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, 2007
Or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _____________ to _________________
Commission File Number: 1-11454
vFinance, Inc.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 58-1974423
State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3010 NORTH MILITARY TRAIL, SUITE 300,
BOCA RATON, FLORIDA 33431
(Address of Principal Executive Offices) (Zip Code)
(561) 981-1000
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ X ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of August 10, 2007: 54,679,876 shares of Common Stock $0.01 par value
per share.
VFINANCE, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2007
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Unaudited Condensed Consolidated Statements of Financial Condition
as of June 30, 2007 and December 31, 2006................................. 4
Unaudited Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 2007 and 2006 .............................. 5
Unaudited Condensed Consolidated Statement of Shareholders' Equity and
Comprehensive Income for the Six Months ended June 30, 2007 .............. 6
Unaudited Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2007 and 2006 ...................................... 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 16
Item 3 - Quantitative & Qualitative Disclosures About Market Risk ........... 22
Item 4 - Controls and Procedures ............................................ 22
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings .................................................. 23
Item 6 - Exhibits ........................................................... 23
Signatures .................................................................. 24
2
FORWARD-LOOKING STATEMENTS
The following information provides cautionary statements under the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
Reform Act). We identify important factors that could cause our actual results
to differ materially from those projected in forward-looking statements we make
in this report or in other documents that reference this report. All statements
that express or involve discussions as to: expectations, beliefs, plans,
objectives, assumptions or future events or performance (often, but not always,
identified through the use of words or phrases such as we or our management
believes, expects, anticipates or hopes and words or phrases such as will
result, are expected to, will continue, is anticipated, estimated, projection
and outlook, and words of similar import) are not statements of historical facts
and may be forward-looking. These forward-looking statements are based largely
on our expectations and are subject to a number of risks and uncertainties
including, but not limited to, economic, competitive, regulatory, growth
strategies, available financing and other factors discussed elsewhere in this
report and in the documents filed by us with the Securities and Exchange
Commission ("SEC"). Many of these factors are beyond our control. Actual results
could differ materially from the forward-looking statements we make in this
report or in other documents that reference this report. In light of these risks
and uncertainties, there can be no assurance that the results anticipated in the
forward-looking information contained in this report or other documents that
reference this report will, in fact, occur.
These forward-looking statements involve estimates, assumptions and
uncertainties, and, accordingly, actual results could differ materially from
those expressed in the forward-looking statements. These uncertainties include,
among others, the following: (i) the inability of our broker-dealer operations
to operate profitably in the face of intense competition from larger full
service and discount brokers; (ii) a general decrease in merger and acquisition
activities and our potential inability to receive success fees as a result of
transactions not being completed; (iii) increased competition from business
development portals; (iv) technological changes; (v) our potential inability to
implement our growth strategy through acquisitions or joint ventures; and (vi)
our potential inability to secure additional debt or equity financing.
Any forward-looking statement speaks only as of the date on which such
statement is made, and we undertake no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for our
management to predict all of such factors, nor can our management assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
3
PART I...FINANCIAL INFORMATION
ITEM 1. .FINANCIAL STATEMENTS
VFINANCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share and per share data)
June 30, 2007 December 31, 2006
----------------- --------------------
Assets:
Current assets:
Cash and cash equivalents $ 5,071.1 $ 4,205.2
Due from clearing broker 1,452.8 299.9
Marketable investment securities:
Trading securities 2,646.9 1,009.4
Available-for-sale securities 464.4 414.6
Accounts receivable 928.3 123.8
Forgivable loans - employees, current portion 51.7 58.8
Notes receivable - employees 52.2 128.1
Prepaid expenses and other current assets 172.7 184.0
----------------- --------------------
Total current assets 10,840.1 6,423.8
----------------- --------------------
Property and equipment, net 536.4 661.0
Customer relationships, net 3,701.5 4,115.4
Other assets 516.3 443.0
----------------- --------------------
Total assets $ 15,594.3 $ 11,643.2
================= ====================
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable $ 951.0 $ 821.7
Accrued compensation 3,558.4 2,394.6
Other accrued liabilities 1,090.0 800.7
Securities sold, not yet purchased 882.5 41.6
Capital lease obligations, current portion 180.7 210.8
Other 1,862.4 348.5
----------------- --------------------
Total current liabilities 8,525.0 4,617.9
----------------- --------------------
Capital lease obligations, long term 76.7 125.6
Shareholders' Equity:
Common stock $0.01 par value, 100,000,000 shares authorized
54,679,876 and 54,429,876 shares issued and outstanding 546.8 544.3
Additional paid-in capital 31,425.3 31,147.4
Accumulated deficit (24,241.6) (24,149.5)
Accumulated other comprehensive loss (737.9) (642.5)
----------------- --------------------
Total shareholders' equity 6,992.6 6,899.7
----------------- --------------------
Total liabilities and shareholders' equity $ 15,594.3 $ 11,643.2
================= ====================
See accompanying notes to unaudited condensed consolidated financial statements.
