also
entered into a management agreement whereby it agreed to provide certain
management services to Sterling until such time as the Asset Purchase could be
completed or April 24th whichever occurred first. In connection with this
acquisition , the Company will add a fixed income proprietary trading business
and an Independent Contractor arrangement with a Panamanian group.
Results of Operations
During 2005, the Company's revenues declined by $502,901 or 1.9% and the company
incurred losses in each fiscal quarter and a total net loss of $1,137,398 for
the year. In the final quarter of 2005, the Company's loss amounted to $780,664
or roughly 69% of the total loss for the year. In the final quarter, the Company
incurred an impairment charge of $420,000 related to the write-off of goodwill
and $80,000 related to the impairment of an investment. The Company increased
revenue by 9.4% in its retail brokerage business, which represents 62% of total
revenues. This was offset by declines of 19.0% in its trading business and a
29.4% in investment banking which represent 16% and 10% of total revenue for
2005, respectively. Other brokerage related income increased $270,100 or 10.5%
and other revenues, which consist primarily of management fee revenue related to
the Center for Innovative Entrepreneurship, decreased by $106,762 or 24.4%. In
2004, other revenue was produced from sales through the company's website.
29
The following table and discussion summarizes the changes in the major revenue
and expense categories for the past two years.
For Years Ended December 31
---------------------------------------------------------------
% of % of
2005 Revenues 2004 Revenues
-------------- ----------- -------------- ------------
Revenues
Commissions - agency $ 15,941,221 62% $14,571,878 55%
Trading Profits 4,177,402 16% 5,156,842 20%
Success fees 2,006,016 8% 3,224,973 12%
Consulting and retainers 533,644 2% 370,829 1%
Other brokerage related income 2,837,589 11% 2,567,489 10%
Other 330,378 1% 437,140 2%
-------------- ----------- -------------- ------------
Total revenues 25,826,250 100% 26,329,151 100%
-------------- ----------- -------------- ------------
Cost of revenues:
Commissions 14,187,765 55% 14,624,914 55%
Clearing and transaction costs 1,905,215 7% 1,030,114 4%
Success 1,099,519 4% 1,346,272 5%
Consulting and retainers 377,585 2% 224,916 1%
Other 100 0% 4,581 0%
-------------- ----------- -------------- ------------
Total cost of revenues 17,570,184 68% 17,230,797 65%
-------------- ----------- -------------- ------------
Gross profit 8,256,066 32% 9,098,354 35%
-------------- ----------- -------------- ------------
Other expenses:
General and administrative 8,479,910 34% 6,686,372 25%
Professional fees 262,607 1% 157,370 1%
Provision for bad debts 70,990 0% 85,567 0%
Legal litigation 312,155 1% 399,647 2%
Depreciation and amortization 299,604 1% 147,804 1%
Amounts forgiven under forgivable loans 6,597 0% 80,161 0%
Stock based compensation 19,412 0% 5,294 0%
-------------- ----------- -------------- ------------
Total other expenses 9,451,275 37% 7,562,215 29%
Income (loss) from operations (1,195,209) (5%) 1,536,139 6%
-------------- ----------- -------------- ------------
Gain on forgiveness of debt 0 0% 1,500,000 6%
-------------- ----------- -------------- ------------
Interest and dividend income (Expense) 57,811 0% (221,704) (1%)
-------------- ----------- -------------- ------------
Pre-tax net (loss) profit (1,137,398) (4%) 2,814,435 11%
-------------- ----------- -------------- ------------
Income taxes 0 0% (40,000) 0%
-------------- ----------- -------------- ------------
Net (loss) profit $ (1,137,398) (4%) $2,774,435 11%
============== =========== ============== ============
30
Total revenues were $25,826,250 for the year ended December 31, 2005 as compared
to $26,329,151 for the year ended December 31, 2004, a decrease of $502,901, or
1.9%. The decrease in revenues was primarily related to Trading Profits and
Success Fees which decreased by $979,440, or 19.0% and $1,218,957 or 37.8%,
respectively, from the prior year, partially offset by an increase in retail
agency commissions which increased $1,369,343 or 9.4%, from the prior year along
with an increase in consulting fees of $162,815 or 43.9%. Overall, the Company
attributes the decrease in its operating revenues to less favorable market
conditions than in the prior year for the investment banking and trading
businesses offset by an increase in its clearing revenue and retail agency
commission revenue. Revenues in 2005 also benefited from having a full year of
operations for the acquired businesses of Global Partners Securities.
Cost of revenues was $17,570,184 for the year ended December 31, 2005 as
compared to $17,230,797 for the year ended December 31, 2004, an increase of
$339,387, or 2.0%. The increase was primarily due to an increase in the clearing
and transaction costs of $875,101, resulting from the addition of the
EquityStation trading platform business and increases in execution fees for
wholesale trading. This was offset by decreases in commissions and related fees
of $535,714 due to having lower revenues in principal trading and investment
banking.
Gross profit was $8,256,066 for the year ended December 31, 2005 as compared to
$9,098,354 for the year ended December 31, 2004, an decrease of $842,288, or
9.3%. Gross profit margin for the year ended December 31, 2005 was 32.0% as
compared to 34.6% for the year ended December 31, 2004, a decrease of 2.6%
percentage points. The decrease in gross profit and gross profit margin was
mostly due to profit of $602,440 realized in 2004 from the sale of securities
with no corresponding expense and the $200,000 provided by NFS to assist the
Company with transition costs related to the conversion from CSC to NFS which
materially benefited the gross margin percentage in 2004.
General and administrative expenses were $8,479,910 for the year ended December
31, 2005 as compared to $6,686,372 for the year ended December 31, 2004, an
increase of $1,793,538, or 26.8%. This increase was mostly due to an investment
in talent at the senior management level, higher health benefit costs, and
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 the
disaster recovery sight in Mt. Laurel, New Jersey. In addition, the Company
incurred a non-cash expense of $500,000, for the impairment of goodwill
associated with a prior acquisition and the write-down of an investment in one
of its independent contractor entities, which amounted to about one-third of the
increase in G&A expense.
Professional fees were $262,607 for the year ended December 31, 2005 as compared
to $157,370 for the year ended December 31, 2004, an increase of $105,237, or
66.9%. The increase was primarily due to legal fees associated with the
management agreements for Sterling, other acquisition activities that have not
yet resulted in any definitive agreements and slightly higher fees from our
independent accounting firm.
Provision for bad debts was $70,990 for the year ended December 31, 2005 as
compared to $85,567 for the year ended December 31, 2004, a decrease of $14,577,
or 17.0%. The decrease was due to a more proactive approach by management to
collect aged accounts.
Legal litigation was $312,155 for the year ended December 31, 2005 as compared
to $399,647 for the year ended December 31, 2004, a decrease of $87,492, or
21.9%. As is typical in the industry, customers make claims regarding the
Company's actions and the Company defends itself vigorously against such claims.
The Company's cost of defending itself varies year-to-year depending on the
volume of claims that are in process at any given time.
Depreciation and amortization was $299,604 for the year ended December 31, 2005
as compared to $147,804 for the year ended December 31, 2004, an increase of
$151,800 or 103.7%. The increase is primarily due to the Company's investment in
new systems and technologies as a strategy to introduce new services that exceed
compliance requirements and offer a comprehensive business solution thereby
increasing productivity while reducing regulatory risk.
The amount forgiven under forgivable loans was $6,597 for the year ended
December 31, 2005 as compared to $80,161 for the year ended December 31, 2004, a
decrease of $73,564, or 91.8%. This decrease was attributable to the fact that
several years ago the Company discontinued its practice of providing forgivable
loans to brokers as part of its recruitment efforts. Accordingly, there have
been no additions to the outstanding balance and the remaining balance was fully
amortized in 2005.
31
Stock based compensation was $19,412 for the year ended December 31, 2005 as
compared to $5,294 for the year ended December 31, 2004 an increase of $14,118,
or 266.7%. This amount primarily represents the amortization of deferred
compensation to an outside consultant who was granted options from the Company
in return for his services. The amount related to this consultant was fully
recognized as of March 31, 2003. In addition, during January 2003, the Company
granted warrants to its landlord related to the renegotiation of its lease and
this amount was fully amortized in 2005 as a result of a change in ownership of
the building leased as the company headquarters.
Net loss amounted to $1,137,398 for the year ended December 31, 2005 as compared
to Income of $2,774,435 for the year ended December 31, 2004. The change was
primarily due to the higher general and administrative costs and higher cost of
revenue.
Income from forgiveness of indebtedness amounted to $0 for the year ended
December 31, 2005, as compared to $1,500,000 as of December 31, 2004 which was
the result of NFS agreeing to pay down the UBS credit facility, pursuant to a
guaranty Fidelity Investments made to UBS as part of their original acquisition
of the CSC clearing division.
Interest and dividend income, net of interest expense, was $57,811 for the year
ended December 31, 2005 as compared to interest expense net of interest and
dividend income of $221,704 for the year ended December 31, 2004, an increase of
$279,515. This increase in income was primarily attributable forgiveness of debt
and less interest expense being paid as a result of this forgiveness.
We do not believe our operations are materially affected by inflation and or by
seasonal fluctuations. Our main lines of business are directly affected by
higher interest rates, the volatility and volume of the stock market and the
capital markets.
Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003
Statements of Operations
Business Environment
The securities industry is highly competitive and sensitive to many factors and
is directly affected by general economic and market conditions, including the
volatility and price level of securities markets; the trading volume, size, and
timing of securities transactions; the demand for investment banking services
and changes in interest rates. All such conditions have an impact on
commissions, trading and investment income as well as on liquidity. In addition,
a significant portion of the Company's expenses are relatively fixed and do not
vary with market activity. Consequently, substantial fluctuations can occur in
the Company's revenues and net income from period to period due to these and
other factors.
In addition, the Company continues to face increasing competition from
commercial banks and other large financial services firms as they begin to offer
more investment banking and financial services traditionally provided by
securities firms. The effect of the consolidation of the securities industry of
recent years means that a variety of financial services companies have merged to
offer a broader spectrum of investment products and such competitors have
substantially greater financial resources than the Company. The Company is
incurring additional expenses to comply with increased regulation from the
Sarbanes-Oxley Act and the securities industry, particularly in the
over-the-counter markets. At present, the Company is unable to predict the
extent of the changes, or their potential effect on the Company's business.
Outlook
The Company will continue executing its plan for growth and profitability by
investing in its core businesses and through merger and acquisition. Due to the
many complexities of purchasing companies, the Company cannot predict its
success in executing this strategy. The Company will leverage the substantial
investments in technology and infrastructure made in 2004 by adding independent
contractors to its retail brokerage and investment banking businesses. The
Company will expand its institutional sales business by focusing on providing a
full range of investment, research and trading services to the Hedge Fund
Industry. Furthermore, the Company plans to find opportunities to expand its
newly acquired emerging markets fixed income securities trading business.
32
Results of Operations
During 2004, the Company's revenues grew by 7.6% and continued its profitability
from 2003, compared to the significant net losses incurred in prior years. The
Company achieved operating profitability in each fiscal quarter even though the
financial markets in fiscal 2004 were volatile. During the first quarter, net
income was strong due to favorable market conditions, the recognition of a gain
of $1,500,000 for the forgiveness of indebtedness, the recognition of a tax
benefit in the amount of $400,000 and income received from its clearing agent in
the amount of $200,000 which reduced transaction costs; this was offset by a
one-time conversion premium expense in the amount of $231,625. Markets softened
during the second quarter but the Company achieved profitability. The results
for the third quarter were further impacted by continued unfavorable market
conditions. In the fourth quarter, market conditions strengthened in the retail
brokerage segment and the Company realized a gain of $775,489 on the sale of
securities; this was offset by the reversal of the $400,000 tax benefit realized
in the first quarter.
The following table and discussion summarizes the changes in the major revenue
and expense categories for the past two years.
Years ended December 31,
-----------------------------------------------------------------
2004 % of Revenues 2003 % of Revenues
--------------- ---------------- -------------- -----------------
Revenues:
Commissions - agency $ 14,571,878 55% $13,372,875 55%
Trading Profits 5,156,842 20% 4,533,933 19%
Success fees 3,224,973 12% 3,549,453 15%
Consulting and retainers 370,829 1% 468,168 2%
Other brokerage related income 2,567,489 10% 2,085,313 9%
Other 437,140 2% 468,724 2%
--------------- ---------------- -------------- -----------------
Total revenues 26,329,151 100% 24,478,466 100%
--------------- ---------------- -------------- -----------------
Cost of revenues:
Commissions 14,624,914 55% 13,234,856 54%
Clearing and transaction costs 1,030,114 4% 934,884 4%
Success 1,346,272 5% 1,792,760 7%
Consulting and retainers 224,916 1% 218,807 1%
Other 4,581 0% 16,138 0%
--------------- ---------------- -------------- -----------------
Total cost of revenues 17,230,797 65% 16,197,445 66%
--------------- ---------------- -------------- -----------------
Gross profit 9,098,354 35% 8,281,021 34%
--------------- ---------------- -------------- -----------------
Other expenses:
General and administrative 6,686,372 25% 6,776,221 28%
Professional fees 157,370 1% 324,712 1%
Provision for bad debts 85,567 0% 148,672 1%
Legal litigation 399,647 2% 327,499 1%
Depreciation and amortization 147,804 1% 118,619 0%
Amounts forgiven under forgivable loans 80,161 0% 152,902 1%
Stock based compensation 5,294 0% 17,714 0%
--------------- ---------------- -------------- -----------------
Total other expenses 7,562,215 29% 7,866,339 32%
--------------- ---------------- -------------- -----------------
Income from operations 1,536,139 6% 414,682 2%
--------------- ---------------- -------------- -----------------
Gain on forgiveness of debt 1,500,000 6% - 0%
Interest and dividend income (expense) (221,704) -1% (103,267) 0%
--------------- ---------------- -------------- -----------------
Pre-Tax Net Income 2,814,435 11% 311,415 1%
--------------- ---------------- -------------- -----------------
Federal Income Taxes (40,000) 0% - 0%
--------------- ---------------- -------------- -----------------
Net Income $2,774,435 11% $311,415 1%
=============== ================ ============== =================
33
Total revenues were $26,329,151 for the year ended December 31, 2004 as compared
to $24,478,466 for the year ended December 31, 2003, an increase of $1,850,685,
or 7.6 %. The increase in revenues was primarily related to Brokerage and
Trading which increased $2,304,088, or 11.52% from the prior year, partially
offset by a decrease in Investment Banking which decreased $421,819, or 10.50%,
from the prior year. Overall, the Company believes that the increase in its
operating revenues was a result of more favorable market conditions than in the
prior year, the Global acquisition and expense reductions.
Cost of revenues was $17,230,797 for the year ended December 31, 2004 as
compared to $16,197,445 for the year ended December 31, 2003, an increase of
$1,033,352, or 6.4%. The increase was primarily due to the increase in
commission expense corresponding to the increased revenues.
Gross profit was $9,098,354 for the year ended December 31, 2004 as compared to
$8,281,021 for the year ended December 31, 2003, an increase of $817,333, or
9.9%. Gross profit margin for the year ended December 31, 2004 was 35% as
compared to 34% for the year ended December 31, 2003. The increase in gross
profit margin was due to an increase of $602,440 in realized profits from the
sale of securities compared to the prior year with no corresponding expense and
the $200,000 provided by NFS to assist the Company with transition costs related
to the conversion from CSC to NFS.
General and administrative expenses were $6,686,372 for the year ended December
31, 2004 as compared to $6,776,221 for the year ended December 31, 2003, a
decrease of $89,849, or 1.3%. This decrease was primarily attributable to cost
saving measures that were implemented throughout the organization.
Professional fees were $157,370 for the year ended December 31, 2004 as compared
to $324,712 for the year ended December 31, 2003, a decrease of $167,342, or
51.5%. The decrease was primarily due to decreases in accounting, legal and
consulting fees largely attributable to the Company's increased utilization of
its internal professional staff.
Provision for bad debts was $85,567 for the year ended December 31, 2004 as
compared to $148,672 for the year ended December 31, 2003, a decrease of
$63,105, or 42.4%. The decrease was primarily due to a significant reduction in
retainer fees, which often prove difficult to collect. Retainer fees are
recognized as services are provided. We provide for credit losses at the time we
believe accounts receivable may not be collectible. Our evaluation is made and
recorded on a monthly basis. Credit losses have not exceeded management's
expectations.
Legal litigation was $399,647 for the year ended December 31, 2004 as compared
to $327,499 for the year ended December 31, 2003, an increase of $72,148, or
22%. As is typical in the industry, customers make claims regarding the
Company's actions and the Company defends itself vigorously against such claims.
The Company's cost of defending itself varies year-to-year depending on the
volume of claims, which are in process at any given time.
Depreciation and amortization was $147,804 for the year ended December 31, 2004
as compared to $118,619 for the year ended December 31, 2003, an increase of
$29,185 or 25%. The increase is primarily due to the Company's investment in new
systems and technologies as a strategy to introduce new services that exceed
compliance requirements and offer a comprehensive business solution thereby
increasing productivity while reducing regulatory risk.
The amount forgiven under forgivable loans was $80,161 for the year ended
December 31, 2004 as compared to $152,902 for the year ended December 31, 2003,
a decrease of $72,741, or 48%. This decrease was attributable to the fact that
several years ago the Company discontinued its practice of providing forgivable
loans to brokers as part of its recruitment efforts. Accordingly, there have
been no additions to the outstanding balance and the remaining balance is simply
being amortized over time.
Stock based compensation was $5,294 for the year ended December 31, 2004 as
compared to $17,714 for the year ended December 31, 2003 a decrease of $12,420,
or 70%. This amount primarily represents the amortization of deferred
compensation to an outside consultant who was granted options from the Company
in return for his services. The amount related to this consultant was fully
recognized as of March 31, 2003. In addition, during January 2003, the Company
granted warrants to its landlord related to the renegotiation of its lease and
this amount is being amortized over the life of the lease.
34
Income from operations amounted to $1,536,139 for the year ended December 31,
2004 as compared to $414,682 for the year ended December 31, 2003, an increase
of $1,121,457, or 270% The increase was primarily due to the higher revenues and
the resulting gross profit and reduced operating expenses.
