UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _____________ to _________________
Commission File Number 1-11454-03
vFinance, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 58-1974423
------------------------------- ------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3010 North Military Trail, Suite 300, Boca Raton, FL 33431
(Address of principal executive offices)
(561) 981-1000
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of August 14, 2006: 53,126,133 shares of Common Stock $0.01 par value
1
vFinance, Inc.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2006
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets
As of June 30, 2006 (Unaudited)
and December 31, 2005 4
Consolidated Statements of Operations
For the Three and Six months ended
June 30, 2006 and 2005 (Unaudited) 5
Consolidated Statements of Cash Flows
For the Six months ended June 30, 2006
and 2005 (Unaudited) 6
Notes to (Unaudited) Consolidated
Financial Statements 7
Item 2 - Management's Discussion and
Analysis or Plan of Operation 18
Item 3 - Quantitative and Qualitative
Disclosures About Market Risk 24
Item 4 - Controls and Procedures 24
PART II - OTHER INFORMATION
Item 6 - Exhibits 25
Signatures 26
2
FORWARD-LOOKING STATEMENTS
This Form 10-Q for vFinance, Inc. (the "Company") includes statements that may
constitute "forward-looking" statements, usually containing the words "believe",
"estimate", "intend", "expect", or similar expressions. These statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements inherently involve risks and
uncertainties that could cause actual results to differ materially from the
forward-looking statements. Factors that would cause or contribute to such
differences include, but are not limited to, the inability of our broker-dealer
operations to operate profitably in the face of intense competition from larger
full service and discount brokers, a general decrease in merger and acquisition
activities and our potential inability to receive success fees as a result of
transactions not being completed, our potential inability to implement our
growth strategy through acquisitions or joint ventures, our potential inability
to secure additional debt or equity financing to support our growth strategies
and other risks detailed in the Company's periodic report filings with the
Securities and Exchange Commission.
By making these forward-looking statements, the Company undertakes no obligation
to update these statements for revisions or changes after the date of this Form
10-Q.
3
vFinance, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
Assets: June 30, 2006 December 31, 2005
(Unaudited)
------------------- ------------------------
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
==============================================
See accompanying notes to unaudited consolidated financial statements.
4
vFinance, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30, 2006 Six months ended June 30, 2006
-------------------------------- ---------------------------------
2006 2005 2006 2005
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------- --------------- ---------------- ----------------
Revenues:
Commissions - agency $4,769,502 $3,590,197 $ 9,524,835 $7,401,588
Trading profits 2,502,998 1,055,096 4,004,032 2,423,861
Success fees 1,331,579 661,460 2,850,548 1,005,401
Other brokerage related income 753,601 759,373 1,546,037 1,397,770
Consulting fees 151,625 173,850 303,026 387,144
Other 146,203 80,698 352,836 237,985
---------------- --------------- ---------------- ----------------
Total revenues 9,655,508 6,320,674 18,581,314 12,853,749
---------------- --------------- ---------------- ----------------
Operating expenses:
Compensation, commissions and benefits 7,592,248 4,717,283 14,208,788 9,946,936
Clearing and transactions costs 1,060,288 787,604 2,007,589 1,523,343
General and administrative costs 717,665 633,955 1,344,319 1,109,647
Occupancy and equipment costs 339,060 175,878 554,957 360,366
Depreciation and amortization 248,411 74,092 407,055 134,799
Stock based compensation 122,960 1,324 236,029 2,647
---------------- --------------- ---------------- ----------------
Total Operating expenses: 10,080,632 6,390,136 18,758,737 13,077,738
---------------- --------------- ---------------- ----------------
Loss from operations (425,124) (69,462) (177,423) (223,989)
Income tax benefit (provision) - - - -
---------------- --------------- ---------------- ----------------
Net loss $ (425,124) $ (69,462) $(177,423) $ (223,989)
================ =============== ================ ================
Net loss per share: basic and diluted $ (0.01) $ (0.00) $ (0.00) $ (0.01)
================ =============== ================ ================
Weighted average shares outstanding:
basic and diluted 47,268,990 40,126,133 43,717,293 39,815,966
See accompanying notes to unaudited consolidated financial statements.
5
vFinance, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
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 affilliate (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.
6
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
7
vFinance, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2006
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Use of estimates
(Continued)
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.
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 amortised over the life of the lease. The cost
of repairs and maintenance is expensed as incurred; major replacements and
improvements are capitalized. When assets are retired or disposed of, the cost
and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition.
Intangible assets
Intangible assets consist of customer relationships acquired in connection with
business combinations. The customer relationships are amortized using the
straight-line method over an expected useful life of five years in accordance
with SFAS No.142.
Impairment of long-lived assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company periodically reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. The Company
recognizes an impairment loss when the sum of expected undiscounted future cash
flows is less than the carrying amount of the asset. The amount of impairment is
measured as the difference between the asset's estimated fair value and its book
value.
8
vFinance, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2006
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Revenue recognition
The Company follows the guidance of the Commission's Staff Accounting Bulletin
104 for revenue recognition. In general, the Company records revenue when
persuasive evidence of an arrangement exists, services have been rendered or
product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectibility is reasonably assured.