4
VFINANCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
2006 2006
(Restated and (Restated and
2007 Revised) 2007 Revised)
---------------- ---------------- ---------------- ----------------
Revenues:
Commissions - agency $ 6,878.1 $ 4,769.5 $12,507.3 $ 9,524.9
Trading profits 3,238.8 2,503.0 6,835.1 4,004.0
Success fees 940.5 1,367.2 2,538.8 3,003.4
Other brokerage related income 2,075.1 753.6 3,228.0 1,546.0
Consulting fees 17.6 151.6 36.1 303.0
Other 46.3 109.6 70.4 280.8
---------------- ---------------- ---------------- ----------------
Total revenues 13,196.4 9,654.5 25,215.7 18,662.1
---------------- ---------------- ---------------- ----------------
Compensation, commissions and benefits 10,250.1 7,770.9 19,912.7 14,555.7
Clearing and transaction costs 1,139.7 1,053.5 2,243.8 1,990.8
General and administrative costs 1,323.2 658.7 1,980.0 1,230.2
Occupancy and equipment costs 291.5 321.2 532.2 524.8
Depreciation and amortization 320.6 211.7 639.0 333.7
---------------- ---------------- ---------------- ----------------
Total operating costs 13,325.1 10,016.0 25,307.7 18,635.2
---------------- ---------------- ---------------- ----------------
Income (loss) from operations (128.7) (361.5) (92.0) 26.9
---------------- ---------------- ---------------- ----------------
Other income (expenses):
Interest income 10.6 9.9 25.2 37.2
Interest expense (17.9) (17.9) (36.2) (30.1)
Dividend income 3.8 9.7 7.2 13.8
Other income, net 2.3 17.0 3.7 21.0
---------------- ---------------- ---------------- ----------------
Total other income (expense), net (1.2) 18.7 (0.1) 41.9
---------------- ---------------- ---------------- ----------------
Income (loss) before income taxes (129.9) (342.8) (92.1) 68.8
Income tax benefit (provision) - - - -
---------------- ---------------- ---------------- ----------------
Net income (loss) $ (129.9) $ (342.8) $ (92.1) $ 68.8
================ ================ ================ ================
Net income (loss) per share: basic $ (0.00) $ (0.01) $ (0.00) $ 0.00
================ ================ ================ ================
Weighted average number of shares outstanding:
basic 54,679.9 47,269.0 54,630.2 43,717.3
================ ================ ================ ================
Net income (loss) per share: diluted $ (0.00) $ (0.01) $ (0.00) $ 0.00
================ ================ ================ ================
Weighted average number of shares outstanding:
diluted 54,679.9 47,269.0 54,630.2 46,984.4
================ ================ ================ ================
See accompanying notes to unaudited condensed consolidated financial statements.
5
VFINANCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands)
Accumulated
Other
Common Common Additional Comprehen- Compre- Total Share-
Stock Stock Paid-In Accumulated sive hensive holders'
Shares Amount Capital Deficit (Loss) (Loss) Equity
--------- -------- ----------- ------------- ------------ -------- ------------
Balance at December 31, 2006 54,429.9 $ 544.3 $ 31,147.4 $ (24,149.5) $ (642.5) $ 6,899.7
Net loss - - - (92.1) - $ (92.1) (92.1)
Other comprehensive (loss):
Unrealized loss on
available-for-sale
marketable securities - - - - (95.4) (95.4) (95.4)
--------
Comprehensive (loss) $ (187.5)
========
Stock-based compensation expense - - 230.4 - - 230.4
Issuance of shares for
future services 250.0 2.5 47.5 - - 50.0
---------- -------- ----------- ------------ ------------ -----------
Balance at June 30, 2007 54,679.9 $ 546.8 $ 31,425.3 $ (24,241.6) $ (737.9) $ 6,992.6
========== ======== =========== ============ ============ ===========
See accompanying notes to unaudited condensed consolidated financial statements.