Income from forgiveness of indebtedness amounted to $1,500,000 for the year
ended December 31, 2004, which was the result of NFS agreeing to pay down the
UBS credit facility.
Interest expense, net of interest and dividend income, was $221,704 for the year
ended December 31, 2004 as compared to $103,267 for the year ended December 31,
2003, an increase in the amount of $118,437. This increase was primarily
attributable to the amount recorded as beneficial conversion premium on the SBI
note.
We do not believe our operations are materially affected by inflation and or by
seasonal fluctuations. Our main lines of business are directly affected by
higher interest rates, the volatility and volume of the stock market and the
capital markets.
Liquidity and Capital Resources
The Company had $3,908,652 of unrestricted cash at June 30, 2006 as compared to
$4,427,406 of unrestricted cash at December 31, 2005
Net cash used by operating activities for the six months ended June 30, 2006
decreased by $382,991 to $119,707 compared to $502,696 for the six months ended
June 30, 2005. This decrease is attributable to a $46,566 decrease in our net
loss and a decrease of approximately $335,000 in net adjustments to reconcile
our net loss to the net cash used by operating activities. The most significant
changes in these net adjustments were comprised primarily of: i.) an increase of
$698,029 in the change in securities sold, not yet purchased, used as a hedge
against an increase in investments in trading securities ii.) a decrease of
$571,604 in the change in accounts receivable, primarily as a result of a
payback of a customer debit of approximately $450,000 iii.) an increase of
$459,434 in the change in accounts payable and accrued liabilities, primarily as
a result of an increase in payables to brokers driven by higher revenues iv.) a
$272,255 increase in depreciation and amortization, and v.) a $233,381 increase
in stock based compensation, partially offset by a $909,870 increase in non-cash
fees received due to higher total investment banking revenues and an increase of
$951,595 in the investments in trading securities.
Net cash used in investing activities for the six months ending June 30, 2006,
was $338,305 compared to $333,307 for the six months ending June 30, 2005. Net
cash used in investing activities for the six months ended June 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 six months of 2006 compared to the first
six months of 2005. In the first six 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 six months ending June 30, 2006,
was $60,742 as compared to net cash provided by financing activities of $357,688
for the six months ending June 30, 2005. In 2005 the Company entered into
approximately $300,000 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.
35
Future and Contingent Liabilities:
The following statements are made in consideration of Financial Reporting
Release (FR-61), Liquidity and Off-Balance Sheet Arrangements, Certain Trading
Activities, & Transactions with Related and Certain Other Parties. We do not
have "off-balance sheet arrangements."
We lease office space under the terms of operating leases. The following chart
shows lease obligations including rental of real property and equipment.
Year Amount
------------------------- ----------------------
2006 966,808
2007 934,118
2008 666,674
2009 89,569
2010 0
----------------------
TOTAL $2,657,169
======================
Total rent expense under operating leases, including space rental, totaled
approximately $726,290 and $690,414 for the years ended December 31, 2005 and
2004.
Litigation
From time to time we are a party to various lawsuits that have arisen in the
ordinary course of business. The amounts asserted in these matters are material
to our financial statements. While any litigation contains an element of
uncertainty and although it is possible that losses exceeding amounts already
recorded may be incurred upon ultimate resolution of these existing legal
proceedings, management believes 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.
Subsequent Events
On January 10, 2006, vFinance, Inc.'s (the "Company") wholly-owned subsidiary,
vFinance Investments, Inc. ("vFinance Investments"), entered into an agreement
to acquire certain assets of Sterling Financial Investment Group, Inc. ("SFIG")
and Sterling Financial Group of Companies, Inc. ("SFGC" and together with SFIG,
"Sterling Financial"). These transactions are subject to the approval of the
National Association of Securities Dealers, Inc.
The assets to be acquired from Sterling Financial include Sterling Financial's
businesses as a going concern, certain intellectual property, client accounts
and revenues, computer equipment, and a certain real property lease. On the
closing date, vFinance Investments will not assume any liabilities of Sterling
Financial except an office lease and select office services contracts directly
relating to the operation of the business that arise and are to be paid,
performed or discharged from and after the closing date. One of the principals
of Sterling Financial will enter into an employment agreement with vFinance
Investments that provides for an annual base salary of $262,000 and certain
performance bonuses and options to be granted in the sole discretion of vFinance
Investments.
In accordance with the terms of the asset purchase agreement, vFinance
Investments will deliver to SFGC 17,500,000 shares of the Company's common stock
and approximately $26,800, for certain prepaid expenses. Subject to the
financial performance of the business of Sterling Financial acquired by vFinance
Investments over the period specified in the asset purchase agreement, up to
4,500,000 of such shares may be cancelled. The Company has granted SFGC certain
registration rights with respect to the shares. The Company and vFinance
Investments will enter into a standstill agreement with each of SFGC, SFIG,
Charles Garcia and Alexis Korybut to provide restrictions on certain actions for
a defined time period. The Company and vFinance Investments also will enter into
a voting and lockup agreement with each of SFIG, SFGC, Charles Garcia, Leonard
Sokolow and Timothy Mahoney to provide certain rights and obligations with
respect to the Company's common stock.
36
vFinance Investments and Sterling Financial also entered into a management
agreement, pursuant to which certain designated principals of vFinance
Investments will provide risk management of, and operational and back office
support for, the branch offices of SFIG from January 10, 2005 until the closing
of the acquisition transactions. In addition, such principals will assist SFIG
with the supervision of SFIG's registered representatives in accordance with
applicable rules and regulations.
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, 2004.
37
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rates, foreign exchange
rates, equity and commodity prices and also changes in the credit ratings of
either the issuer or its related country of origin. Market risk is inherent to
both derivative and non-derivative financial instruments, and accordingly, the
scope of our market risk management procedures extends beyond derivatives to
include all market risk sensitive financial instruments.
Current and proposed underwriting, corporate finance, merchant banking and other
commitments are subject to due diligence reviews by our senior management, as
well as professionals in the appropriate business and support units involved.
Credit risk related to various financing activities is reduced by the industry
practice of obtaining and maintaining collateral. We monitor our exposure to
counterparty risk through the use of credit exposure information, the monitoring
of collateral values and the establishment of credit limits.
We maintain inventories of trading securities. At December 31, 2005 the fair
market value of our inventories were $870,306 in long positions and $42,421 in
short positions. We have performed an entity-wide analysis of our financial
instruments and assessed the related risk. Based on this analysis, in the
opinion of management, the market risk associated with our financial instruments
at December 31, 2005 should not have a material adverse effect on our
consolidated financial position or results of operations.
38
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of our executive
officers and directors as of March 28, 2005. 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 Director, Chief Executive Officer and President
Timothy E. Mahoney 50 Director, Chief Operating Officer and Chairman
Alan B. Levin 43 Interim Chief Financial Officer
Richard Campanella 55 Secretary
Leonard J. Sokolow has been one of our directors since November 8, 1997, our
Chief Executive Officer since November 8, 1999, and our President since January
5, 2001. 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.
Timothy E. Mahoney has been one of our directors, Chairman of the Board and our
Chief Operating Officer since November 8, 1999. Since September 1996, Mr.
Mahoney has been a partner of Union Atlantic LC. From 1994 through 1995, Mr.
Mahoney was President of the Highlands Group Holdings, Inc., a private holding
company. Mr. Mahoney was a founder of the consumer products business for SyQuest
Technology, Inc. In 1986, Mr. Mahoney founded and was the President of Rodime
Systems, a retail-products business of hard drive manufacturer Rodime plc. In
addition, Mr. Mahoney was the Vice President of Marketing and Sales for Tecmar
Technologies, Inc., the first PC add-in board company and spent eight years in
marketing and sales management in the computer timesharing business with
Computer Sciences Corporation, Automatic Data Processing, Inc. and General
Electric Information Services. Mr. Mahoney received two B.A. degrees with majors
in Computer Science and Business from the West Virginia University in 1978. Mr.
Mahoney received a Master of Business Administration from George Washington
University in 1983.
Alan B. Levin has been our Interim Chief Financial Officer since July 2006. Mr.
Levin has been 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, Inc. 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.
39
Audit Committee Financial Expert
Our full Board of Directors functions as our audit committee. During the year,
our Board of Directors examined its composition in light of the applicable
listing standards of the Nasdaq Stock Market and the regulations under the
Exchange Act applicable to audit committees. Based upon this examination, our
Board of Directors has determined that neither of its members is an
"independent" director within the meaning of such listing standards and the
Exchange Act and the rules and regulations promulgated thereunder. Both of our
directors have experience with the financial management of a company and are
familiar with the reports that are provided by management for the purpose of
reporting the financial position of the business. Our Board of Directors has
determined that Mr. Sokolow qualifies as an "audit committee financial expert"
as that term is defined in the applicable regulations of the Exchange Act and
the regulations thereunder.
Executive compensation
The following table provides information concerning the annual and long term
compensation earned by our chief executive officer and each of the other most
highly compensated executive officers of the Company (collectively, the "Named
Executive Officers") during the fiscal years ended December 31, 2005, 2004 and
2003:
Summary Compensation Table
Annual Compensation Long term Compensation
-----------------------------------------------------------------------
Other
Annual Securities
Name and Principal Position Year Salary Bonus Compensation Underlying Options
------------------------------------------------------------------------------------------------------------------
Leonard J. Sokolow (1)(2)(3) 2005 $270,375 $145,000 $0 1,500,000
CEO and President 2004 $236,265 $180,000 $0 0
2003 $230,265 $0 $18,900 (2) 734,802
Timothy E. Mahoney (1)(2)(3) 2005 $270,375 $130,000 $0 1,500,000
COO and Chairman 2004 $236,265 $175,000 $0 0
2003 $230,265 $0 $18,900 (2) 734,802
Sheila C. Reinken (4) 2005 $175,000 $38,000 $0 1,250,000
Chief Financial Officer
Richard Campanella 2005 $130,000 $0 $0 600,000
President and Chief Operating
Officer of vFinance Investments, 2004 $125,000 $10,000 $0 0
Inc.
2003 $125,000 $0 $0 75,000
Kathleen Kennedy (5) 2005 $128,154 $10,000 $0 500,000
Vice President
(1) Messrs. Sokolow and Mahoney respectively earned $145,000 and 130,000 in
2005, $180,000 and $175,000 in 2004, and $0 in 2003 of annual incentive
compensation based on our performance during the respective years.
These amounts are reflected in the corresponding table as bonuses.
(2) Messrs. Sokolow and Mahoney each received a car allowance of $18,900
during 2003.
(3) Options that were issued in prior years were cancelled in 2002. During
2003, Messrs. Sokolow and Mahoney each were granted 734,802 options. In
2005, 500,000 of the options held by each of Mr. Sokolow and Mr.
Mahoney expired.
(4) Mrs. Reinken resigned effective July 21, 2006.
(5) Mrs. Kennedy resigned effective February 24, 2006.
40
The following table contains information concerning options granted to the Named
Executive Officers during the fiscal year ended December 31, 2005. No options
were exercised during 2005.
Option/SAR Grants in Last Fiscal Year
Individual Grants
Number of
Securities % of Total Options/SARs
Underlying Granted to Employees in Exercise Price
Named Executive Officer Options Granted Fiscal Year ($/share) Expiration Date
-------------------------------------------------------------------------------------------------------------------
Leonard J. Sokolow 1,500,000 15.1% $0.155 12/29/2010
Timothy E. Mahoney 1,500,000 15.1% $0.155 12/29/2010
Sheila C. Reinken 750,000 7.5% $0.245 01/14/2010
Sheila C. Reinken 500,000 5.0% $0.155 12/29/2010
Richard Campanella 600,000 6.0% $0.170 06/30/2010
Kathleen Kennedy 500,000 5.0% $0.280 01/19/2010
Fiscal Year-End Option Table
The following table provides information on the total number of exercisable and
unexercisable stock options held at December 31, 2005 by the Named Executive
Officers. None of the Named Executive Officers exercised any options during
fiscal year 2005.
Fiscal Year-End Option/SAR Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-End (#) at Fiscal Year-End(1) ($)
----------------------------------------------------------------------------------
Named Executive Officer Exercisable Unexercisable Exercisable Unexercisable
-----------------------------------------------------------------------------------------------------------------
Leonard J. Sokolow 234,802 1,500,000 $ -- $22,500
Timothy E. Mahoney 234,802 1,500,000 -- 22,500
Sheila C. Reinken 93,750 1,156,250 -- 7,500
Richard Campanella 100,000 600,000 -- --
Kathleen Kennedy -- 500,000 -- --
(1) Based on the difference between the option's exercise price and a
closing price of $0.17 for the underlying Common Stock on December 30,
2005 (our last business day of fiscal year 2005) as reported by the
National Quotation Bureau.
Compensation of Directors
Directors do not receive any compensation for serving on our Board of Directors.
41
Employment Agreements
Effective January 1, 2006, we entered into new agreements ("Primary Employment
Agreements") to amend and restate certain employment agreements dated November
8, 1999 with each of Leonard J. Sokolow, our Chief Executive Officer and
President, and Timothy E. Mahoney, our Chief Operating Officer and Chairman, as
amended on January 5, 2001, July 2, 2001, January 7, 2002 and November 16, 2004.
Under the terms of the Primary Employment Agreements, (i) Leonard J. Sokolow
will receive an initial base salary of $343,511 per annum that will increase 5%
per annum beginning January 1, 2007 and each year thereafter and (ii) Timothy E.
Mahoney will receive an initial base salary of $283,394 per annum that will
increase 5% per annum beginning on January 1, 2007. Our Board will review the
base salary at least annually and may increase (but not decrease) the base
salary from time to time. Further, each individual will receive discretionary
bonuses, interim cash bonuses and/or other bonuses when and in such amounts as
may be determined by our Board of Directors based on each individuals
performance, our performance and/or other factors; provided that the Board shall
meet at least annually to review employees' bonus entitlements. Finally, each
individual will receive incentive compensation, which will be paid quarterly no
later than the 45th day following the end of the quarter primarily based on our
performance and out respective subsidiaries. The Primary Employment Agreements
have terms of three years and automatically extend for one year on each
anniversary date thereafter unless we have provided a non-renewal notice thirty
(30) days prior to an anniversary date as directed by a majority vote of our
Board of Directors. The Primary Employment Agreements also contain provisions
related to change of control.
Under the terms of an employment agreement with Alan B. Levin, our Interim Chief
Financial Officer and Controller, Mr. Levin is entitled to an annual base salary
of $135,000, plus certain incentive bonuses. No later than six months from July
24, 2006, if we convert Mr. Levin's status from Interim Chief Financial Officer
to Chief Financial Officer, then Mr. Levin's annual base salary will increase to
$165,000. In addition, we granted Mr. Levin five-year options to purchase
500,000 shares of Common Stock at an exercise price of $0.20 per share, of which
125,000 options vest on July 24, 2007 and 125,000 options vest each subsequent
anniversary thereafter provided that Mr. Levin remains employed by us on the
applicable vesting date. Mr. Levin's employment is terminable at will. Upon a
change of control in the Company, Mr. Levin's options would vest immediately.
42
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below provides information regarding the beneficial ownership of the
Common Stock as of October 31, 2006. 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 55,328,060 shares of Common Stock outstanding.
Shares of Common Stock
Name of Beneficial Owner Beneficially Owned (1) Percent of Class
----------------------------------------------------------------------------------------------------
Leonard J. Sokolow (2) 6,617,812 11.7%
Timothy E. Mahoney (3) 6,617,811 11.7%
Highlands Group Holdings, Inc. (4) 2,175,000 3.9%
Alan B. Levin (5) 40,000 *
Richard Campanella (6) 100,000 *
Sterling Financial Group of Companies, Inc. (7) 13,000,000 23.5%
Global Partners Securities, Inc. (8) 5,812,209 10.2%
Level2.com, Inc. (9) 5,812,209 10.2%
Oxir Investment Ltd. (10) 3,000,000 5.4%
All directors and executive officers as a group (4 persons) 13,375,623 23.3%
* Indicates less than 1%.
(1) 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 October 31, 2006, 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 officers, directors and
stockholders can be reached at our principal offices. Percentage of
ownership is based on 55,328,060 shares of Common Stock outstanding as
of October 31, 2006.
(2) Includes 5,883,010 shares of Common Stock issued in the names of Mr.
Sokolow and his wife, and 734,802 shares of Common Stock issuable upon
exercise of options at a price of $0.21 per share, which options are
exercisable within 60 days of October 31, 2006.
(3) Includes 2,175,000 shares of Common Stock issued in the name of
Highlands Group Holdings, Inc., 3,208,009 shares of Common Stock issued
in the name of Mr. Mahoney, and 734,802 shares of Common Stock issuable
upon exercise of options at a price of $0.21 per share, which options
are exercisable within 60 days of October 31, 2006.
(4) Highlands Group Holdings, Inc., whose address is 68 Cayman Place, Palm
Beach Gardens, Florida 33418, is wholly owned by Mr. Mahoney, our
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 40,000 shares of Common Stock issuable upon exercise of
options at a price of $0.18 per share, which options are exercisable
within 60 days of October 31, 2006.
(6) Includes 100,000 shares of Common Stock issuable upon exercise of
options at a price of $0.18 per share, which options are exercisable
within 60 days of October 31, 2006.
(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
business address is 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.
43
(8) Includes 4,162,345 shares of Common Stock and 1,649,864 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 October 31, 2006.
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
plans to assign these shares of Common Stock for the benefit of its
creditor, Dennis de Marchena.
(9) Includes 4,162,345 shares of Common Stock and 1,649,864 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 October 31, 2006.
Level2.com, Inc.'s business address is 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 plans 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.
On November 2, 2004, we and vFinance Investments entered into an asset purchase
agreement with Global Partners Securities, Inc. ("Global") and a securities
purchase agreement with Level2.com, Inc. ("Level2"). Pursuant to the terms of
such agreements, the securities issued to Global and Level2 were deposited into
escrow. After the securities were deposited into escrow, a dispute arose over
the amount of shares of Common Stock and shares underlying warrants that were
deposited into escrow and the value of such items. In connection with a
settlement agreement dated November 7, 2006 among us, vFinance Investments,
Global, Level2 and Edwards Angell Palmer & Dodge LLP (as escrow agent), the
securities currently issued in the name of Global and Level2 will be cancelled.