The Company earns revenue from brokerage and trading which are recognized at the
time of execution. The Company also earns revenue from investment banking and
consulting. Monthly consulting fees for investment banking are recognized as
earned. Investment banking success fees are revenues that are paid only upon
successful completion of a capital raise or similar transaction. Success fees
are generally based on a percentage of the total value of the customers benefit
from the transaction. These fees are not accrued prior to completing the
transaction and are recorded when fees are earned as a result of completing a
successful transaction.
The Company does not require collateral from its customers. Revenues are not
concentrated in any particular region of the country or with any individual or
group.
The Company periodically receives equity instruments which include stock
purchase warrants and common and 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.
9
vFinance, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2006
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
10
vFinance, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2006
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
11
vFinance, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2006
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, December 31,
Description (Years) 2006 2005
(Unaudited)
Furniture & fixtures 5 $ 88,025 $ 85,132
Equipment 5 664,365 559,504
Capital leases - computer equipment 3 605,475 572,535
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:
Useful Life June 30, December 31,
Description (Years) 2006 2005
(Unaudited)
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.
12
vFinance, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2006
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.
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
================= ================== =================
13
vFinance, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2006
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.
14
vFinance, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2006
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.
Three Months Ended Six Months Ended
June 30, June 30,
2005 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
15
vFinance, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2006
NOTE 6 - STOCKHOLDERS' EQUITY
(Continued)
A summary of the stock option activity for the six months ended June 30, 2006 is
as follows:
Weighted Average Number of Exercise Price
Exercise Price Shares Per Option
--------------------- --------------- ----------------------
Outstanding options at December 31, 2005 $ 0.23 14,614,839 $ 0.15 - $ 2.25
--------------------- --------------- ---------- ----------
Granted $ 0.20 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 Options
Price 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.
16
vFinance, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2006
NOTE 6 - STOCKHOLDERS' EQUITY
(Continued)
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.
17
vFinance, Inc. and Subsidiaries
June 30, 2006
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table and discussion summarizes the changes in the major revenue
and expense categories for the past two years.
Three months ended June 30, 2006 Six months ended June 30, 2006
-------------------------------- --------------------------------
2006 2005 % 2006 2005 %
Unaudited Unaudited Chg Unaudited Unaudited Chg
---------------------------------------------------------------------------------
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 benefits 7,592,248 4,717,283 61% 14,208,788 9,946,936 43%
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 339,060 167,628 92% 554,829 360,366 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%
=================================================================================
18
vFinance, Inc. and Subsidiaries
June 30, 2006
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations Continued
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2005
STATEMENTS OF OPERATIONS
Revenues
Net revenues increased 3,334,834 or 53% to $9,655,508 for the three months ended
June 30, 2006 compared to $6,320,674 for the three months ended June 30, 2005.
Approximately 30% 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 30%
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.
Operating Expenses
Compensation, commissions and benefits increased 61% to $7,592,248 for the three
months ended June 30, 2006 compared to $4,717,283 for the three months ended
June 30, 2005, primarily as a result of the Sterling acquisition and a 53%
increase in net revenues.
Clearing and transaction costs increased 35% to $1,060,288 for the three months
ended June 30, 2006 compared to $787,604 for the three months ended June 30,
2005, primarily as a result of an increase in transaction volume partially due
to the Sterling acquisition as well as higher average transaction costs
associated with our trading activities.
General and administrative expenses increased $83,710 or 13% to $717,665 for the
three months ended June 30, 2006 compared to $633,995 for the three months ended
June 30, 2005. This increase is primarily due to accruals for legal matters.
Occupancy and equipment costs increased $163,182 to $339,060 for the three
months ended June 30, 2006 compared to $175,878 for the three months ended June
30, 2005. This increase relates primarily to the occupancy and equipment costs
associated with the Sterling acquisition.
Depreciation and amortization increased $174,319 to $248,411 for the three
months ended June 30, 2006 compared to $74,092 for the three months ended June
30, 2005. The increase was primarily attributable to the Company's amortization
of customer relationships from the Sterling acquisition and the reclassification
of goodwill to customer relationships in the second half of 2005.
Stock based compensation was $122,960 for the three months ended June 30, 2006
compared to $1,324 for the three 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.
19
vFinance, Inc. and Subsidiaries
June 30, 2006
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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.
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.
20
vFinance, Inc. and Subsidiaries
June 30, 2006
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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 $46,568 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.
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CRITICAL ACCOUNTING ESTIMATES
This discussion and analysis of financial condition and results of operations is
based on the Company's consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires our management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, and expenses, as well as related disclosures of contingent assets and
liabilities. The Company evaluates our estimates on an ongoing basis and the
Company bases its estimates on historical experience and various other
assumptions the Company deem reasonable to the situation. These estimates and
assumptions form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Changes
in our estimates could materially impact our results of operations and financial
condition in any particular period.