6
VFINANCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30,
------------------ ---------------
2006
(Restated and
2007 Revised)
------------------ ---------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (92.1) $ 68.8
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Non-cash fees received (680.6) (1,017.0)
Non-cash compensation paid 488.2 678.3
Depreciation and amortization 639.0 333.7
Provision for doubtful accounts - 2.0
Stock-based compensation 230.4 236.0
Amounts forgiven under forgivable loans 36.6 7.9
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (804.5) 10.1
Forgivable loans (29.5) (44.2)
Due from clearing broker (1,152.9) (65.1)
Notes receivable - employees 75.9 33.8
Investments in trading securities (1,637.5) (968.7)
Other current assets 61.3 (23.1)
Other assets and liabilities, net 1,440.6 (73.0)
Increase in:
Accounts payable and accrued liabilities 1,582.4 58.5
Securities sold, not yet purchased 840.9 444.6
------------------ ---------------
Cash provided by (used in) operating activities 998.2 (317.4)
------------------ ---------------
CASH USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (53.3) (143.5)
Proceeds from sales of investments in securities available-for-sale 47.2 197.8
Investment in unconsolidated affiliate - (161.9)
------------------ ---------------
Cash used in investing activities (6.1) (107.6)
------------------ ---------------
CASH USED IN FINANCING ACTIVTIES:
Repayments of capital lease obligations (126.2) (93.7)
------------------ ---------------
Cash used in financing activities (126.2) (93.7)
------------------ ---------------
Increase (decrease) in cash and cash equivalents 865.9 (518.7)
Cash and cash equivalents at beginning of period 4,205.2 4,427.4
------------------ ---------------
Cash and cash equivalents at end of period $ 5,071.1 $ 3,908.7
================== ===============
See accompanying notes to unaudited condensed consolidated financial statements.
7
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
vFinance, Inc. (the "Company") is a financial services company which
specializes in high growth opportunities. The Company's proficiency in this
marketplace flows from three principal lines of business: providing investment
banking and advisory services to micro, small and mid-cap high growth companies;
making markets in over 3,000 micro and small cap stocks; and offering
information services on its website, a leading destination for emerging
companies seeking capital and investors seeking opportunities. Due to its focus,
the Company believes it is very well positioned to offer alternative investments
to institutional and high net worth investors seeking to outperform market
indices in addition to offering a full range of investment options. With over 40
corporate and independent offices in the U.S. and other parts of the world, the
Company serves more than 12,000 corporate, institutional and high net worth
clients. vFinance Investments, Inc. ("vFinance Investments") and EquityStation,
Inc. ("EquityStation"), both subsidiaries of vFinance, Inc., are broker-dealers
registered with the Securities and Exchange Commission ("SEC"), and members of
Financial Industry Regulatory Authority("FINRA") and Securities Investor
Protection Corporation ("SIPC"). vFinance Investments is also a member of the
National Futures Association ("NFA").
The unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts have been eliminated in consolidation.
The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the three and six month periods
ended June 30, 2007 is not necessarily indicative of the results to be expected
for the year ended December 31, 2007. The interim financial statements should be
read in connection with the audited financial statements and notes contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 2006.
Reclassifications
Certain items in the 2006 Unaudited Condensed Consolidated Financial
Statements have been reclassified to conform to the presentation in the 2007
Unaudited Condensed Consolidated Financial Statements. Such reclassifications
did not have a material impact on the presentation of the overall financial
statements.
8
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except per share data)
Restatement and Revision
The Company has restated certain amounts in the Unaudited Condensed
Consolidated Financial Statements as of and for the three and six months ended
June 30, 2006 as a result of comments to the Company from the staff of the
Securities and Exchange Commission ("SEC"), as previously disclosed in the
Company's Annual Report on Form 10-K for the year ended December 31, 2006.