In lieu thereof, we will issue 3,288,253 and 3,288,252 shares of our Common
Stock to Global and Level2, respectively. We will also issue warrants to
purchase 1,303,393 and 1,303,392 shares of our Common Stock to Global and
Level2, respectively.
In connection with the asset purchase agreement with Global and the securities
purchase agreement with Level2, on November 2, 2004, we also entered into a
standstill agreement with Marcos Konig, Harry Konig and Salomon Konig
(collectively, the "Konigs"). Pursuant to this agreement, the Konigs agreed not
to: (i) acquire material assets or securities of the Company or our
subsidiaries; (ii) influence any person to vote in opposition to any matter
recommended by our Board of Directors; (iii) be involved in any group with
respect to our voting stock or the acquisition of our assets; (iv) enter into
any voting arrangement with respect to our voting stock that would cause the
Konigs to violate the standstill agreement; or (v) seek election or removal of a
director is such action is opposed by the Board of Directors. If Global and
Level2 assign their shares of Common Stock to Dennis de Marchena, Mr. de
Marchena will be required to agree to be bound by the terms of this standstill
agreement.
44
In connection with Sterling Financial Group of Companies, Inc.'s acquisition of
our securities, on January 17, 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 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"), which agreement has
the same standstill provisions as our agreement with the Konigs.
45
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.
Closing Sale Price
High Low
Six Months Ending June 30, 2006
First Quarter $ 0.28 $ 0.16
Second Quarter $ 0.31 $ 0.18
Year Ending 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
Year Ended December 31, 2004
First Quarter $ 0.45 $ 0.22
Second Quarter $ 0.37 $ 0.31
Third Quarter $ 0.21 $ 0.19
Fourth Quarter $ 0.34 $ 0.17
On November 8, 2006, the closing sales price for the common stock was $0.22, as
reported on the website of the Over-the-Counter Bulletin Board. As of November
8, 2006, there were approximately 292 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.
46
Equity Compensation Plan Information
The following table sets forth certain information as of December 31, 2005, with
respect to compensation plans (including individual compensation arrangements)
under which our equity securities are authorized for issuance under:
o all compensation plans previously approved by our security holders; and
o all compensation plans not previously approved by our security holders.
Number of Securities to be Number of Securities Remaining
issued upon exercise of Weighted-Average Available for Future Issuance Under
outstanding options, Exercise Price quity Compensation Plans (excluding
warrants and rights Outstanding options, Esecurities reflected in column (a)
Plan Category (a) warrants and rights (b) (c)
------------------------------------------------------------------------------------------------------------------
Equity compensation -- $ -- --
plans approved by
security holders
Equity compensation
plans not approved by 22,274,428 0.53 --
security holders (1)
Total 22,274,428 $ 0.53 --
(1) Includes options and warrants granted pursuant to individual compensation
arrangements.
47
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 75,000,000 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:
o dividend rights;
o conversion rights;
o voting rights, which may be greater or lesser than the voting rights
of the common stock;
o rights and terms of redemption;
o liquidation preferences; and
o 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 75,000,000 shares of common stock, of which
59,828,060 shares were issued and outstanding as of November 8, 2006. 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 November 8, 2006 was 292.
We have not paid any cash dividends since inception, and we do not anticipate
paying any cash dividend in the foreseeable future.
48
Warrants to Purchase Our Common Stock
As of November 8, 2006, warrants to purchase 7,074,589 shares of our common
stock were issued and outstanding. These warrants expire at various dates
between October 2006 and April 2011. The weighted average exercise price of
these warrants is $1.023.
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 November 8, 2006, options to purchase 13,115,002 shares of our common
stock were issued and outstanding. These options expire at various dates between
October 2006 and September 2011 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 $0.22.
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.
49
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, 2004 and 2005 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.
50
FINANCIAL STATEMENTS
Index to Financial Statements
Consolidated Balance Sheet as of June 30, 2006 and December 31, 2005 F-1
Consolidated Statements of Operations for the six months ended June 30, 2006 F-2
Consolidated Statements of Cash Flows for the six months ended June 30, 2006 F-3
Notes to Consolidated Financial Statements F-4
Report of Independent Registered Public Accounting Firm F-11
Report of Independent Registered Public Accounting Firm F-12
Consolidated Balance Sheet for each of the two years in the period ended December 31, 2005 F-13
Consolidated Statements of Operations for each of the three years in the period ended December
31, 2005 F-14
Consolidated Statements of Changes in Stockholders' Deficit for each of the three years in the
period ended December 31, 2005 F-15
Consolidated Statements of Cash Flows for each of the three years in the period ended December
31, 2005 F-17
Notes to Consolidated Financial Statements F-18
VFINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,2006 AND DECEMBER 31, 2005
June 30, 2006
Assets: (Unaudited) December 31, 2005
--------------- -------------------
Current Assets:
Cash and cash equivalents $3,908,652 $4,427,406
Due from clearing broker 770,264 705,097
Investments in trading securities 1,827,225 870,306
Accounts receivable less allowance for doubtful
accounts ($2,044 in 2006, $0 in 2005) 396,663 408,841
Notes receivable - employees 33,791 67,588
Prepaid expenses and other current assets 189,334 130,033
--------------- ----------------
Total current assets 7,125,929 6,609,271
Furniture and equipment, at cost:
Furniture and equipment 1,527,372 1,383,878
Software 206,781 173,890
--------------- ----------------
1,734,153 1,557,768
Less accumulated depreciation (1,040,365) (865,130)
--------------- ----------------
Furniture and equipment, net 693,788 692,638
Intangible assets, net of amortization 4,621,028 1,446,848
Other assets 514,041 313,327
--------------- ----------------
Total assets $12,954,786 $9,062,084
=============== ================
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $662,824 $714,197
Accrued payroll 1,831,011 1,678,632
Other accrued liabilities 783,102 825,594
Securities sold, not yet purchased 487,039 42,421
Capital lease obligations 204,585 187,775
Other 104,487 118,781
--------------- ----------------
Total current liabilities 4,073,048 3,567,400
Capital lease obligations, long term 147,514 225,067
Stockholders' equity:
Common stock $0.01 par value, 75,000,000
shares authorized, 53,126,133 and 40,126,133 issued
and outstanding 531,265 401,266
Additional paid-in-capital 30,333,587 26,821,557
Accumulated deficit (22,130,628) (21,953,206)
--------------- ----------------
Total stockholders' equity 8,734,224 5,269,617
--------------- ----------------
Total liabilities and stockholders' equity $12,954,786 $9,062,084
=============== ================
F-1
VFINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
Six months ended June 30, 2006
---------------------------------
2006 2005
(Unaudited) (Unaudited)
---------------- ----------------
Revenues:
Commissions - agency $ 9,524,835 $7,401,588
Trading profits 4,004,032 2,423,861
Success fees 2,850,548 1,005,401
Other brokerage related income 1,546,037 1,397,770
Consulting fees 303,026 387,144
Other 352,836 237,985
---------------- ----------------
Total revenues 18,581,314 12,853,749
---------------- ----------------
Operating expenses:
Compensation, commissions and benefits 14,208,788 9,946,936
Clearing and transactions costs 2,007,589 1,523,343
General and administrative costs 1,344,319 1,109,647
Occupancy and equipment costs 554,957 360,366
Depreciation and amortization 407,055 134,799
Stock based compensation 236,029 2,647
---------------- ----------------
Total Operating expenses: 18,758,737 13,077,738
---------------- ----------------
Loss from operations (177,423) (223,989)
Income tax benefit (provision) - -
---------------- ----------------
Net loss $ (177,423) $(223,989)
================ ================
Net loss per share: basic and diluted $ (0.00) $(0.01)
================ ================
Weighted average shares outstanding: basic and diluted 43,717,293 39,815,966
See accompanying notes to unaudited consolidated financial statements.
F-2
VFINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
Six months ended Six months ended
June 30, 2006 June 30, 2005
(Unaudited) (Unaudited)
------------------- -----------------
Cash flows from operating activities:
Net loss (177,423) (223,989)
Adjustments to reconcile net loss to net cash used in operating
activities:
Non-cash fees received (1,016,980) (107,110)
Depreciation and amortization 407,054 134,799
Provision for doubtful accounts 2,043 43,390
Unrealized loss (gain) on investments, net 225,323 (24,445)
Unrealized (gain) loss on warrants (72,443) 90,340
Amount forgiven under forgivable loans - 6,597
Non-cash compensation - 58,809
Imputed interest (846) -
Stock based compensation 236,029 2,648
Changes in operating assets and liabilities:
(Increase) decrease
Accounts receivable (13,701) (585,305)
Forgivable loans (57,083) -
Due from clearing broker (112,030) (157,389)
Notes receivable - employees 33,797 8,290
Investments in trading securities (92,819) 858,776
Other assets and liabilities 43,634 73,618
Increase (decrease)
Accounts payable and accrued liabilities 31,121 (428,313)
Securities, sold not yet purchased 444,617 (253,412)
---------------- ----------------
Net cash used in operating activities (119,707) (502,696)
Cash flows from investing activities:
Purchase of capital lease equipment (32,940) (300,624)
Purchase of equipment (143,443) (32,683)
Investment in unconsolidated affiliate (161,922) -
---------------- ----------------
Net cash used in investing activities (338,305) (333,307)
Cash flows from financing activities:
Proceeds from capital leases 23,763 300,624
Repayments on capital leases (84,505) (56,486)
Proceeds from exercise of common stock options - 113,550
---------------- ----------------
Net cash (used in) provided by financing activities (60,742) 357,688
Decrease in cash and cash equivalents (518,754) (478,315)
Cash and cash equivalents at beginning of year 4,427,406 5,256,308
================ ================
Cash and cash equivalents at end of period $3,908,652 $4,777,993
================ ================
See accompanying notes to unaudited consolidated financial statements.
F-3
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All intercompany accounts have
been eliminated in consolidation. The unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The results of operations for the three
and six month periods ended June 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 could materially affect results in the
period when expenses are ultimately determined. As of June 30, 2006, the Company
has accrued approximately $205,000 for these matters. The Company has recently
acquired an errors and omissions 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.
F-4
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 June
30, 2006 was approximately $2,000 and at December 31, 2005 was $0. A receivable
from one independent contractor in the amount of $162,289 accounted for 40% of
the Company's accounts receivable balance at June 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.
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.
F-5
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.
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.
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 June 30, 2006, the Company had approximately $3,908,652 in
United States bank deposits, which exceeded federally insured limits. The
Company has not experienced any losses in such accounts through June 30, 2006.
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 $11.8 million at June 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.
F-6
Recent accounting pronouncements
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.
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.
NOTE 3 - PROPERTY AND EQUIPMENT
At June 30, 2006 and December 31, 2005 respectively, property and equipment
consisted of the following:
Useful Life June 30, 200
Description (Years) (Unaudited) December 31, 2005
------------- -------------- ---------------------
Furniture & fixtures 5 $ 88,025 $85,132
Equipment 5 664,365 559,504
Capital leases - 3 605,475 572,535
computer equipment
Leasehold improvements 4 169,507 166,707
Software 5 206,781 173,890
-------------- -------------------
Less accumulated depreciation (1,040,365) (865,130)
-------------- -------------------
Total fixed assets $693,788 $692,638
============== ===================
For the six months ended June 30, 2006 depreciation expense of $175,235 was
recorded by the Company, compared to $134,799 in the six months ended June 30,
2005.
NOTE 4 - INTANGIBLE ASSETS
At June 30, 2006 and December 31, 2005 respectively, intangible assets consisted
of the following:
Description Useful Life June 30, 2006
(Years) (Unaudited) December 31,2005
------------- -------------------- ----------------
Customer relationships 5 $4,872,700 $1,466,700
Accumulated amortization (251,672) (19,852)
------------- -------------------- ----------------
Total intangible assets $4,621,028 $1,446,848
============= ==================== ================
For the six months ended June 30, 2006 amortization expense of $231,820 was
recorded by the Company, compared to $0 in the six months ended June 30, 2005.
NOTE 5 - ACQUISITION
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.
F-7
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. The transactions were accounted for as a business
combination using the purchase method of accounting, in accordance with SFAS No.
141, "Business Combinations". The purchase price of $3,406,000 (based on the
average closing price of the Company's stock for the five days prior to
completing the business combination) was allocated entirely to customer
relationships, an intangible asset that will be amortized over its estimated
useful life of five 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 six months
ended June 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:
Six Months Ended June 30, 2006
-------------------------------------------------------------------------------------------------------------
vFinance Sterling Adjustments Pro Forma
-------------- ------------ -------------- --------------
Net revenues $18,581,314 $3,759,367 $- $22,310,553
(Loss) income from operations (177,423) 47,951 227,067 97,595
-------------- ------------ -------------- --------------
Net (loss) income $(177,423) $47,951 $ 227,067 $97,595
============== ============ ============== ==============
Loss per share - basic and diluted $(0.00) $0.00
============== ==============
Wtd. avg. shares outstanding - basic and diluted 47,268,990 5,785,320 53,054,310
============== ============== ==============
Six Months Ended June 30, 2005
vFinance Sterling Adjustments Pro Forma
-------------- ------------ -------------- --------------
Revenues $12,853,749 $5,663,291 $- $18,504,507
(Loss) income from operations (223,990) 465,893 340,600 582,503
============== ============ ============== ==============
Net (loss) income $ (223,990) $ 465,893 $ 340,600 $582,503
============== ============ ============== ==============
Loss per share - basic and diluted $ (0.00) $ 0.01
============== ==============
Wtd. avg. shares outstanding - basic and diluted 39,815,966 13,000,000 52,815,966
============== ============== ==============
Pro forma adjustments consist of amortization on 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.
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 six months ended June 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 June 30, 2006, the Company issued 1,040,000 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 77.7%, risk free
interest rate of 4.75% and a term of five years. For the quarter ended June 30,
2006, the net income and earnings per share reflect a non cash compensation
expense of $122,960.
F-8
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
----------------------- -------------------
Net (loss) - as reported (69,462) (223,989)
Less: stock based compensation determined under
the Fair value method, net of income tax effect 94,799 189,587
----------------------- -------------------
Pro forma net loss (164,261) (413,485)
======================= ===================
Basic earnings (loss) per share - as reported $(0.00) $ (0.00)
Basic earnings (loss) per share - pro forma $(0.00) $ 0.00
Weighted average shares outstanding: basic and diluted 40,126,133 39,815,966
A summary of the stock option activity for the six months ended June 30, 2006 is
as follows:
Weighted Average Number of Shares Exercise Price
Exercise Price Per Option
-------------------- ------------------- ---------------------
Outstanding options at December 31, 2005 $0.23 14,614,839 $0.15 - $ 2.25
-------------------- ------------------- --------- -- --------
Granted $0.20 2,046,250 $0.17 - $ 0.25
Exercised $ - - - - -
Cancelled $0.43 (1,858,660) $0.15 - $ 2.25
-------------------- ------------------- --------- -- --------
Outstanding options at June 30, 2006 $0.21 14,802,429 $0.15 - $ 1.00
==================== =================== ========= == ========
The following table summarizes information concerning stock options outstanding
at June 30, 2006.
Exercise Price Options Outstanding
------------------ ----------------------
0.150 250,000
0.155 4,495,000
0.170 1,635,000
0.180 685,000
0.190 1,667,502
0.200 480,000
0.205 320,000
0.210 1,733,962
0.220 60,000
0.230 902,500
0.245 750,000
0.250 258,750
0.260 405,000
0.270 5,000
0.280 97,500
0.320 310,000
0.330 2,500
0.350 484,215
0.363 120,000
0.500 100,000
0.625 22,500
1.000 18,000
----------------------
14,802,429
======================
For the period ended June 30, 2006 the company had 3,740,824 exercisable common
stock options and 11,061,605 common stock options that are presently unvested.
F-9
A summary of the stock purchase warrant activity for the six months ended June
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 June 30, 2006 $1.02 7,074,589 $0.15 - $ 7.20
==================== ============ ========= == ========
The following table summarizes information concerning warrants outstanding at
June 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
2.250 20,000
6.000 103,166
7.200 700,000
--------------
7,074,589
==============
For the period ended June 30, 2006 the company had 7,074,589 exercisable common
stock warrants.
F-10
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
vFinance Inc., & Subsidiaries
We have audited the accompanying balance sheet of vFinance Inc., & Subsidiaries,
as of December 31, 2004 and the related statements of operations, shareholders'
equity and cash flows for the years ended December 31, 2004 and 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of vFinance Inc., & Subsidiaries,
at December 31, 2004, and the results of its operations and its cash flows for
the years ended December 31, 2004 and 2003, in conformity with accounting
principles generally accepted in the United States.
/s/ Sherb & Co., LLP
Certified Public Accountants
Boca Raton, Florida
March 29, 2005
F-11
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
vFinance Inc., & Subsidiaries
We have audited the accompanying balance sheet of vFinance Inc., & Subsidiaries,
as of December 31, 2005 and the related statements of operations, shareholders'
equity and cash flows for the years ended December 31, 2005 and 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of vFinance Inc., & Subsidiaries,
at December 31, 2005, and the results of its operations and its cash flows for
the years ended December 31, 2005 and 2004, in conformity with accounting
principles generally accepted in the United States.
/s/ Sherb & Co., LLP
Certified Public Accountants
Boca Raton, Florida
March 29, 2006
F-12
VFINANCE, INC.