Note 2 to our audited consolidated financial statements dated December 31, 2005
includes a summary of the significant accounting policies and methods used in
the preparation of our consolidated financial statements. Based on the high
degree of judgment or complexity in their application, the Company considers our
critical accounting policies and estimates to be:
REVENUE RECOGNITION. The Company periodically receives equity instruments which
include stock purchase warrants and common and preferred stock from companies as
part of our compensation for investment-banking services that are classified as
investments in trading securities on the balance sheet if still held at the
financial reporting date. These instruments are stated at fair value in
accordance with SFAS #115 "Accounting for certain investments in debt and equity
securities" and EITF 00-8 "Accounting by a grantee for an equity instrument to
be received in conjunction with providing goods or services." Primarily all of
the equity instruments are received from small public companies. The stock and
stock purchase warrants received are typically restricted as to resale, though
the Company generally receives a registration right within one year. Company
policy is to sell these securities in anticipation of short-term market
movements. The Company recognizes revenue for these stock purchase warrants when
received based on the Black Scholes valuation model. The revenue recognized
related to other equity instruments is determined based on available market
information, discounted by a factor reflective of the expected holding period
for those particular equity instruments. On a monthly basis, the Company
recognizes unrealized gains or losses in the statement of operations based on
the changes in value in the stock purchase warrants and other equity
instruments. Realized gains or losses are recognized in the statement of
operations when the related stock purchase warrant or other equity instrument is
sold.
Occasionally, the Company receives equity instruments in private companies with
no readily available market value. Equity interests and warrants for which there
is not a public market are valued based on factors such as significant equity
financing by sophisticated, unrelated new investors, history of positive cash
flow from operations, the market value of comparable publicly traded companies
(discounted for liquidity) and other pertinent factors. Management also
considers recent offers to purchase a portfolio company's securities and the
filings of registration statements in connection with a portfolio company's
initial public offering when valuing warrants.
22
vFinance, Inc. and Subsidiaries
June 30, 2006
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
CUSTOMER CLAIMS. In the normal course of business, our operating subsidiaries
have been and continue to be the subject of numerous civil actions and
arbitrations arising out of customer complaints relating to our activities as a
broker-dealer, as an employer and as a result of other business activities. In
general, the cases involve various allegations that our employees had mishandled
customer accounts. Based on our historical experience and consultation with
counsel, the Company typically reserves an amount the Company believes will be
sufficient to cover any damages assessed against us. However, the Company has in
the past been assessed damages that exceeded our reserves. If the Company
misjudged the amount of damages that may be assessed against us from pending or
threatened claims or if the Company is unable to adequately estimate the amount
of damages that will be assessed against us from claims that arise in the future
and reserve accordingly, our operating income would be reduced.
FAIR VALUE. "Investments in trading securities" and "Securities sold, not yet
purchased" on our consolidated balance sheet are carried at fair value or
amounts that approximate fair value, with related unrealized gains and losses
recognized in our results of operations. The estimates of fair value are
fundamental to our financial condition and results of operations and, in certain
circumstances, require complex judgments. vFinance Investments relies upon its
clearing firm to provide us with these fair values, because the clearing firms
use market data services that provide fair values of securities based on current
market prices. In the case of restricted securities, the Company further adjusts
the fair values of securities received to reflect the restrictions.
23
vFinance, Inc. and Subsidiaries
June 30, 2006
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk, and does periodically hedge against
that risk. The Company does not hold or issue any derivative financial
instruments for trading or other speculative purposes. The Company is exposed to
market risk associated with changes in the fair market value of the marketable
securities that it holds. The Company's revenue and profitability may be
adversely affected by declines in the volume of securities transactions and in
market liquidity, which generally result in lower revenues from trading
activities and commissions. Lower securities price levels may also result in a
reduced volume of transactions, as well as losses from declines in the market
value of securities held by the Company in trading and investment positions.
Sudden sharp declines in market values of securities and the failure of issuers
and counterparts to perform their obligations can result in illiquid markets in
which the Company may incur losses in its principal trading activities.
ITEM 4. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Interim Chief Financial Officer (collectively,
the "Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for us. Such officers have concluded (based
upon such officers' evaluation of these controls and procedures at the end of
the period covered by this report) that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in this
report is accumulated and communicated to management, including our principal
executive officers as appropriate, to allow timely decisions regarding required
disclosure.
The Certifying Officers have also indicated that there were no significant
changes in our internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
Our management, including each of the Certifying Officers, does not expect that
our disclosure controls or our internal controls will prevent all error and
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls also is based in
part upon certain assumptions about the likelihood of future events, and their
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Because of these inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
24
vFinance, Inc. and Subsidiaries
June 30, 2006
Part II. OTHER INFORMATION
ITEM 6. EXHIBITS.
(a) EXHIBITS
31.1 - Certification by Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 - Certification by Interim Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 - Certification by Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 - Certification by Interim Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley act of 2002.
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Signature Title Date
--------- ----- ----
By: /s/ Leonard J. Sokolow Chief Executive Officer August 14, 2006
---------------------- and President
Leonard J. Sokolow (Principal Executive Officer)
By: /s/ Alan B. Levin Interim Chief Financial Officer August 14, 2006
---------------------- and (Principal Financial and
Alan B. Levin Accounting Officer)
26