A summary of the effects of the restatement and revision for the three and
six months ended June 30, 2006 is as follows:
Effect of Restatements
--------------------------------------------
Reclass-
As Reported- ification of Net
Three Months Securities Amortiz- Amortiz- Effect
Ended from Trading ation of ation of of
June 30, Reclass- to Available- Intangible Transition Restate- Restated and
2006 ifications As Revised for-Sale Asset Payment ments Revised
---------- -------- ---------- ----------- --------- --------- ------- ----------
Statement of Operations:
Total revenues $ 9,655.5 (36.6) $ 9,618.9 35.6 - - 35.6 $ 9,654.5
Clearing and transaction costs $ 1,060.3 3.2 $ 1,063.5 - - (10.0) (10.0) $ 1,053.5
Depreciation and amortization $ 248.4 - $ 248.4 - (36.7) - (36.7) $ 211.7
Total operating costs $10,080.6 (17.9) $10,062.7 - (36.7) (10.0) (46.7) $10,016.0
(Loss) from operations $ (425.1) (18.7) $ (443.8) 35.6 36.7 10.0 82.3 $ (361.5)
Net (loss) $ (425.1) - $ (425.1) 35.6 36.7 10.0 82.3 $ (342.8)
Net (loss) per share - basic $ (0.01) $ - $ (0.01)
========== ======= ==========
Wt. avg. shares outstanding - basic 47,269.0 47,269.0
========== ==========
Net (loss) per share - diluted $ (0.01) $ - $ (0.01)
========== ======= ==========
Wt. avg. shares outstanding - diluted 47,269.0 47,269.0
========== ==========
Effect of Restatements
--------------------------------------------
Reclass-
As Reported- ification of Net
Six Months Securities Amortiz- Amortiz- Effect
Ended from Trading ation of ation of of
June 30, Reclass- to Available- Intangible Transition Restate- Restated and
2006 ifications As Revised for-Sale Asset Payment ments Revised
---------- -------- ---------- ----------- --------- --------- ------- ----------
Statement of Operations:
Total revenues $18,581.3 (66.5) $18,514.8 147.3 - - 147.3 $18,662.1
Clearing and transaction costs $ 2,007.6 3.2 $ 2,010.8 - - (20.0) (20.0) $ 1,990.8
Depreciation and amortization $ 407.1 - $ 407.1 - (73.4) - (73.4) $ 333.7
Total operating costs $18,758.6 (30.1) $18,278.6 - (73.4) (20.0) (93.4) $18,635.2
Income (loss) from operations $ (171.9) - $ (171.9) 147.3 73.4 20.0 240.7 $ 68.8
Net income (loss) $ (171.9) - $ (171.9) 147.3 73.4 20.0 240.7 $ 68.8
Net income (loss) per share - basic $ - $ - $ -
========== ======= ==========
Wt. avg. shares outstanding - basic 43,717.3 43,717.3
========== ==========
Net income (loss) per share - diluted $ - $ - $ -
========== ======= ==========
Wt. avg. shares outstanding - diluted 43,717.3 46,984.4
========== ==========
9
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.
New Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS")No. 155,
"Accounting for Certain Hybrid Financial Instruments", which amends SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". SFAS No. 155 simplifies the
accounting for certain derivatives embedded in other financial instruments by
allowing them to be accounted for as a whole if the holder elects to account
for the whole instrument on a fair value basis. SFAS No. 155 also clarifies
and amends certain other provisions of SFAS No. 133 and SFAS No. 140.
SFAS No. 155 is effective for all financial instruments acquired, issued
or subject to a remeasurement event occurring in fiscal years beginning after
September 15, 2006. The adoption of SFAS No. 155 did not have a material impact
on the Company's Consolidated Financial Statements.