CONSOLIDATED BALANCE SHEET
FOR THE YEARS ENDED DECEMBER 31,
2005 2004
-----------------------------------
Assets:
Current Assets:
Cash and cash equivalents $4,427,406 $5,256,308
Due from clearing broker 705,097 667,074
Investments in trading securities 870,306 916,365
Accounts receivable 408,841 --
Accounts receivable, net of allowance for doubtful accounts of $6,014 89,545
Notes receivable-employees 67,588 168,702
Forgivable loans - employees 6,597
Prepaid expenses and other current assets 130,033 97,908
-----------------------------------
Total current assets 6,609,271 7,202,499
-----------------------------------
Furniture and equipment, at cost:
Furniture and equipment 1,383,878 905,465
Internal use software 173,890 158,500
-----------------------------------
1,557,768 1,063,965
Less accumulated depreciation (865,130) (565,526)
-----------------------------------
Net furniture and equipment 692,638 --
Intangible asset, net 1,446,848 1,866,848
Other assets 313,327 264,605
-----------------------------------
Total Assets $ 9,062,084 9,832,391
===================================
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $714,197 1,134,148
Accrued payroll 1,678,632 1,568,086
Other accrued liabilities 825,594 526,233
Income tax payable -- 40,000
Securities sold, not yet purchased 42,421 67,470
Capital lease obligations 187,775 65,355
Other 118,781 34,097
-----------------------------------
Total current liabilities 3,567,400 3,435,389
Capital lease obligations, long term 225,067 122,948
Shareholders' Equity:
Series A Convertible Preferred Stock $0.01 par value,122,500 shares authorized,
0 shares issued and outstanding -- --
Series B Convertible Preferred Stock $0.01 par value, 50,000 shares authorized,
0 shares issued and outstanding -- --
Common stock $0.01 par value, 75,000,000 shares authorized, 40,126,133 issued
and outstanding 401,266 395,716
Additional paid-in-capital 26,821,557 26,713,557
Deferred compensation (19,411)
Accumulated deficit (21,953,206) (20,815,808)
-----------------------------------
Total Shareholders' Equity 5,269,617 6,274,054
-----------------------------------
Total Liabilities and Shareholders' Equity $9,062,084 $9,832,391
===================================
F-13
VFINANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
2005 2004 2003
--------------------------------------
Revenues:
Commissions - agency $15,941,221 $14,571,878 $13,372,875
Trading profits 4,177,402 5,156,842 4,533,933
Success Fees 2,006,016 3,224,973 3,549,453
Consulting and retainers 533,644 370,829 468,168
Other brokerage related income 2,837,589 2,567,489 2,085,313
Other 330,378 437,140 468,724
--------------------------------------
Total revenues 25,826,250 26,329,151 24,478,466
--------------------------------------
Cost of revenues:
Commissions 14,187,765 14,624,914 13,234,856
Clearing and transaction costs 1,905,215 1,030,114 934,884
Success 1,099,519 1,346,272 1,792,760
Consulting and retainers 377,585 224,916 218,807
Other 100 4,581 16,138
--------------------------------------
Total cost of revenues 17,570,184 17,230,797 16,197,445
--------------------------------------
Gross profit 8,256,066 9,098,354 8,281,021
--------------------------------------
Other expenses:
General and administrative 8,479,910 6,686,372 6,776,221
Professional fees 262,607 157,370 324,712
Provision for bad debt 70,990 85,567 148,672
Legal litigation 312,155 399,647 327,499
Depreciation and amortization 299,604 147,804 118,619
Amounts forgiven under forgivable loans 6,597 80,161 152,902
Stock based compensation 19,412 5,294 17,714
--------------------------------------
Total other expenses 9,451,275 7,562,215 7,866,339
--------------------------------------
Income (Loss) from operations (1,195,209) 1,536,139 414,682
Gain on forgiveness of debt - 1,500,000 -
Interest and dividend income (expense) 57,811 (221,704) (103,267)
--------------------------------------
Pre-tax Net Income (Loss) (1,137,398) 2,814,435 311,415
Federal income tax - (40,000) -
--------------------------------------
Net Income (Loss) available to common shareholders $ (1,137,398) $2,774,435 311,415
======================================
Net Income (Loss) per share:
Basic (0.03) 0.08 $0.01
======================================
Weighted average number of common Shares used in computing basic net income
per share 40,049,654 33,773,336 29,609,104
======================================
Diluted (0.03) 0.08 $0.01
======================================
Weighted average number of common shares used in computing basic net Income
per share 40,049,654 35,840,248 29,963,446
======================================
F-14
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Stock Common Stock
----------------- ------------------------
Shares Amount Shares Amount
--------- ------- ----------- ------------
Balance at December 31,2002 - - 28,351,570 $283,520
Issuance of shares in conjunction with share
purchase agreement - - 1,500,000 15,000
Amortization of Deferred Compensation - - - -
Acquisition of JSM - - - -
Issuance of stock purchase warrants in
conjunction with lease agreement - - - -
Amortization of Deferred Compensation - - - -
Net Income - - - -
--------- ------- ----------- ------------
Balance at December 31, 2003 - - 29,851,570 $298,520
Partial conversion of promissory note 3,344,298 33,443
Conversion Premium on promissory note - - - -
Imputed Interest write off - - - -
Amortization of Deferred Compensation - - - -
Partial conversion of promissory note - - 100,000 1,000
Issuance of shares in conjunction with
acquisition of EquityStation Inc. and Global
Partners - - 6,275,265 62,753
Net Income - - - -
--------- ------- ----------- ------------
Balance at December 31, 2004 - - 39,571,133 $395,716
--------- ------- ----------- ------------
Exercise of Stock Options - - 555,000 5,550
Amortization of Deferred Compensation - - - -
Net Loss - - - -
--------- ------- ----------- ------------
Balance at December 31, 2005 - - 40,126,133 $ 401,266
========= ======= =========== ============
F-15
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
Additional
Paid
in Capital Deferred Accumulated Shareholders'
Common Compensation Deficit Equity
----------------- ----------------- ------------------- ---------------
Balance at December 31,2002 $24,151,798 $(12,420) $(23,901,658) 521,240
Issuance of shares in conjunction with share
purchase agreement 115,000 - - 130,000
Amortization of Deferred Compensation - 12,420 - 12,420
Acquisition of JSM 80,000 - - 80,000
Issuance of stock purchase warrants in
conjunction with lease agreement 30,000 (30,000) - -
Amortization of Deferred Compensation - 5,295 - 5,295
Net Income - - 311,415 311,415
---------------- ----------------- ------------------- ----------------
Balance at December 31, 2003 $24,376,798 (24,705) $(23,590,243) $1,060,370
Partial conversion of promissory note 688,057 - - 721,500
Conversion Premium on promissory note 231,625 - - 231,625
Imputed Interest write off (128,438) - - (128,438)
Amortization of Deferred Compensation - 5,294 - 5,294
Partial conversion of promissory note 27,500 - - 28,500
Issuance of shares in conjunction with
acquisition of EquityStation Inc. and Global
Partners 1,518,015 - - 1,580,768
Net Income - - 2,774,435 2,774,435
---------------- ----------------- ------------------- ----------------
Balance at December 31, 2004 26,713,557 $(19,411) $(20,815,808) $6,274,054
---------------- ----------------- ------------------- ----------------
Exercise of Stock Options 108,000 - - 113,550
Amortization of Deferred Compensation - 19,411 - 19,411
Net Loss - - (1,137,398) (1,137,398)
---------------- ----------------- ------------------- ----------------
Balance at December 31, 2005 $ 26,821,557 - $(21,953,206) $5,269,617
================ ================= =================== ================
F-16
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended
December 31,
---------------------------------------------
2005 2004 2003
--------------- -------------- --------------
OPERATING ACTIVITIES
Net (loss) income $ (1,137,398) $ 2,774,435 $311,415
Adjustments to reconcile net income/{loss) to
Net cash used (provided) by operating activities:
Non-cash fees received (487,511) (419,365) (777,669)
Gain on forgiveness of debt - (1,500,000) -
Depreciation and amortization 299,604 147,804 118,619
Impairment of goodwill 420,000 - -
Loss on investment in other companies 80,000 - -
Provision for doubtful accounts 69,657 79,817 146,672
Non-cash compensation - 5,492 395,961
Conversion premium expense - 231,625 -
Accretion of debt discount - 18,349 73,393
Unrealized loss on investments, net 131,386 211,854 80,348
Unrealized loss (gain) on warrants 108,040 (41,194) 43,292
Amount forgiven under forgivable loans - 80,161 152,902
Stock based compensation 19,412 5,294 17,714
Changes in operating assets and liabilities:
Accounts receivable (480,154) 26,196 (39,638)
Forgivable Loans 6,597 - -
Due from clearing broker 13,394 (297,984) (72,995)
Notes receivable - employees 101,113 14,527 (17,365)
Investments in trading securities 294,142 328,880 497,932
Other assets and liabilities (32,045) (39,440) (103,471)
Accounts payable and accrued liabilities (54,375) 68,140 643,066
Securities, sold not yet purchased (25,049) (16,310) 14,211
--------------- -------------- --------------
Net cash (used in) provided by operating activities (673,187) 1,678,281 1,484,387
INVESTING ACTIVITIES
Cash acquired in acquisition - 56,221 -
Purchase of capital lease equipment (367,952) (204,583) -
Purchase of equipment (125,852) (245,728) (57,734)
--------------- -------------- --------------
Net cash used in investing activities (493,804) (394,090) (57,734)
FINANCING ACTIVITIES
Proceeds from capital lease 246,088 204,583 -
Payments of capital lease (21,550) (16,280) -
Proceeds from issuance of common stock 113,551 - 130,000
--------------- -------------- --------------
Net cash provided by financing activities 338,089 188,303 130,000
Decrease (increase) in cash and cash equivalents (828,902) 1,472,494 1,556,653
Cash and cash equivalents at beginning of year 5,256,308 3,783,814 2,227,161
--------------- -------------- --------------
Cash and cash equivalents at end of year $ 4,427,406 $ 5,256,308 $ 3,783,814
=============== ============== ==============
F-17
vFinance, Inc.
Notes to the Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
vFinance, Inc. 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., 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 by offering services such as trading technology, routing
software, hedge fund incubation, capital introduction and custodial services.
The Company, through its website www.vfinance.com, provides financial
information services to entrepreneurs and venture investors.
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All inter-company accounts have been eliminated
in consolidation.
Revenue Recognition
The Company earns revenue (commissions) from brokerage and trading which are
recognized on the day of the trade - trade date basis. The Company also earns
revenue from investment banking and consulting. Monthly retainer fees for
investment banking and consulting are recognized as services are provided.
Investment banking success fees are generally based on a percentage of the total
value of a transaction and are recognized upon successful completion.
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 may receive equity instruments which include stock purchase warrants
and common and preferred stock from companies as part of its 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". Primarily
all of the equity instruments are received from small public companies. The
Company recognizes revenue for such stock purchase warrants, when received,
based on the Black Scholes valuation model. The revenue recognized related to
the 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. For the years ended December 31, 2004
and 2003, the Company recognized $419,365 and $777,669, respectively, of revenue
in connection with the receipt of equity instruments. On a monthly basis the
Company recognizes unrealized gains or losses in its statement of operations
based on the changes in value of equity instruments. Realized gains or losses
are recognized in the statement of operations when the related 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 equity instruments received from a private
company.
Upon the consummation of an advisory, consulting, capital or other similar
transactions the Company may distribute equity instruments or proceeds from the
sale of equity instruments to its employees. These distributions are made at the
Company's discretion on a case by case basis as determined by the role of the
employee and the nature of the transaction. At December 31, 2004 and 2003, no
amounts were owed to current employees of the Company in connection with equity
investments received as compensation.
F-18
As of December 31, 2004, certain transactions in process may result in the
Company receiving equity instruments or stock purchase warrants in subsequent
periods as discussed above. In such event, the Company will recognize revenue
related to the receipt of such equity instruments consistent with the
aforementioned policies.
The Company sells two types of listings through its website: (i) perpetual
listings to venture capital vendors, who are interested in providing services to
other companies or individuals; and (ii) three-month listings to entrepreneurs
who have new business ideas to sell. Revenue related to the listings is
generally recognized over the terms of such listings. Website revenues are
concentrated primarily in the United States but are not concentrated in any
particular region of the country or with any individual or group. Fees related
to such listings are included in "other" in the statements of operations for the
years ended December 31, 2004 and 2003.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the accompanying financial
statements. Actual results may differ from those estimates, and such differences
may be material to the financial statements.
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 and notes receivable balances are reviewed monthly to determine the
collectibility of such receivables. The Company records both a specific and
general reserve on such balances as deemed appropriate.
Investments
Investments 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. Investments in trading securities
include both trading account assets and equity instruments which the Company has
received as part of its compensation for investment banking services. At
December 31, 2004, investments consisted of common stock, corporate bonds and
common stock purchase warrants held for resale.
Trading account assets, consisting of marketable equity securities, are stated
at fair value. Unrealized gains or losses are recognized in the statement of
operations on a monthly basis based on changes in the fair value of the security
as quoted on national or inter-dealer stock exchanges. Realized gains or losses
are recognized in the statement of operations as trading profits when the equity
instruments are sold.
As mentioned above, the Company periodically receives equity instruments which
include stock purchase warrants and common and preferred stock from companies as
part of its compensation for investment-banking services. 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 the stock purchase warrants received are
typically restricted as to resale, although, the company generally receives a
registration right within one year. Company policy is to resell these securities
in anticipation of short-term market movements. The Company recognizes revenue
for such equity instruments based on the fair value of the stock at the time
equity instruments are granted and for stock purchase warrants based on the
Black-Scholes valuation model. Unrealized gains or losses are recognized in the
statement of operations on a monthly basis based on changes in the fair value of
the security as quoted on national or inter-dealer stock exchanges, discounted
by a factor to address the remaining period which the equity instrument is
restricted as to resale.
F-19
Net unrealized gains related to investments in trading securities as of December
31, 2004, and 2003, aggregated $170,660 and $123,640, respectively. Net realized
gains related to investments in trading securities as of December 31, 2004 and
2003 aggregated $1,087,741 and $485,302, respectively.
Investments in trading securities and securities sold, not yet purchased,
consist of trading and investment securities at market values at December 31,
2004, as follows:
Sold, not yet
Owned purchased
---------------------- -------------- -----------------
Corporate Stocks $ 787,876 $ 67,470
Warrants 128,489
---------------------- -------------- -----------------
Total $ 916,365 $ 67,470
====================== ============== =================
At December 31, 2004, restricted equity securities had an aggregate fair value
of $96,139.
Securities Transactions
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.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations
in accounting for its employee stock options and employee stock purchase
warrants because the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION ("SFAS 123") and SFAS 148 ACCOUNTING FOR STOCK BASED COMPENSATION
TRANSITION AND DISCLOSURE, AN AMENDMENT OF SFAS 123, requires the use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, if the exercise price of the Company's employee stock
options or stock purchase warrants equals or exceeds the market price of the
underlying stock on the date of grant no compensation expense is recognized.
F-20
Fair Value of Financial Instruments
The fair values of the Company's financial instruments, which includes cash and
cash equivalents, accounts and notes receivable, investments, accounts payable,
and accrued expenses approximate their carrying values.
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable. The
Company places its cash with high quality insured financial institutions.
Furniture and Equipment
Furniture 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, 2-5 years, for financial reporting purposes. Depreciation expense for
the years ended December 31, 2004 and 2003, totaled $147,804 and $118,619,
respectively. Included in Furniture and Equipment is approximately $200,000 of
equipment acquired under capital leases.
Goodwill
The carrying value of goodwill as well as other long-lived assets are reviewed
if the facts and circumstances suggest that they may be impaired. If this review
indicates that the assets will not be recoverable, as determined based on the
undiscounted estimated cash flows of the Company over the remaining amortization
period, the Company's carrying values of the assets would be reduced to their
estimated fair values in accordance with Statement of Financial Accounting
Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS ("FAS 144"). Among other factors considered in such evaluation is the
historical and projected operating performance of business operations, the
operating environment and business strategy, competitive information and market
trends. As a result of the acquisition of EquityStation and certain assets of
Global in November 2, 2004, the Company recorded goodwill in the amount of
$1,446,848. The Company had goodwill of $1,866,848 and $420,000 as of December
31, 2004 and December 31, 2003, respectively, which constituted approximately
19% and 7%, respectively, of our total assets. Management evaluates this balance
on an ongoing basis and believes that there has not been an impairment of its
Goodwill or long-lived assets as of December 31, 2004.
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.
Statement of Cash Flows
Supplemental disclosure of cash flow information: 2004 2003
------------- -----------------
Non-cash items affecting the statement of cash flows are as follows:
Cash paid for interest during the year $ 34,008 $ 125,717
Non-cash items affecting investing and financing activities:
Conversion Premium expense $ 231,625 $ -
============= =================
Imputed Interest $ 18,349 $ -
============= =================
Common Stock issued for payment of Note $ 750,000 $ -
============= =================
Common Stock issued for Acquisition $1,580,768 $ -
============= =================
F-21
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.
Forgivable Loans
In order to remain competitive in the marketplace, the Company previously
granted forgivable loans to certain employees. The terms of the loans ranged
from two to five years with scheduled maturity dates from 2002 to 2005. 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 within 120
days. The loans do not bear interest and interest is not imputed as
collectibility of any such interest would not be probable. As of December 31,
2004, the balance of the forgivable loans was $6,597, which is scheduled for
forgiveness in 2005.
Due from Clearing Broker
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.
3. ACQUISITIONS
On November 2, 2004, vFinance's wholly-owned subsidiary, vFinance Investments
completed its acquisition of certain assets of Global and 100% of the issued and
outstanding equity securities of EquityStation, all of which were owned by
Level2, a subsidiary of Global. These transactions are subject to the approval
of the National Association of Securities Dealers, Inc.
In accordance with the terms of the acquisition agreements, the Company
delivered into escrow 8,324,690 restricted shares of the Company's common stock,
and warrants to purchase 3,299,728 shares of the Common Stock at a price of
$0.11 per share. All of the shares of EquityStation were also delivered into
escrow. Subject to (a) any indemnification claims under the acquisition
agreements and (b) the financial performance of EquityStation and the business
of Global acquired by vFinance Investments over the periods specified in the
escrow agreement, all or a portion of the Shares and the Warrants will be
distributed to Global and Level2. As determined pursuant to the financial
performance calculation in the escrow agreement, 2,199,425 of the Shares and
871,805 of the Warrants are subject to cancellation in accordance with the terms
of the escrow agreement. When the escrow agreement is terminated, all of the
shares of EquityStation will be distributed to vFinance Investments, and the
holders of the Shares and Warrants will be entitled to certain piggyback
registration rights. The Company also entered into a standstill agreement with
each of Marcos Konig, Harry Konig and Salomon Konig, to provide restrictions on
certain actions for a defined time period.