In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48,
"Accounting for Uncertainty in Income Taxes". This interpretation applies to all
tax positions accounted for in accordance with SFAS No. 109, "Accounting for
Income Taxes". FIN 48 clarifies the application of SFAS No. 109 by defining the
criteria that an individual tax position must meet in order for the position to
be recognized within the financial statements. It also provides guidance on
measurement, de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition for tax positions. This
interpretation is effective for fiscal years beginning after December 15, 2006,
with earlier adoption permitted. The adoption of FIN 48 did not have a material
impact on the Company's Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles, and expands disclosures
about fair value measurements. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of SFAS No. 157 is not
expected to have a material impact on the Company's Consolidated Financial
Statements.
10
In December 2006, the FASB issued FASB Staff Position ("FSP") EITF 00-19-2,
"Accounting for Registration Payment Arrangements." FSP EITF 00-19-2 specifies
that the contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement should be separately
recognized and measured in accordance with SFAS No. 5, "Accounting for
Contingencies." This FSP further clarifies that a financial instrument subject
to a registration payment arrangement should be accounted for in accordance with
other applicable generally accepted accounting principles without regard to the
contingent obligation to transfer consideration pursuant to the registration
payment arrangement, and provides disclosure requirements for registration
statement arrangements. The adoption of FSP EITF 00-19-2 did not have a material
impact on the Company's Consolidated Financial Statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities - Including an Amendment of FASB Statement No.
115". SFAS No. 159 permits entities to choose to measure certain financial
assets and liabilities at fair value. Unrealized gains and losses, arising
subsequent to adoption, are reported in earnings. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact of adopting SFAS No. 159, if elected, on its Consolidated
Financial Statements.
2. PROPERTY AND EQUIPMENT
At June 30, 2007 and December 31, 2006, property and equipment, net
consisted of the following:
June 30, 2007 December 31, 2006
----------------- --------------------
Furniture and fixtures $ 90.8 $ 90.8
Equipment 769.5 727.5
Capital leases - computer
equipment 751.7 704.5
Leasehold improvements 174.8 174.8
Software 226.2 214.8
----------------- -------------------
2,013.0 1,912.4
Less: accumulated depreciation (1,476.6) (1,251.4)
----------------- -------------------
Property and equipment, net $ 536.4 $ 661.0
================= ===================
The Company acquired $47.2 thousand of computer equipment under capital
leases in the six months ended June 30, 2007.
The Company recorded depreciation expense of $225.1 thousand and $175.2
thousand in the six months ended June 30, 2007 and 2006, respectively.
11
3. STERLING FINANCIAL ACQUISITION
On May 11, 2006, vFinance Investments purchased certain assets of Sterling
Financial Investment Group, Inc. ("SFIG") and Sterling Financial Group of
Companies, Inc. ("SFGC" and together with SFIG, "Sterling Financial"). The
assets acquired from Sterling Financial consisted primarily of client accounts
from Sterling Financial's Institutional Fixed Income and Latin American
businesses. These transactions were approved by the National Association of
Securities Dealers, Inc. on April 28, 2006.
The following unaudited Pro Forma Combined Financial Statements of Sterling
and vFinance gives effect to the acquisition of certain assets of Sterling
Financial, as though the transactions occurred as of January 1, 2006. This
unaudited pro forma information is presented for informational purposes, based
upon available data and assumptions that management believes are reasonable, and
is not necessarily indicative of future results:
Six Months Ended June 30, 2006
----------------------------------------------------------------------
vFinance
(Restated and
Revised) Sterling Adjustments ProForma
-------------- ----------------- ----------------- ----------------
Total revenue $ 18,662.1 $ 3,759.4 $ - $ 22,421.5
Income from operations 26.9 48.0 (227.1) (152.2)
Net income 68.8 48.0 (227.1) (110.3)
-------------- ----------------- ----------------
Earnings per share - basic $ 0.00 $ (0.02) $ (0.00)
============== ================= ================
Wt. avg. shares outstanding - basic 43,717.3 9,337.0 53,054.3
============== ================= ================
Earnings per share - diluted $ 0.00 $ (0.02) $ (0.00)
============== ================= ================
Wt. avg. shares outstanding - diluted 46,984.4 9,337.0 56,321.4
============== ================= ================
4. CUSTOMER RELATIONSHIPS
At June 30, 2007, customer relationships totaled $3.7 million, net of
accumulated amortization of $1.2 million. At December 31, 2006 customer
relationships totaled $4.1 million, net of accumulated amortization $737.4
thousand.