As remuneration for providing advisory services to Global in connection with the
acquisitions, Scott J. Saunders ("Saunders") received 150,000 restricted shares
of the Common Stock. The shares received by Saunders are not subject to the
escrow agreement, registration rights agreement or standstill agreement.
Goodwill was determined as follows; 6,125,265 common shares issued to Global and
EquityStation, 150,000 common shares issued to Saunders valued at $1,192,300 or
$0.19 per share, 2,427,923 warrants valued at $0.16 per warrant or $388,468
using the Black-Scholes valuation model, and legal fees in the amount of $47,863
for a total purchase price of $1,628,631. The Company acquired net assets of
$181,783 and allocated the difference between the purchase price and the net
assets acquired of $1,446,848 as goodwill.
In accordance with Financial Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" we have included all vested stock
options issued by the Company in exchange for outstanding awards held by
employees of the acquired company as part of the purchase price.
F-23
The following Pro Forma Combined Financial Statements of Global, EquityStation
and vFinance gives effect to the acquisition of certain assets of Global and
100% of the issued and outstanding equity securities of EquityStation, under the
purchase method of accounting prescribed by Accounting Principles Board Opinion
No. 16, Business Combinations. These pro forma statements are presented for
illustrative purposes only. The pro forma adjustments are based upon available
information and assumptions that management believes are reasonable.
VFINANCE, INC.
Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2004
VFinance Global EquityStation Pro Forma Pro Forma
Partners Adjustments
REVENUE
Commissions $14,571,878 $186,402 $1,764,299 - $16,522,579
Trading Profits 5,156,842 2,868,675 2,489 - 8,028,006
Success Fees 3,224,973 - - - 3,224,973
Consulting and Retainers 370,829 - - - 370,829
Other Brokerage Related Income 2,567,489 - - - 2,567,489
Other Income 437,140 388,714 2 - 825,856
-------------- ------------ --------------- -------------- --------------
26,329,151 3,443,791 1,766,790 - 31,539,732
============== ============ =============== ============== ==============
COST OF REVENUES
Commissions 14,624,914 1,675,493 456,037 - 16,756,444
Clearing and Transaction - -
Costs 1,030,114 674,469 665,853 - 2,370,436
Success 1,346,272 - - - 1,346,272
Consulting and Retainers 224,916 2,760 - - 227,676
Other 4,581 2,363 1,278 - 8,222
-------------- ------------ --------------- -------------- --------------
17,230,797 2,355,085 1,123,168 - 20,709,050
============== ============ =============== ============== ==============
GROSS PROFIT 9,098,354 1,088,707 643,621 10,830,682
-------------- ------------ --------------- -------------- --------------
EXPENSES
General and Administrative 6,686,372 1,808,585 802,936 - 9,297,893
Professional Fees 157,370 6,635 260 - 164,265
Provision for Bad Debt 85,567 - - - 85,567
Legal litigation 399,647 94,921 18,414 - 512,982
Depreciation and Amortization 147,804 18,869 - - 166,673
Amounts Forgiven under Forgivable Loans 80,161 - - - 80,161
Stock Based Compensation 5,294 - - - 5,294
7,562,215 1,929,010 821,610 - 10,312,834
INCOME (LOSS) From Operations 1,536,139 (840,303) (177,988) - 517,848
Gain on Forgiveness of Debt 1,500,000 - - - 1,500,000
Interest and Dividend
Income (Expense) (221,704) 3,131 7,520 (211,053)
PRE TAX NET INCOME (LOSS) 2,814,435 (837,172) (170,468) - 1,806,795
Federal Income Tax (40,000) - - - (40,000)
NET INCOME (LOSS) Available to Shareholders $2,774,435 $ (837,172) $(170,469) $- $1,766,795
F-23
4. 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, 2004, vFinance Investments had net capital of
$2,641,131, which was $1,641,131 in excess of its required net capital of
$1,000,000. EquitySation had net capital of $271,121 that was $171,121 in excess
of its required net capital of $100,000.
vFinance Investments' aggregate indebtedness to net capital ratio was to 0.9 to
1 in 2004.Equity Station's aggregate indebtedness to net capital ratio was 0.36
to 1. vFinance Investments and EquityStation qualify under the exemptive
provisions of Rule 15c3-3 under Section (k)(2)(ii) of the Rule, in that they do
not carry security accounts of customers or perform custodial functions related
to customer securities.
5. RELATED PARTY TRANSACTIONS
On November 16, 2004, the Company entered into new agreements ("Primary
Employment Agreements") to amend and restate certain employment agreements dated
November 8, 1999 between the Company's Chief Executive Officer and President,
who is the beneficial owner of 15% and 19.7% of the total outstanding common
shares of the Company at December 31, 2004 and 2003, respectively, and the
Company's Chief Operating Officer and Chairman, who is the beneficial owner of
15% and 19.7% of the total outstanding common shares of the Company at December
31, 2004 and 2003, respectively (collectively the "Primary Shareholders"), as
amended on January 5, 2001, July 2, 2001 and January 7, 2002 (the "Previous
Employment Agreement"). Under the terms of the Primary Employment Agreements,
which shall be for a three year period and shall 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 December 2002, each of the Primary Shareholders forfeited a total of 734,802
outstanding options by signing an Options Cancellation Agreement. Accordingly,
at December 31, 2002 there were no stock options held by the Primary
Shareholders. On July 1, 2003, the Company granted the Primary Shareholders a
total of 734,802 options at a price of $0.21.
On January 1, 2003, the Company entered into a Joint Venture Agreement with JSM
Capital Holding Corp. ("JSM"), a retail brokerage operations headquartered in
New York and founded by John S. Matthews. 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 accounts for this investment using the cost
method. Effective May 1, 2003, vFinance merged its "company-owned" retail
branches into JSM. Effective upon such merger JSM became an independent
contractor of the Company.
6. INCOME TAXES
The components of the Company's tax provision for the years ended December 31,
2004 and 2003 were as follows:
Year Ended December 31, 2004
---------------------------------
2004 2003
------------- -------------------
Current income tax expense $ 40,000 $ -
Deferred income tax (benefit) $ (40,000) $ -
------------- -------------------
$ - $ -
F-24
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:
Year Ended December 31, 2004
---------------------------------
2004 2003
---------------- ----------------
Net operating loss carryforwards $3,282,787 $4,250,848
Unrealized losses 65,809 45,906
Goodwill impairment - 2,775,663
Allowance for doubtful accounts 2,319 74,522
Depreciation 11,573 (6,613)
---------------- ----------------
Gross deferred income tax assets 3,362,488 7,140,326
Deferred income tax asset valuation (3,322,488) (7,140,326)
allowance
---------------- ----------------
Net deferred income tax assets $40,000 $ -
Net operating loss carryforwards totaled approximately $8,575,000 at December
31, 2004. The net operating loss carryforwards will begin to expire in the year
2021 if not utilized. After consideration of all the evidence, both positive and
negative, management has recorded a valuation allowance at December 31, 2004 and
2003, due to the uncertainty of realizing the deferred tax assets.
The company was subject to an approximate $40,000 alternative minimum tax for
the tax year ending December 31, 2004. Such amount may be carried forward as a
tax credit to offset regular tax in future years.
The reconciliation of the income tax computed at the U.S. Federal statutory rate
to income tax expense for the period ended December 31, 2004 and 2003:
Year Ended December 31, 2004
---------------------------------
2004 2003
-------------- -----------
Tax expense (benefit) at federal rate (35%) $ 971,052 $ 106,000
Nondeductible expenses 2,806,786 (116,665)
Alternative Minimum Tax 40,000 0
Change in valuation allowance (3,817,838) 10,665
Net income tax (benefit) allowance $ - $ -
Utilization of the Company's net operating loss carryforwards are limited based
on changes in ownership as defined in Internal Revenue Code Section 382.
7. SHAREHOLDERS' EQUITY
The Company is authorized to issue up to 2,500,000 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, 2004 there are no
Preferred Stock outstanding.
Series A and B Preferred Stock had the following rights, preferences, privileges
and restrictions:
LIQUIDATION PREFERENCE. In the event of any liquidation or winding up of the
Company, the holders of the Series A and B Preferred Stock were entitled to
receive, in preference to the holders of Common Stock, an amount equal to $10
per share, plus unpaid dividends, if any. A consolidation or merger would have
been deemed a liquidation or winding up for purposes of the liquidation
preference.
DIVIDEND RIGHTS. The holders of Series A and B Preferred Stock were entitled to
receive cumulative dividends in preference to holders of Common Stock at the
rate of $1 and $0.70 per share annum (10% and 7% of the liquidation preference
price) for Series A and B, respectively, whether or not earned or declared.
F-25
CONVERSION PRICE ADJUSTMENTS. The conversion price of the Series A and B
Preferred Stock were subject to adjustments to prevent dilution, on the weighted
average basis, in the event the Company issued additional shares, at a purchase
price of $2.60 per share.
VOTING RIGHTS. The holders of Series A and B Preferred Stock had no voting
rights.
REDEMPTION RIGHTS. The Company, at its option, could have redeemed, in whole or
in part, the shares of Series A and B Preferred Stock outstanding, at any time,
upon notice given, at a redemption price of $11 and $10 per share, respectively.
If the Company received proceeds from a single sale of its equity securities of
at least $500,000, the holders of Series A and B Preferred Stock could have
required the Company to redeem all, but not less than all, the Series B
Preferred Stock at a redemption price equal to $10 per share.
On November 28, 2001, we entered into a Note Purchase Agreement, as amended on
November 30, December 14 and December 28, 2001 and February 13 and March 4, 2002
(collectively, the "Agreement"), with SBI Investments (USA) Inc. ("SBI"). Under
the terms of the Agreement, SBI provided a loan to us in the amount of $975,000
in the form of a 48-month non-interest bearing, convertible note (the SBI
Note"). The SBI Note is convertible at SBI's option into as many as 3,421,052
shares of our common stock at $0.285 per share.
In accordance with EITF Issue No. 00-27, (APPLICATION OF ISSUE NO. 98-5),
ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OF
CONTINGENTLY ADJUSTABLE CONVERSION RATIOS, IN CERTAIN CONVERTIBLE INSTRUMENTS,
and APB # 21 (INTEREST ON RECEIVABLES AND PAYABLES) the Company recorded an
imputed interest factor related to the Note Purchase Agreement of $563,000. The
Company fully expensed the beneficial conversion factor due to the fact that the
SBI Note was immediately convertible. The net one time charge to the financial
statements was $412,000.
The imputed interest was accreted ratably over the term of the loan as
additional interest expense. Amortization of the imputed interest began in
January 2002.
During year 2002, the SBI Note was reduced by $225,000 as a portion of the SBI
Note was converted into 789,474 shares of the Company's common stock.
As of December 31, 2003 the SBI note payable balance was $750,000 and was netted
against the $146,787 corresponding asset imputed interest.
During February and March of 2004, $721,500 of the SBI Note was converted into
3,344,298 shares of the Company's common stock. Of this amount, $545,000 was
converted into 2,725,000 shares of the Company's common stock at a discounted
rate of $0.20 per share under a special arrangement offered by the Company to
encourage further equity participation by SBI, which resulted in a $231,625
conversion premium expense during the first quarter of 2004. The remainder,
$176,500, was converted into 619,298 shares at the stated conversion rate of
$0.285 per share. In April of 2004, the remaining balance was converted into
100,000 shares of common stock of the Company at the original stated conversion
rate of $.285 per share. The issuance of the common stock was exempt from
registration pursuant to Section 4 (2) of the Securities Act of 1933, as
amended, because the common stock was acquired in a privately negotiated
transaction by sophisticated investors. Accordingly, the balance due SBI at
December 31, 2003 was $750,000 and 2004 was $0.
On February 27, 2003, the Company entered into an agreement whereby Arend
Verweij and Hoss Bozorgzad, independent contractors of the Company, purchased
1,500,000 unregistered common shares at a price of $0.0867 for a total
consideration of $130,000.
The above noted securities issued to the investors were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
of Regulation D promulgated thereunder because the securities were acquired in a
privately negotiated transaction by sophisticated investors.
During the first quarter of 2004, the Company granted stock options to purchase
an aggregate of 1,625,000 shares of the Company 's common stock to certain
employees of the Company. The exercise prices of these options range from $.20
to $.28. During the second quarter of 2004, the Company granted stock options to
purchase an aggregate of 105,000 shares of the Company's common stock to two
employees of the Company. The exercise price of these options was $0.35. During
the third quarter of 2004, the Company granted stock options to purchase an
aggregate of 205,000 shares of the Company's common stock to certain employees
of the Company. The exercise prices of these options range from $0.19 to $0.36.
During the fourth quarter of 2004, the Company granted stock options to purchase
an aggregate of 2,202,502 shares of the Company 's common stock to certain
employees of the Company. The exercise prices of these options range from $0.19
to $0.28. The option grants were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933, as amended, because the individuals
receiving the options are sophisticated investors who have knowledge of all
material information about the Company.
F-26
A summary of the stock option activity for the years ended December 31, 2004 and
2003 is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Shares Per Option
---------------------- ---------------------- ---------------------
Outstanding Options at December 31, 2002 0.50 4,471,664 0.15 - 6.00
Granted 0.20 7,635,349 0.15 - 0.22
Forfeited 0.49 (1,760,802) 0.21 - 4.13
----------------------
Outstanding Options at December 31, 2003
Granted 0.29 10,346,211 0.15 - 6.00
Forfeited 0.21 4,137,502 0.19 - 0.36
0.23 (3,945,500) 0.15 - 0.35
----------------------
Outstanding Options at December 31, 2004 0.28 10,538,213 0.15 - 2.25
======================
The following table summarizes information concerning stock options outstanding
at December 31, 2004
Weighted
Average
Exercise Number
Price Outstanding
-------------- -------------
$0.15 350,000
0.19 1,860,002
0.20 1,280,000
0.21 3,700,497
0.22 50,000
0.23 2,500
0.25 5,000
0.28 200,000
0.32 890,000
0.35 1,554,215
0.36 120,000
0.50 100,000
0.55 69,000
0.63 142,500
0.70 39,000
1.00 18,000
2.25 157,499
-------------
10,538,213
=============
F-27
A summary of the warrant activity for the years ended December 31, 2004 and 2003
is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Shares Per Option
--------------- ----------------- ----------------
Outstanding Options at December 31, 2002 2.15 4,108,499 0.35 - 7.20
Granted 0.25 1,290,000 0.15 - 2.25
-----------------
Outstanding Warrants at December 31, 2003 1.70 5,398,499 0.35 - 7.20
Granted 0.16 2,927,923 0.15 - 0.16
Forfeited 0.44 (230,000) 0.35 - 2.50
Outstanding Warrants at December 31, 2004 1.18 8,096,422 0.15 - 7.20
=================
The following table summarizes information concerning warrants outstanding at
December 31, 2004.
Weighted
Average
Exercise Number
Price Outstanding
-------------- --------------
0.15 750,000
0.26 2,427,923
0.20 1,000,000
0.35 1,773,500
0.63 400,000
2.25 625,000
2.50 290,000
6.00 129,999
7.20 700,000
--------------
8,096,422
==============
The weighted average grant-date fair value of warrants granted equaled $0.16 and
$0.25 for the years ended December 31, 2004 and 2003, respectively. The weighted
average grant-date fair value of options granted during the year equaled $0.21
and $0.20 for the years ended December 31, 2004 and 2003, respectively. For
purposes of pro forma disclosures, the estimated fair value of the options and
warrants is amortized to expense over their respective vesting periods.
Options granted to employees are exercisable according to the terms of each
agreement, ranging from one month to four years. At December 31, 2004 and 2003,
5,779,766 and 4,916,608 options outstanding were exercisable with weighted
average exercise prices of $.35 and $.37, respectively. At December 31, 2004 and
2003, 7,920,172 and 4,745,999 warrants outstanding were exercisable with
weighted average exercises prices of $1.15 and $1.75, respectively.
Pro forma information regarding net income (loss) is required by SFAS 123, which
also requires that the information be determined as if the Company has accounted
for its employee stock options under the fair value method. The fair value for
options and warrants granted was estimated at the date of grant using the Black
Scholes option pricing model with the following weighted-average assumptions:
for 2004 risk-free interest rates of 3.31%; no dividend yields; volatility
factor of the expected market price of the Company's common stock of 1.12 for
options and warrants and an expected life of the options and warrants of 4-5
years; for 2003: risk-free interest of 3.28%; no dividend yields; volatility
factor of the expected market price of the Company's common stock of 2.131; and
an expected life of the options and warrants of 4-5 years. The Company's pro
forma net income for the year ended December 31, 2004 is $2,287,230 and the pro
forma net loss for the year ended December 31, 2003 is $128,971. The Company's
pro forma basic and diluted net income per share for the year ended December 31,
2004 is $0.07 and $0.06, respectively. Pro forma basic net loss per share for
the year ended December 31, 2003 is $0.00.
F-28
The Company recorded deferred compensation of $5,294 and $17,714 during the
years ended December 31, 2004 and 2003, respectively, in connection with the
grants of stock options, primarily to outside consultants, with exercise prices
lower than the deemed fair value per share of the Company's common stock on the
date of the grants. The Company had an unamortized balance of $ 12,420 at
December 31, 2002 fully amortized during 2003. In addition, during 2003 the
Company granted 250,000 warrants, valued at $30,000, to its landlord in relation
to the renegotiation of the lease on its headquarters. This balance is being
amortized over the term of the lease. At December 31, 2004 the remaining
unamortized balance was $19,409.
8. DEBT
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
$3,000,000 for the purpose of supporting the expansion of our brokerage business
or investments in infrastructure to expand our operations and our 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 $1,500,000 under the credit facility on January 28, 2002
leaving an additional $1,500,000 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. The credit facility stayed with
UBS subsequent to the acquisition giving rise to potential breaches under such
credit facility as well as precluding the Company from drawing an additional
$1,500,000 thereunder. During March 2004, NFS agreed to directly pay down the
UBS credit facility in the amount of $1,500,000 pursuant to a guaranty Fidelity
Investments made to UBS as part of their original acquisition of the CSC
clearing division. As a result, the Company was relieved from $1,500,000 in debt
but no longer had the ability to obtain an additional $1,500,000 under the
credit facility or assert any claims against UBS or NFS regarding this
transaction and credit facility. During March 2004, the Company entered into a
clearing agreement with NFS. The new clearing agreement required NFS to pay to
vFinance, over a five year period beginning January 2004, a monthly incentive
bonus not to exceed $25,000 per month up to $1,500,000, based on a formula that
the Company believes is very achievable. Accordingly, NFS has been paying
$25,000 per month related to this incentive calculation and such amount,
$300,000 through December 31, 2004, has been included in the attached statements
of operations as "other brokerage related income". The new clearing agreement
also required NFS to provide the Company with $200,000 to assist the company
with transition costs related to the conversion from CSC to NFS. This amount was
paid to vFinance in March 2004 and was included in the first quarter's
statements of operations as a reduction to clearing and transaction costs. In
consideration for these incentives, NFS required a termination fee of $1,700,000
should vFinance discontinue using NFS' services. This fee is reduced, pro rata,
annually over the five year term of the agreement. The Company began clearing
through NFS during May 2004.
As discussed in Note 7, the Company entered in to a Note Purchase Agreement with
SBI Investments (USA), Inc. ("SBI"). As of December 31, 2003 the SBI note
payable balance was $750,000. During 2004, the balance of the Note was converted
into 3,444,298 shares of the Company's common stock. Of this amount, $545,000
was converted into 2,725,000 shares of the Company's common stock at a
discounted rate of $0.20 per share under a special arrangement offered by the
Company to encourage further equity participation by SBI, which resulted in a
$231,625 conversion premium expense during the first quarter of 2004.
Accordingly, the balance due SBI at December 31, 2003 was $750,000 and 2004 was
$0.
F-29
9. COMMITMENTS AND CONTINGENCIES
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 AMOUNT
2005 $828,484
2006 797,233
2007 764,543
2008 599,654
2009 85,897
------------
TOTAL $3,075,811
============
Total rent expense under operating leases, including space rental, totaled
$690,415 and $700,464 for the years ended December 31, 2004 and 2003.
Capital lease obligations at December 31, 2004 consisted of the following:
2004
------------
Obligation under capital lease $188,303
Less current maturities (65,355)
------------
$122,948
============
Future minimum lease payments for equipment under capital leases at December 31,
2004 are as follows:
2005 $ 74,417
2006 74,417
2007 55,049
------------
Total minimum lease payments 203,883
Less amount representing interest (15,580)
------------
Present value of net minimum lease 188,303
Less current portion (65,355)
------------
$122,948
============
From time to time the Company, and/or one of its 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, 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.
F-30
On August 20, 2001, we entered into a Securities Exchange Agreement by means of
which we acquired the membership interests in two related companies, Critical
Investments, LLC, a Delaware limited liability company ("Critical Investments"),
and Critical Advisors, L.L.C., a Virginia limited liability company ("Critical
Advisors"). Critical Investments manages Critical Infrastructure Fund, L.P.
("Critical Infrastructure LP"), a Delaware limited partnership. Critical
Advisors manages Critical Infrastructure Fund, Ltd. ("Critical Infrastructure
Ltd."), an international business company organized and existing under the laws
of the British Virgin Islands and receives (i) a management fee equal to 1% of
the net asset value of Critical Infrastructure Ltd. and (ii) a performance fee
equal to 20% of the increase in net asset value of Critical Infrastructure Ltd.
Critical Infrastructure LP and Critical Infrastructure Ltd. are the sole general
partners in, owning 96% and 4%, respectively, and conduct their investment and
trading activity through Critical Infrastructure Fund (BVI), LP, a limited
partnership organized and existing under the laws of the British Virgin Islands,
which holds a portfolio of securities. A determination has been made to
liquidate the funds. The SEC is conducting a non-public investigation relating
to Critical Infrastructure LP, Critical Investments and Critical Advisors. The
Company is cooperating with this investigation. Critical Investments and
Critical Advisors changed their names to vFinance Investors, LLC and vFinance
Advisors, LLC, respectively, subsequent to the acquisition.
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 alleges "Breach of Contract"
and "Unjust Enrichment" and seeks damages of $250,000 plus interest and court
costs. It is alleged that Colonial Direct defaulted on a Promissory Note in the
principal amount of $250,000. The Company believes their claim is without merit
and is vigorously defending the action.
On October 23, 2002, Henry Shoemaker, III, filed a claim with the NASD against
First Level Securities, now known as vFinance Investments, Inc., stating among
other things, that there was a breach of fiduciary duties resulting in a loss of
$570,000. This matter went to the arbitration panel during 2004 and Mr.
Shoemaker was awarded $15,000. Mr. Shoemaker filed an action in the Parish of
Orleans requesting that the arbitration be vacated. vFinance Investments filed a
motion to remove the matter to Federal Court. Federal Court denied his request
to vacate the arbitration. Mr. Shoemaker then appealed to Federal Courts ruling
to the United States Court of Appeal for the 5th Circuit. This matter is still
pending.
On January 12, 2003, MP 830 Third Avenue LLC ( the Landlord), filed a claim
against First Colonial, vFinance, Inc. and vFinance Investments Inc. in the
Supreme Court of the State of New York, alleging the abandonment of leased
facilities and seeking payment of the related rent. The lease was for a term of
seven years expiring on December 31, 2006. First Colonial allegedly ceased
paying rent as of July 1, 2002. After applying First Colonial's security deposit
of $200,000, the Landlord is seeking $59,868 plus any further rent due until
such time as they can successfully lease the premises at a similar rate. This
matter was settled on December 6, 2004 in the amount of $100,000. On April 15,
2003, Ms. Madeline Moore filed a claim with the NASD against vFinance
Investments, Inc. in the amount of $150,527 claiming a breach of fiduciary
duties. This matter was settled on February 27, 2004 in the amount of $125,000.
On October 17, 2003, we were advised by the staff of the SEC that it intended to
recommend that the SEC institute enforcement proceedings against vFinance
Investments and one of its former employees. The SEC claims that vFinance
Investments and its former employee failed reasonably to supervise the alleged
illegal trading activities over a period of approximately two months of one of
our broker/dealer's former securities traders with respect to one publicly
traded security that resulted in vFinance Investments earning $11,000 in
commissions related to that one security over the two month period. As of
December 31, 2004, the Company has included an accrual of $50,000 for estimated
expenses. On March 17,2005 we were advised by a member of the staff of the SEC
that the SEC had accepted our offer to settle the matter. Pursuant to the terms
of the settlement, vFinance Investments is required to make its first payment of
the $50,000 penalty ($16,667) within 30 days of the entry of the Order. In
addition, the Company will need to retain, within 60 days of the date of the
Order, an independent consultant to conduct a review of vFinance's existing
procedures regarding the supervision of traders to ensure that they are
adequate. The Company believes that this matter will not have a material adverse
affect on its business and operations.
On November 13, 2003, UBUY Holdings, Inc., f/k/a E-PAWN.COM, Inc., and Steven
Bazuly, and for and on behalf of all of the shareholders of UBUY Holdings, Inc.
filed an amended complaint for damages and consequential damages against
vFinance Investments, Inc. and approximately 60 other defendants in the United
States District Court for the Southern District of Florida stating, among other
things, that there were violations of certain securities rules and regulations.
The Company has not yet been served with this complaint, but in the event it is,
the Company believes that their claim is without merit and will vigorously
defend this action.
F-31
On March 15, 2004 Joseph & Joan Barr filed a claim with the NASD against
Pittsford Capital Markets, vFinance Investments, Inc. and others, claiming that
vFinance Investments was the successor firm to Pittsford Capital Markets and
alleging, among other things, that in 1998 he purchased Private Placements that
were unsuitable. The claim alleges damages of $700,000. The Company believes
their claim is without merit and is vigorously defending the action.
On or about February 28, 2005, Knight Equity Markets, L.P. ("Knight") commenced
an arbitration proceeding with the National Association of Securities Dealers
Inc. by filing a Statement of Claim against vFinance Investments, Inc., and one
of vFinance's registered representatives, Steven Soskin. The matter is titled
Knight Equity Markets, L.P. v. vFinance Investments, Inc., and Steven Soskin,
NASD Case No. 05-01069. Knight alleges that vFinance and Mr. Soskin were engaged
in a fraudulent scheme to buy various stocks at ex-dividend prices that vFinance
and Mr. Soskin knew were subject to dividends. Knight further alleges that
vFinance received $6.5 million in dividends that it was not otherwise entitled
to receive. Knight seeks a declaration that vFinance was not entitled to receive
the dividends, $6.5 million in damages, attorneys fees, costs and an unspecified
amount of punitive damages. The matter is currently in the pleadings phase. The
primary customer involved in the subject stock purchases has now filed an action
in the Supreme Court for the State of New York against Knight seeking a
Declaratory Judgment and Equitable Relief with regard to the subject dividends.
This action seeks a declaratory judgment that the customer is the rightful owner
of the $5.8 million in dividends. The Company believes that Knight's claim is
without merit, and the Company will vigorously defend the action.
We are engaged in a number of other legal proceedings incidental to the conduct
of our business. These claims aggregate a range of $28,000 to $260,000.
10. 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, 2004 and 2003, respectively.
11. SUBSEQUENT EVENTS
Subsequent to December 31, 2004, the Company came to an agreement in principle
with The Center for Innovative Entrepreneurship ("CIE"), a nonprofit
organization, to develop www.vfinance.com as a platform for academic-quality
research on entrepreneurial activities and to produce the Company's proprietary
vFinance Entrepreneurial Confidence Index ("VECI") and sector research reports,
and to provide educational and informational services to entrepreneurs with
start-ups and other early-stage firms. The Company also agreed to enter into a
management services agreement to provide management, administrative and
technical support services for CIE. It is anticipated that the Company and CIE
will enter into definitive documentation evidencing these agreements in April
2005.
On January 31, 2005, The Company issued 300,000 common shares in connection with
the exercise of options. The Company received $60,000. The exercise price of
these options was $0.20.
On March 14, 2005, The Company issued 255,000 common shares in connection with
the exercise of options. The Company received $53,550. The exercise price of
these options was $0.21.
F-32
vFinance, Inc.
Notes to the Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
vFinance, Inc. 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., 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 by offering services such as trading technology, routing
software, hedge fund incubation, capital introduction and custodial services.
The Company, through its website www.vfinance.com, provides financial
information services to entrepreneurs and venture investors.
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All inter-company accounts have been eliminated
in consolidation.
Revenue Recognition
The Company earns revenue (commissions) from brokerage and trading which are
recognized on the day of the trade - trade date basis. The Company also earns
revenue from investment banking and consulting. Monthly retainer fees for
investment banking and consulting are recognized as services are provided.
Investment banking success fees are generally based on a percentage of the total
value of a transaction and are recognized upon successful completion.
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 may receive equity instruments which include stock purchase warrants
and common and preferred stock from companies as part of its 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". Primarily
all of the equity instruments are received from small public companies. The
Company recognizes revenue for such stock purchase warrants, when received,
based on the Black Scholes valuation model. The revenue recognized related to
the 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. For the years ended December 31, 2005
and 2004, the Company recognized $487,511 and $419,365, respectively, of revenue
in connection with the receipt of equity instruments. On a monthly basis the
Company recognizes unrealized gains or losses in its statement of operations
based on the changes in value of equity instruments. Realized gains or losses
are recognized in the statement of operations when the related 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 equity instruments received from a private
company.
F-33
Upon the consummation of an advisory, consulting, capital or other similar
transactions the Company may distribute equity instruments or proceeds from the
sale of equity instruments to its employees. These distributions are made at the
Company's discretion on a case by case basis as determined by the role of the
employee and the nature of the transaction. At December 31, 2005 and 2004, no
amounts were owed to current employees of the Company in connection with equity
investments received as compensation.
As of December 31, 2005, certain transactions in process may result in the
Company receiving equity instruments or stock purchase warrants in subsequent
periods as discussed above. In such event, the Company will recognize revenue
related to the receipt of such equity instruments consistent with the
aforementioned policies.
The Company sells two types of listings through its website: (i) perpetual
listings to venture capital vendors, who are interested in providing services to
other companies or individuals; and (ii) three-month listings to entrepreneurs
who have new business ideas to sell. Revenue related to the listings is
generally recognized over the terms of such listings. Website revenues are
concentrated primarily in the United States but are not concentrated in any
particular region of the country or with any individual or group. Fees related
to such listings are included in "other" in the statements of operations for the
years ended December 31, 2004. In May 2005, the Company entered into an
agreement with The Center for Innovative Entrepreneurship ("CIE"), a nonprofit
organization, to develop www.vfinance.com as a platform for academic-quality
research on entrepreneurial activities and to produce the Company's proprietary
Finance Entrepreneurial Confidence Index ("VECI") and sector research reports,
and to provide educational and informational services to entrepreneurs with
start-ups and other early-stage firms. The Company also agreed to enter into a
management services agreement to provide management, administrative and
technical support services for CIE. These agreements became effective beginning
in January 2005 and no revenue from website operations is shown in 2005 in other
income. The fee income obtained from the management services agreement is shown
as revenue under Other revenue in 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, Inc. , has been
named as a defendant in various customer arbitrations. These claims result from
the actions of brokers affiliated with vFinance Investments, Inc. In addition,
under the vFinance Investments, Inc. registered representatives 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 could
materially affect results in the period other expenses are ultimately
determined. As of December 31, 2005, the Company has accrued approximately
$220,000 for these matters. As the Company has recently acquired an errors and
omissions policy, future claims will be covered in excess of the policies
$75,000 per claim deductible. 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.
F-34
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 and notes receivable balances are reviewed monthly to determine the
Company's ability to collect such receivables. The Company records both a
specific and general reserve on such balances as deemed appropriate.
Investments
Investments 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. Investments in trading securities
include both trading account assets and equity instruments which the Company has
received as part of its compensation for investment banking services. At
December 31, 2005, investments consisted of common stock, corporate bonds and
common stock purchase warrants held for resale. Trading account assets,
consisting of marketable equity securities, are stated at fair value. Unrealized
gains or losses are recognized in the statement of operations on a monthly basis
based on changes in the fair value of the security as quoted on national or
inter-dealer stock exchanges. Realized gains or losses are recognized in the
statement of operations as trading profits when the equity instruments are sold.
As mentioned above, the Company periodically receives equity instruments which
include stock purchase warrants and common and preferred stock from companies as
part of its compensation for investment-banking services. 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 the stock purchase warrants received are
typically restricted as to resale, although, the Company generally receives a
registration right within one year. Company policy is to resell these securities
in anticipation of short-term market movements. The Company recognizes revenue
for such equity instruments based on the fair value of the stock at the time
equity instruments are granted and for stock purchase warrants based on the
Black-Scholes valuation model. Unrealized gains or losses are recognized in the
statement of operations on a monthly basis based on changes in the fair value of
the security as quoted on national or inter-dealer stock exchanges, discounted
by a factor to address the remaining period which the equity instrument is
restricted as to resale. Net unrealized (losses)gains related to investments in
trading securities as of December 31, 2005, and 2004, aggregated $(244,447) and
$170,660, respectively. Net realized gains related to investments in trading
securities as of December 31, 2005 and 2004 aggregated $174,775 and $1,087,741,
respectively.
Investments in trading securities and securities sold, not yet purchased,
consist of trading and investment securities at market values at December 31,
2005, as follows:
Owned Sold, not yet purchased
------------ -------------------------
Corporate Stocks $ 849,858 $42,421
Warrants 20,448
--------------------- ------------ -------------------------
Total $ 870,306 $42,421
===================== ============ =========================
At December 31, 2005, restricted equity securities had an aggregate fair value
of $253,841.
Securities Transactions
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.
F-35
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.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations
in accounting for its employee stock options and employee stock purchase
warrants because the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION ("SFAS 123") and SFAS 148 ACCOUNTING FOR STOCK BASED COMPENSATION
TRANSITION AND DISCLOSURE, AN AMENDMENT OF SFAS 123, requires the use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, if the exercise price of the Company's employee stock
options or stock purchase warrants equals or exceeds the market price of the
underlying stock on the date of grant no compensation expense is recognized.
Fair Value of Financial Instruments
The fair values of the Company's financial instruments, which includes cash and
cash equivalents, accounts and notes receivable, investments, accounts payable,
and accrued expenses approximate their carrying values.
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable. The
Company places its cash with high quality insured financial institutions.
Furniture and Equipment
Furniture 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, 2-5 years, for financial reporting purposes. Depreciation expense for
the years ended December 31, 2005 and 2004, totaled $299,604 and $147,804
respectively. Included in Furniture and Equipment is approximately $573,000 of
equipment acquired under capital leases.
Intangible Asset
The carrying value of intangible assets as well as other long-lived assets are
reviewed if the facts and circumstances suggest that they may be impaired. If
this review indicates that the assets will not be recoverable, as determined
based on the undiscounted estimated cash flows of the Company over the remaining
amortization period, the Company's carrying values of the assets would be
reduced to their estimated fair values in accordance with Statement of Financial
Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS ("FAS 144"). Among other factors considered in such evaluation
is the historical and projected operating performance of business operations,
the operating environment and business strategy, competitive information and
market trends. As a result of the acquisition of EquityStation and certain
assets of Global in November 2004, the Company recorded goodwill in the amount
of $1,446,848. The Company had goodwill of $1,866,848 as of December 31, 2004,
which constituted approximately 19% of our total assets. In November 2005, the
Company reassessed the allocation of the original purchase price of
EquityStation and Global and re-classed the goodwill to customer relationships.
The customer relationships will be amortized over 5 years. No amortization
expense has been recorded through December 31, 2005. Management evaluates this
balance on an ongoing basis and as a result of this evaluation, has impaired the
goodwill by $420,000 against its First Level acquisition. Management believes
that there has not been an impairment of its remaining long-lived assets as of
December 31, 2005. The Company no longer has goodwill recorded on its books at
December 31, 2005.
F-36
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.
Statement of Cash Flows
Supplemental disclosure of cash flow information:
Non-cash items affecting the statement of cash flows are as follows:
2005 2004
------------- --------------
Cash paid for interest during the year $30,710 $ 34,008
Non-cash items affecting investing and
financing activities:
Conversion Premium expense $ 0 $ 231,625
============= ==============
Imputed Interest $ 0 $ 18,349
============= ==============
Common Stock issued for payment of Note $ 0 $ 750,000
============= ==============
Common Stock issued for Acquisition $ 0 $ 1,580,768
============= ==============
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 had 658,701 options and warrants at
December 31, 2005, not included in diluted earnings per share because the
options and warrants would have been anti-dilutive because the company had a net
loss.
Forgivable Loans
In order to remain competitive in the marketplace, the Company previously
granted forgivable loans to certain employees. The terms of the loans ranged
from two to five years with scheduled maturity dates from 2002 to 2005. 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 within 120
days. The loans do not bear interest and interest is not imputed as the
Company's ability to collect such interest would not be probable. As of December
31, 2005, the balance of the forgivable loans was $0, as the balance was fully
amortized in 2005.
F-37
Other Accrued Liabilities
Other accrued liabilities is primarily comprised of $280,000 in settlement
reserves for open litigation and $185,000 in accrued bonus payable and $93,620
in accrued audit fees related to the 2005 audit as of December 31, 2005.
Due from Clearing Broker
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.
3. ACQUISITIONS
On November 2, 2004, vFinance's wholly-owned subsidiary, vFinance Investments
completed its acquisition of certain assets of Global and 100% of the issued and
outstanding equity securities of 7EquityStation, all of which were owned by
Level 2, a subsidiary of Global. These transactions are subject to the approval
of the National Association of Securities Dealers, Inc.
In accordance with the terms of the acquisition agreements, the Company
delivered into escrow 8,324,690 restricted shares of the Company's common stock,
and warrants to purchase 3,299,728 shares of the Common Stock at a price of
$0.11 per share. All of the shares of EquityStation were also delivered into
escrow. Subject to (a) any indemnification claims under the acquisition
agreements and (b) the financial performance of EquityStation and the business
of Global acquired by vFinance Investments over the periods specified in the
escrow agreement, all or a portion of the Shares and the Warrants will be
distributed to Global and Level 2. As determined pursuant to the financial
performance calculation in the escrow agreement, 2,199,425 of the Shares and
871,805 of the Warrants are subject to cancellation in accordance with the terms
of the escrow agreement. When the escrow agreement is terminated, all of the
shares of EquityStation will be distributed to vFinance Investments, and the
holders of the Shares and Warrants will be entitled to certain piggyback
registration rights. The Company also entered into a standstill agreement with
each of Marcos Konig, Harry Konig and Salomon Konig, to provide restrictions on
certain actions for a defined time period.
As remuneration for providing advisory services to Global in connection with the
acquisitions, Scott J. Saunders ("Saunders") received 150,000 restricted shares
of the Common Stock. The shares received by Saunders are not subject to the
escrow agreement, registration rights agreement or standstill agreement.
Goodwill was determined as follows; 6,125,265 common shares issued to Global and
EquityStation, 150,000 common shares issued to Saunders valued at $1,192,300 or
$0.19 per share, 2,427,923 warrants valued at $0.16 per warrant or $388,468
using the Black-Scholes valuation model, and legal fees in the amount of $47,863
or a total purchase price of $1,628,631. The Company acquired net assets of
$181,783 and allocated the difference between the purchase price and the net
assets acquired of $1,446,848 as goodwill. See note 2 for description of the
reclassification of goodwill to the intangible asset Customer Relationships.
In accordance with Financial Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" we have included all vested stock
options issued by the Company in exchange for outstanding awards held by
employees of the acquired company as part of the purchase price.
The following Pro Forma Combined Financial Statements of Global, EquityStation
and vFinance gives effect to the acquisition of certain assets of Global and
100% of the issued and outstanding equity securities of EquityStation, under the
purchase method of accounting prescribed by Accounting Principles Board Opinion
No. 16, Business Combinations. These pro forma statements are presented for
illustrative purposes only. The pro forma adjustments are based upon available
information and assumptions that management believes are reasonable.
F-38
VFINANCE, INC.
Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2004
VFinance Global EquityStation Pro Forma Pro Forma
Partners Adjustments
REVENUE
Commissions $14,571,878 $186,402 $1,764,299 - $ 16,522,579
Trading Profits 5,156,842 2,868,675 2,489 - 8,028,006
Success Fees 3,224,973 - - - 3,224,973
Consulting and Retainers 370,829 - - - 370,829
Other Brokerage Related Income 2,567,489 - - - 2,567,489
Other Income 437,140 388,714 2 - 825,856
-------------- ----------- --------------- -------------- --------------
26,329,151 3,443,791 1,766,790 - 31,539,732
============== =========== =============== ============== ==============
COST OF REVENUES
Commissions 14,624,914 1,675,493 456,037 - - 16,756,444
Clearing and Transaction - -
Costs 1,030,114 674,469 665,853 - 2,370,436
Success 1,346,272 - - - 1,346,272
Consulting and Retainers 224,916 2,760 - - 227,676
Other 4,581 2,363 1,278 - 8,222
-------------- ----------- --------------- -------------- --------------
17,230,797 2,355,085 1,123,168 - 20,709,050
============== =========== =============== ============== ==============
GROSS PROFIT 9,098,354 1,088,707 643,621 10,830,682
-------------- ----------- --------------- -------------- --------------
EXPENSES
General and Administrative 6,686,372 1,808,585 802,936 - 9,297,893
Professional Fees 157,370 6,635 260 - 164,265
Provision for Bad Debt 85,567 - - - 85,567
Legal litigation 399,647 94,921 18,414 - 512,982
Depreciation and Amortization 147,804 18,869 - - 166,673
Amounts Forgiven under Forgivable Loans 80,161 - - - 80,161
Stock Based Compensation 5,294 - - - 5,294
-------------- ----------- --------------- -------------- --------------
7,562,215 1,929,010 821,610 - 10,312,834
============== =========== =============== ============== ==============
INCOME (LOSS) From Operations 1,536,139 (840,303) (177,988) - 517,848
-------------- ----------- --------------- -------------- --------------
Gain on Forgiveness of Debt 1,500,000 - - - 1,500,000
Interest and Dividend
Income (Expense) (221,704) 3,131 7,520 (211,053)
-------------- ----------- --------------- -------------- --------------
PRE TAX NET INCOME (LOSS) 2,814,435 (837,172) (170,468) - 1,806,795
Federal Income Tax (40,000) - - - (40,000)
-------------- ----------- --------------- -------------- --------------
NET INCOME (LOSS) Available to Shareholders $2,774,435 $ (837,172) $ (170,469) $ - $1,766,795
============== =========== =============== ============== ==============
4. 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, 2005, vFinance Investments had net capital of
$2,030,784, which was $1,030,784 in excess of its required net capital of
$1,000,000. EquityStation had net capital of $583,430 that was $483,430 in
excess of its required net capital of $100,000.
F-39
vFinance Investments' aggregate indebtedness to net capital ratio was to 1.28 to
1 in 2005. Equity Station's aggregate indebtedness to net capital ratio was 0.33
to 1. vFinance Investments and EquityStation qualify under the exemptive
provisions of Rule 15c3-3 under Section (k)(2)(ii) of the Rule, in that they do
not carry security accounts of customers or perform custodial functions related
to customer securities.
5. RELATED PARTY TRANSACTIONS
On November 16, 2004, the Company entered into new agreements ("Primary
Employment Agreements") to amend and restate certain employment agreements dated
November 8, 1999 between the Company's Chief Executive Officer and President,
who is the beneficial owner of 15% and 19.7% of the total outstanding common
shares of the Company at December 31, 2005 and 2003, respectively, and the
Company's Chief Operating Officer and Chairman, who is the beneficial owner of
15% and 19.7% of the total outstanding common shares of the Company at December
31, 2004 and 2003, respectively (collectively the "Primary Shareholders"), as
amended on January 5, 2001, July 2, 2001 and January 7, 2002 (the "Previous
Employment Agreement"). Under the terms of the Primary Employment Agreements,
which shall be for a three year period and shall automatically extend for a one
year period on each anniversary date thereafter unless the Company has provided
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 January 1, 2003, the Company entered into a Joint Venture Agreement with JSM
Capital Holding Corp. ("JSM"), a retail brokerage operations headquartered in
New York and founded by John S. Matthews. 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 accounts for this investment using the cost
method. Effective May 1, 2003, vFinance merged its "company-owned" retail
branches into JSM. Effective upon such merger JSM became an independent
contractor of the Company. In August 2005, the relationship between the Company
and JSM was terminated, and management impaired the asset fully.
6. INCOME TAXES
The components of the Company's tax provision for the years ended December 31,
2005 and 2004 were as follows:
Year Ended December 31, 2004
--------------------------------
2005 2004
Current income tax expense $ - $ 40,000
Deferred income tax (benefit) $ - $(40,000)
--------------------------------
$ -
F-40
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:
Year Ended December 31,
------------------------------------------
2005 2004
-------------------- ---------------------
Net operating loss carryforwards $ 4,587,563 $ 3,282,787
Unrealized losses 158,079 65,809
impairment of Investment in JSM 30,860 -
Allowance for doubtful accounts - 2,319
Depreciation (154,250) 11,573
-------------------- ---------------------
Gross deferred income tax assets 4,622,252 3,362,488
Deferred income tax asset valuation allowance (4,622,252) (3,322,488)
-------------------- ---------------------
Net deferred income tax assets $0 $40,000
Net operating loss carry forwards totaled approximately $11,892,582 at December
31, 2005. The net operating loss carry forwards will begin to expire in the year
2021 if not utilized. After consideration of all the evidence, both positive and
negative, management has recorded a valuation allowance at December 31, 2005 and
2004, due to the uncertainty of realizing the deferred tax assets. The company
was not subject to any alternative minimum tax for the tax year ending December
31, 2005.
The reconciliation of the income tax computed at the U. S. Federal statutory
rate to income tax expense for the period ended December 31, 2005 and 2004:
Year Ended December 31
------------------------------------------
2005 2004
--------------------- --------------------
Tax expense (benefit) at federal rate (35%) $ (398,789) 971,052
Nondeductible expenses 2,916,861 2,806,786
Alternative Minimum Tax - 40,000
Change in valuation allowance (2,518,072) (3,817,838)
--------------------- --------------------
Net income tax (benefit) allowance $ - $ -
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.
7. SHAREHOLDERS' EQUITY
The Company is authorized to issue up to 2,500,000 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, 2005 there are no
Preferred Stock outstanding.
VOTING RIGHTS. The holders of Series A and B Preferred Stock had no voting
rights.
REDEMPTION RIGHTS. The Company, at its option, could have redeemed, in whole or
in part, the shares of Series A and B Preferred Stock outstanding, at any time,
upon notice given, at a redemption price of $11 and $10 per share, respectively.
If the Company received proceeds from a single sale of its equity securities of
at least $500,000, the holders of Series A and B Preferred Stock could have
required the Company to redeem all, but not less than all, the Series B
Preferred Stock at a redemption price equal to $10 per share.
On November 28, 2001, we entered into a Note Purchase Agreement, as amended on
November 30, December 14 and December 28, 2001 and February 13 and March 4,
2002(collectively, the "Agreement"), with SBI Investments (USA) Inc. ("SBI").
Under the terms of the Agreement, SBI provided a loan to us in the amount of
$975,000 in the form of a 48-month non-interest bearing, convertible note (the
SBI Note"). The SBI Note is convertible at SBI's option into as many as
3,421,052 shares of our common stock at $0.285 per share.
F-41
In accordance with EITF Issue No. 00-27, (APPLICATION OF ISSUE NO.
98-5),ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES
OF CONTINGENTLY ADJUSTABLE CONVERSION RATIOS, IN CERTAIN CONVERTIBLE
INSTRUMENTS, and APB # 21 (INTEREST ON RECEIVABLES AND PAYABLES) the Company
recorded an imputed interest factor related to the Note Purchase Agreement of
$563,000. The Company fully expensed the beneficial conversion factor due to the
fact that the SBI Note was immediately convertible. The net one time charge to
the financial statements was $412,000.
The imputed interest was accreted ratably over the term of the loan as
additional interest expense. Amortization of the imputed interest began in
January 2002.
During year 2002, the SBI Note was reduced by $225,000 as a portion of the SBI
Note was converted into 789,474 shares of the Company's common stock.
As of December 31, 2003 the SBI note payable balance was $750,000 and was netted
against the $146,787 corresponding asset imputed interest.
During February and March of 2004, $721,500 of the SBI Note was converted into
3,344,298 shares of the Company's common stock. Of this amount, $545,000 was
converted into 2,725,000 shares of the Company's common stock at a discounted
rate of $0.20 per share under a special arrangement offered by the Company to
encourage further equity participation by SBI, which resulted in a $231,625
conversion premium expense during the first quarter of 2004. The remainder,
$176,500, was converted into 619,298 shares at the stated conversion rate of
$0.285 per share. In April of 2004, the remaining balance was converted into
100,000 shares of common stock of the Company at the original stated conversion
rate of $.285 per share. The issuance of the common stock was exempt from
registration pursuant to Section 4 (2) of the Securities Act of 1933, as
amended, because the common stock was acquired in a privately negotiated
transaction by sophisticated investors. Accordingly, the balance due SBI at
December 31, 2003 was $750,000 and 2004 and 2005 was $0.
During the first quarter of 2005, the Company granted stock options to purchase
an aggregate of 1,277,500 shares of the Company `s common stock to certain
employees of the Company. The exercise prices of these options range from $.25
to $.35. During the second quarter of 2005, the Company granted stock options to
purchase an aggregate of 1,177,500 shares of the Company's common stock to
certain employees of the Company. The exercise prices of these options range
from $.17 to $.35. During the third quarter of 2005, the Company granted stock
options to purchase an aggregate of 1,616,250 shares of the Company's common
stock to certain employees of the Company. The exercise prices of these options
range from $0.17 to $0.26. During the fourth quarter of 2005, the Company
granted stock options to purchase an aggregate of 5,870,000 shares of the
Company `s common stock to certain employees of the Company. The exercise prices
of these options range from $0.155 to $0.21. The option grants were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended,
because the individuals receiving the options are sophisticated investors who
have knowledge of all material information about the Company.
On January 31, 2005, The Company issued 300,000 common shares in connection with
the exercise of options. The Company received $60,000. The exercise price of
these options was $0.20.
On March 14, 2005, The Company issued 255,000 common shares in connection with
the exercise of options. The Company received $53,550. The exercise price of
these options was $0.21.
F-42
A summary of the stock option activity for the years ended Dec. 31, 2005 and
2004 is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Shares Per Option
---------- ------------- ---------------
Outstanding Options at December 31, 2003
Granted 0.29 10,346,211 0.15 - 6.00
Forfeited 0.21 4,137,502 0.19 - 0.36
0.23 (3,945,500)
-------------
Outstanding Options at December 31, 2004 0.28 10,538,213 0.15 - 0.35
Granted 0.19 9,941,250 0.15 - 6.00
Forfeited 0.30 (5,309,624) 0.16 - 0.35
Exercised 0.21 (555,000) 0.15 - 2.25
-------------
0.20 - 0.21
Outstanding options at December 31, 2005 0.23 14,614,839 0.15 - 2.25
=============
Stock Options Outstanding
Weighted Avg Weighted
Range of Remaining Average
Exercise Number of Contractual Exercise
Prices Shares Life in Years Price
----------------- ------------ ---------------- -----------
$ 0.15 - 2.25 14,614,839 4.18 $ 0.23
The following table summarizes information concerning stock options outstanding
at December 31, 2005
Weighted
Average
Exercise Number
Price Outstanding
-------------- -------------
$ 0.150 260,000
0.155 4,500,000
0.170 885,000
0.180 180,000
0.190 1,662,502
0.200 485,000
0.205 400,000
0.210 2,064,497
0.220 60,000
0.230 902,500
0.245 750,000
0.250 43,750
0.270 5,000
0.280 597,500
0.320 310,000
0.330 2,500
0.350 484,215
0.363 120,000
0.500 100,000
0.550 69,000
0.625 642,500
0.700 39,000
1.000 18,000
2.250 33,875
-------------
14,614,839
=============
F-43
A summary of the warrant activity for the years ended December 31, 2005 and 2004
is as follows:
Weighted
Average
Exercise Number of Exercie Price
Price Shares Per Option
Outstanding Warrants at December 31, 2003 1.70 5,398,499 0.35 - 7.20
Granted 0.16 2,927,923 0.15 - 0.16
Forfeited 0.44 (230,000) 0.35 - 2.50
------------
Outstanding Warrants at December 31, 2004 1.18 8,096,422 0.15 - 7.20
Granted - - 0.00 - 0.00
Forfeited 2.21 (436,833) 0.35 - 6.00
============
Outstanding Warrants at December 31, 2005 1.12 7,659,589 0.15 - 7.20
The following table summarizes information concerning warrants outstanding at
December 31, 2005.
Weighted Number
Average
Exercise Price Outstanding
------------------ --------------
0.15 750,000
0.16 2,427,923
0.20 1,000,000
0.35 1,673,500
0.63 400,000
2.25 605,000
6.00 103,166
7.20 700,000
--------------
7,659,589
==============
There were no warrants granted for the year ended December 31, 2005. The
weighted average grant-date fair value of warrants granted equaled $0.16 for the
year ended December 31, 2004. The weighted average grant-date fair value of
options granted during the year equaled $0.19 and $0.21 for the years ended
December 31, 2005 and 2004, respectively. For purposes of pro forma disclosures,
the estimated fair value of the options and warrants is amortized to expense
over their respective vesting periods.
Options granted to employees are exercisable according to the terms of each
agreement, ranging from one month to four years. At December 31, 2005 and 2004,
3,926,421 and 5,779,766 options outstanding were exercisable with weighted
average exercise prices of $.33 and $.35, respectively. At December 31, 2005 and
2004, 7,639,589 and 7,920,172 warrants outstanding were exercisable with
weighted average exercises prices of $1.11 and $1.15, respectively.
Pro forma information regarding net loss is required by SFAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options under the fair value method. The fair value for
options and warrants granted was estimated at the date of grant using the Black
Scholes option pricing model with the following weighted-average assumptions:
for 2005 risk free interest rates of 4.25%; expected dividends of zero;
volatility factor of the expected market price of the Company's common stock of
0.723 for options and warrants and an expected life of the options and warrants
of 4-5 years; for 2004 risk free interest rates of 3.31%; expected dividends of
zero; volatility factor of the expected market price of the Company's common
stock of 1.12 for options and warrants and an expected life of the options and
warrants of 4-5 years. The Company's pro forma net loss for the year ended
December 31, 2005 was $1,543,569 and the pro forma net income for the year ended
December 31, 2004 was $2,287,230. The Company's pro forma basic and diluted net
loss per share for the year ended December 31, 2005 was $(0.04) and the
Company's pro forma basic and diluted income per share for December 31, 2004
were $0.07 and $0.06, respectively. The impact of the Company's pro forma net
loss and loss per share of the SFAS 123 pro forma requirements are not likely to
be representative of future pro forma results.
F-44
The Company recorded deferred compensation of $19,412 and $5,294 during the
years ended December 31, 2005 and 2004, respectively, in connection with the
grants of stock options, primarily to outside consultants, with exercise prices
lower than the deemed fair value per share of the Company's common stock on the
date of the grants. The Company had an unamortized balance of $ 12,420 at
December 31, 2002 fully amortized during 2003. In addition, during 2003 the
Company granted 250,000 warrants, valued at $30,000, to its landlord in relation
to the renegotiation of the lease on its headquarters. This balance was to be
amortized over the term of the lease. At December 31, 2005 the remaining
unamortized balance was $0.
8. DEBT
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
$3,000,000 for the purpose of supporting the expansion of our brokerage business
or investments in infrastructure to expand our operations and our 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 $1,500,000 under the credit facility on January 28, 2002
leaving an additional $1,500,000 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. The credit facility stayed with
UBS subsequent to the acquisition giving rise to potential breaches under such
credit facility as well as precluding the Company from drawing an additional
$1,500,000 thereunder. During March 2004, NFS agreed to directly pay down the
UBS credit facility in the amount of $1,500,000 pursuant to a guaranty Fidelity
Investments made to UBS as part of their original acquisition of the CSC
clearing division. As a result, the Company was relieved from $1,500,000 in debt
but no longer had the ability to obtain an additional $1,500,000 under the
credit facility or assert any claims against UBS or NFS regarding this
transaction and credit facility. During March 2004, the Company entered into a
clearing agreement with NFS. The new clearing agreement required NFS to pay to
vFinance, over a five year period beginning January 2004, a monthly incentive
bonus not to exceed $25,000 per month up to $1,500,000, based on a formula that
the Company believes is very achievable. Accordingly, NFS has been paying
$25,000 per month related to this incentive calculation and such amount,
$300,000 through December 31, 2005, has been included in the attached statements
of operations as "other brokerage related income". The new clearing agreement
also required NFS to provide the Company with $200,000 to assist the company
with transition costs related to the conversion from CSC to NFS. This amount was
paid to vFinance in March 2004 and was included in the first quarter's
statements of operations as a reduction to clearing and transaction costs.
Inconsideration for these incentives, NFS required a termination fee of
$1,700,000 should vFinance discontinue using NFS' services. This fee is reduced,
pro rata, annually over the five year term of the agreement. The Company began
clearing through NFS during May 2004.
9. COMMITMENTS AND CONTINGENCIES
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 AMOUNT
2006 966,808
2007 934,118
2008 666,674
2009 87,194
2010 -
-------------
TOTAL $2,654,794
=============
Total rent expense under operating leases, including space rental, totaled
$726,290 and $690,415 for the years ended December 31, 2005 and 2004.
F-45
Capital lease obligations at December 31, 2005 consisted of the following:
2005
------------
Obligation under capital lease $412,842
Less current maturities (187,775)
------------
$225,067
============
Future minimum lease payments for equipment under capital leases at December 31,
2005 are as follows:
2006 $215,996
2007 196,589
2008 41,986
2009 -
-----------
Total minimum lease payments 454,571
Less amount representing interest (41,729)
-----------
Present value of net minimum lease 412,842
Less current portion (187,775)
-----------
$225,067
===========
From time to time the Company, and/or one of its 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, 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 August 20, 2001, we entered into a Securities Exchange Agreement by means of
which we acquired the membership interests in two related companies, Critical
Investments, LLC, a Delaware limited liability company ("Critical
Investments"),and Critical Advisors, L. L. C., a Virginia limited liability
company ("Critical Advisors"). Critical Investments manages Critical
Infrastructure Fund, L. P. ("Critical Infrastructure LP"), a Delaware limited
partnership. Critical Advisors manages Critical Infrastructure Fund, Ltd.
("Critical Infrastructure Ltd."), an international business company organized
and existing under the laws of the British Virgin Islands and receives (i) a
management fee equal to 1% of the net asset value of Critical Infrastructure
Ltd. and (ii) a performance fee equal to 20% of the increase in net asset value
of Critical Infrastructure Ltd. Critical Infrastructure LP and Critical
Infrastructure Ltd. are the sole general partners in, owning 96% and 4%,
respectively, and conduct their investment and trading activity through Critical
Infrastructure Fund (BVI), LP, a limited partnership organized and existing
under the laws of the British Virgin Islands, which holds a portfolio of
securities. A determination has been made to liquidate the funds.
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 alleges "Breach of Contract"
and "Unjust Enrichment" and seeks damages of $250,000 plus interest and court
costs. It is alleged that Colonial Direct defaulted on a Promissory Note in the
principal amount of $250,000. The Company believes their claim is without merit
and is vigorously defending the action.
F-46
On October 17, 2003, we were advised by the staff of the SEC that it intended to
recommend that the SEC institute enforcement proceedings against vFinance
Investments and one of its former employees. The SEC claims that vFinance
Investments and its former employee failed reasonably to supervise the alleged
illegal trading activities over a period of approximately two months of one of
our broker/dealer's former securities traders with respect to one publicly
traded security that resulted in vFinance Investments earning $11,000 in
commissions related to that one security over the two month period. As of
December 31, 2005, the Company has included an accrual of $50,000 for estimated
expenses. On March 17,2005 we were advised by a member of the staff of the SEC
that the SEC had accepted our offer to settle the matter. Pursuant to the terms
of the settlement, vFinance Investments paid amounts aggregating to $50,000 by
March 2006.
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 is currently scheduled for August 30
through September 1, 2006. 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.
We are engaged in a number of other legal proceedings incidental to the conduct
of our business. These claims aggregate a range of $28,000 to $260,000.
10. 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, 2005 and 2004, respectively.
11. SUBSEQUENT EVENTS
On January 10, 2006, vFinance, Inc.'s (the "Company") wholly-owned subsidiary,
vFinance Investments, Inc. ("vFinance Investments"), entered into an agreement
to acquire certain assets of Sterling Financial Investment Group, Inc. ("SFIG")
and Sterling Financial Group of Companies, Inc. ("SFGC" and together with SFIG,
"Sterling Financial"). These transactions are subject to the approval of the
National Association of Securities Dealers, Inc.
The assets to be acquired from Sterling Financial include Sterling Financial's
businesses as a going concern, certain intellectual property, client accounts
and revenues, computer equipment, and a certain real property lease. On the
closing date, vFinance Investments will not assume any liabilities of Sterling
Financial except an office lease and select office services contracts directly
relating to the operation of the business that arise and are to be paid,
performed or discharged from and after the closing date. One of the principals
of Sterling Financial will enter into an employment agreement with vFinance
Investments that provides for an annual base salary of $262,000 and certain
performance bonuses and options to be granted in the sole discretion of vFinance
Investments.
F-47
In accordance with the terms of the asset purchase agreement, vFinance
Investments will deliver to SFGC 17,500,000 shares of the Company's common stock
and approximately $26,800, for certain prepaid expenses. Subject to the
financial performance of the business of Sterling Financial acquired by vFinance
Investments over the period specified in the asset purchase agreement, up to
4,500,000 of such shares may be cancelled. The Company has granted SFGC certain
registration rights with respect to the shares. The Company and vFinance
Investments will enter into a standstill agreement with each of SFGC, SFIG,
Charles Garcia and Alexis Korybut but to provide restrictions on certain actions
for a defined time period. The Company and vFinance Investments also will enter
into a voting and lockup agreement with each of SFIG, SFGC, Charles Garcia,
Leonard Sokolow and Timothy Mahoney to provide certain rights and obligations
with respect to the Company's common stock.
vFinance Investments and Sterling Financial also entered into a management
agreement, pursuant to which certain designated principals of vFinance
Investments will provide risk management of, and operational and back office
support for, the branch offices of SFIG from January 10, 2005 until the closing
of the acquisition transactions. In addition, such principals will assist SFIG
with the supervision of SFIG's registered representatives in accordance with
applicable rules and regulations.
F-48
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 $ 293
Accounting Fees and Expenses 5,000
Legal Fees and Expenses 30,000
Miscellaneous 5,000
-----------------
Total $40,293
=================
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 November 2, 2004, vFinance Investments, Inc. ("vFinance Investments")
completed its acquisition of certain assets of Global Partners Securities, Inc.
and 100% of the issued and outstanding equity securities of EquityStation, Inc.,
all of which were owned by Level2.com, Inc., a subsidiary of Global Partners
Securities, Inc. As consideration for the acquired assets, the Company issued
3,288,253 shares of the Company's common stock and a warrant to purchase
1,303,393 shares of the Company's common stock for $0.11 per share to Global
Partners Securities, Inc. and 3,288,252 shares of the Company's common stock and
warrants to purchase 1,303,392 shares of the Company's common stock for $0.11
per share to Level2.com, Inc. Such securities were issued pursuant to an
exemption provided by Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder.
On May 11, 2006, vFinance Investments completed its acquisition of certain
assets of Sterling Financial Investment Group, Inc. and Sterling Financial Group
of Companies, Inc. As consideration for the acquired assets, the Company issued
13 million shares of the Company's common stock to Sterling Financial Group of
Companies, Inc. Such securities were issued pursuant to an exemption provided by
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder.
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
acquistion 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.
II-1
ITEM 16. Exhibits
Number Exhibit Description
of Exhibit
------------- ------------------------------------------------------------------------------------------------
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 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 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 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 the Company's Current Report on Form 8-K filed
with the SEC on January 17, 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 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 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 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.
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 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 the
Company's Current Report on Form 8-K filed with the SEC on January 17, 2001).
3.8 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).
3.9 Unanimous Written Consent of the Company's Board of Directors dated January 24, 1994,
amending the Bylaws (incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the SEC on March 30, 2000).
II-2
3.10 Unanimous Written Consent of the Company's Board of Directors, effective as of January 24,
1994, amending the Bylaws (incorporated by reference to the Company's Annual Report on Form
10-KSB filed with the SEC on March 30, 2000).
4.1 Registration Rights Agreement, dated January 10, 2006, by and among vFinance, Inc., and
Sterling Financial Group of Companies, Inc.
4.2 Amendment to Registration Rights Agreement, dated May 11, 2006, by and among vFinance, Inc.,
and Sterling Financial Group of Companies, Inc.
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 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 the Company's Annual Report on Form 10-KSB
filed with the SEC on March 30, 2000).
10.3 Stock Purchase Agreement between the Company and River Rapids Ltd., dated September 27, 1999
(incorporated by reference to the Company's Annual Report on Form 10-KSB filed with the SEC
on March 30, 2000).
10.4 Amendment to Stock Purchase Agreement between the Company and River Rapids Ltd. dated
December 22, 1999 (incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the SEC on March 30, 2000).
10.5 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, worldVentures Fund I, LLC and RBB Bank Aktiengesellschaft, dated March 31, 2000
(incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on April
13, 2000).
10.6 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,
worldVentures Fund I, LLC, RBB Bank Aktiengesellschaft and Thomas Kernaghan & Co., Ltd., dated
March 31,2000(incorporated by reference to the Company's Current Report on Form 8-K filed with the
SEC on April 13, 2000).
10.7 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), worldVentures 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 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, worldVentures
Fund I, LLC, RBB Bank Aktiengesellschaft and Epstein Becker & Green, P.C., dated March 31, 2000
(incorporated by reference to Amendment No. 1 to the Company's Registration (Statement on Form SB-2
filed with the SEC on July 14, 2000).
II-3
10.9 Amended and Restated Employment Letter Agreement dated December 18, 2000, between the Company
and David Spector (incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the SEC on March 20, 2001).
10.10 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 the Company's Quarterly Report on Form 10-QSB filed with the SEC on August 14,
2001).
10.11 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 the
Company's Quarterly Report on Form 10-QSB filed with the SEC on August 14, 2001).
10.12 Stock Purchase Warrant, dated August 15, 2001, issued to Kathleen Wallman (incorporated by
reference to the Company's Quarterly Report on Form 10-QSB filed with the SEC on August 14,
2001).
10.13 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 the Company's Annual Report on Form
10-KSB filed with the SEC April 16, 2002).
10.14 Letter Agreement dated November 30, 2001 amending Note Purchase Agreement (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed with the SEC April 16, 2002).
10.15 Letter Agreement dated December 14, 2001 amending Note Purchase Agreement (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed with the SEC April 16, 2002).
10.16 Letter Agreement dated December 28, 2001 amending Note Purchase Agreement (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed with the SEC April 16, 2002).
10.17 Letter Agreement dated February 13, 2002 amending Note Purchase Agreement (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed with the SEC April 16, 2002).
10.18 Letter Agreement dated March 4, 2002 amending Note Purchase Agreement (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed with the SEC April 16, 2002).
10.19 Credit Facility by and between the Company and UBS Americas, Inc. dated as of January 25,
2002 (incorporated by reference to the Company's Annual Report on Form 10-KSB filed with the
SEC April 16, 2002).
10.20 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 the Company's Annual
Report on Form 10-KSB filed with the SEC April 16, 2002).
10.21 Consulting Agreement effective as of August 20, 2001 by and between vFinance.com, Inc. and
Insight Capital Consultants Corporation (incorporated by reference to the Company's Annual
Report on Form 10- KSB filed with the SEC April 16, 2002).
II-4
10.22 Amendment to Credit Agreement dated April 12, 2002 by and between the Company and UBS
Americas Inc. (incorporated by reference to the Company's Annual Report on Form 10-KSB filed
with the SEC April 16, 2002).
10.23 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 the Company's
Quarterly Report on Form 10-QSB filed with the SEC August 14, 2002).
10.24 Amendment to Select Asset Purchase Agreement dated June 17, 2002 (the "Amendment")
(incorporated by reference to the Company's Quarterly Report on Form 10-QSB filed with the
SEC August 14, 2002).
10.25 Escrow Agreement executed in conjunction with the Amendment (incorporated by reference to the
Company's Quarterly Report on Form 10-QSB filed with the SEC August 14, 2002).
10.26 Termination Agreement (incorporated by reference to the Company's Quarterly Report on Form
10-QSB/A filed with the SEC November 14, 2002).
10.27 Branch Agreement between the Company and JSM Holding Corp (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed with the SEC March 31, 2003).
10.28 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 the
Company's Annual Report on Form 10-KSB filed with the SEC March 30, 2004).
10.29 Stock warrant agreement between the Company and Zenith Professional Center, LTD. (incorporated
by reference to the Company's Annual Report on Form 10-KSB filed with the SEC March 30, 2004).
10.30 Asset Purchase Agreement, dated November 2, 2004, by and between vFinance Investments
Holdings, Inc. and Global Partners Securities, Inc. (incorporated by reference to the
Company's Current Report on Form 8-K filed with the SEC November 8, 2004).
10.31 Stock Purchase Agreement, dated November 2, 2004, by and between vFinance Investments
Holdings, Inc. and Level2.com, Inc. (incorporated by reference to the Company's Current Report
on Form 8-K filed with the SEC November 8, 2004).
10.32 Registration Rights Agreement, dated November 2, 2004, by and among vFinance, Inc., Global
Partners Securities, Inc. and Level2.com, Inc. (incorporated by reference to the Company's
Current Report on Form 8-K filed with the SEC November 8, 2004).
10.33 Form of Common Stock Purchase Warrant (incorporated by reference to the Company's Current
Report on Form 8-K filed with the SEC November 8, 2004).
10.34 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 the Company's Current Report on Form 8-K filed with the SEC
November 8, 2004).
10.35 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 the Company's Current
Report on Form 8-K filed with the SEC November 8, 2004).
10.38 Amended and Restated Letter Agreement dated January 14, 2005 between the Company and Sheila C.
Reinken (incorporated by reference to the Company's Current Report on Form 8-K filed with the
SEC January 21, 2005).
II-5
10.39 Asset Purchase Agreement, dated January 10, 2006, by and between vFinance, Inc., vFinance
Investments, Inc., Sterling Financial Investment Group, Inc., and Sterling Financial Group of
Companies, Inc.
10.40 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.
10.41 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.
10.42 Management Agreement, dated January 10, 2006, by and among vFinance Investments, Inc.,
Sterling Financial Investment Group, Inc. and Sterling Financial Group of Companies, Inc.
10.43 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.
10.44 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.
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.
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.
10.47 Stock Escrow Agreement dated Mat 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.
10.48 Employment Agreement Amendment No. 1 dated May 12, 2006 by and among vFinance, Inc. and
Leonard Sokolow.
10.49 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).
10.50 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 the Exhibit filed as part of vFinance
Inc.'s Form 8-K dated November 13, 2006, Commission File No. 1-11454).
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 the Exhibit filed as part of vFinance, Inc.'s Form 8-K dated November 13, 2006,
Commission File No. 1-11454).
10.52 Warrant to Purchase Common Stock dated November 7, 2006 issued to Global Partners Securities, Inc.
10.53 Warrant to Purchase Common Stock dated November 7, 2006 issued to Level2.com, Inc.
21.1 List of Subsidiaries
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).
* To be filed by amendment
II-6
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.
II-7
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 13 day of November 2006.
VFINANCE, INC.
By: /s/ Leonard J. Sokolow
---------------------------------------------
Leonard J. Sokolow
Chief Executive Officer and President
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 Title Date
/s/ Leonard J. Sokolow Director, Chief Executive
------------------------ Officer and President November 13, 2006
/s/ Timothy E. Mahoney Director and Chief Operating
------------------------ Officer November 13, 2006
II-9
INDEX TO EXHIBITS
Exhibit Number Exhibit
5.1 Opinion of Edwards Angell Palmer & Dodge LLP. *
23.1 Consent of Sherb & Co., LLP, independent registered public
accounting firm.
* To be filed by amendment