Acquired customer relationships are amortized using the straight-line
method over their estimated useful lives, which coincide with their expected
revenue-generating lives, which range from five to ten years. The Company
recorded amortization expense of $413.9 thousand and $158.5 thousand in the six
months ended June 30, 2007 and 2006, respectively.
12
5. EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings per Share". In accordance with SFAS No. 128, basic earnings per share
is computed using the weighted average number of shares of common stock
outstanding and diluted earnings per share is computed using the weighted
average number of shares of common stock and the dilutive effect of options and
warrants outstanding, using the "treasury stock" method, as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Weighted average shares outstanding - basic 54,679.9 47,269.0 54,630.2 43,717.3
Effect of dilutive stock options and warrants - - - 3,267.1
------------ ------------ ------------ ------------
Weighted average shares outstanding - diluted 54,679.9 47,269.0 54,630.2 46,984.4
============ ============ ============ ============
As of June 30, 2007, the Company had 17.9 million stock options and
warrants outstanding, all of which have been excluded from the computation of
diluted earnings per share because they were anti-dilutive. As of June 30, 2006,
the Company had 21.9 million stock options and warrants outstanding, of which
6.4 million have been excluded from the computation of diluted earnings per
share because they were anti-dilutive.
6. COMMITMENTS AND CONTINGENCIES
Clearing Agreements
As consideration for certain incentives received at the inception of one of
the Company's clearing agreements, the Company would be required to pay a
termination fee in the event vFinance Investments terminates the clearing
agreement. This fee is reduced annually on a pro rata basis over the five year
term of the clearing agreement. As of June 30, 2007, the contingent obligation
of the Company associated with this clearing agreement was $680.0 thousand.
On May 9, 2007 EquityStation received notification from Merrill Lynch
Pierce Fenner & Smith, Broadcort Division that effective September 22, 2007 it
will be terminating its clearing agreement with EquityStation, as provided for
in the clearing agreement. The Company does not expect this termination to
result in a material impact to its Consolidated Financial Statements, as it has
started the process of replacing this agreement and expects to replace it by
September 22, 2007.
Litigation
The business of vFinance Investments and EquityStation involve substantial
risks of liability, including exposure to liability under federal and state
securities laws in connection with the underwriting or distribution of
securities and claims by dissatisfied customers for fraud, unauthorized trading,
churning, mismanagement and breach of fiduciary duty. In recent years, there has
been an increasing incidence of litigation involving the securities industry,
including class actions that generally seek rescission and substantial damages.
13
In the ordinary course of business, the Company and/or its subsidiaries may
be parties to legal proceedings and regulatory inquiries, the outcome of which,
either singularly or in the aggregate, is not expected to be material. There can
be no assurance however that any sanctions will not have a material adverse
effect on the financial condition or results of operations of the Company and/or
its subsidiaries.
The following is a brief summary of certain matters pending against or
involving the Company and its subsidiaries.
On or about February 28, 2005, Knight Equity Markets, LP ("Knight") filed
an arbitration action (NASD Case No. 05-01069) against vFinance Investments,
claiming that vFinance Investments received roughly $6.5 million in dividends
that rightfully belong to Knight. vFinance Investments asserts that the
dividends actually went to two of its clients, Pearl Securities LLC ("Pearl
Securities") and Michael Balog, and that vFinance Investments has no liability.
vFinance Investments filed third party claims against Pearl Securities and
Michael Balog to bring all of the parties into the action. Knight is seeking
approximately $6.5 million in damages plus costs, attorney fees and punitive
damages. vFinance Investments denies any liability to Knight and intends to
vigorously defend against Knight's claims.
In April 2005 Gregory F. and Ruth A. Whitten filed an arbitration action
(NASD Case No. 05-02103) with NASD naming vFinance Investments as a
Co-Respondent. The Statement of Claim filed in this action alleges negligent and
intentional misrepresentations, breach of fiduciary duty, violation of
Washington State Securities Act, and violation of the Washington Consumer
Protection Act, in connection with the handling of claimants' brokerage accounts
by Robert Agriogianis. The Statement of Claim alleges compensatory damages in
excess of $445.0 thousand plus interest, costs, and attorney's fees. vFinance
Investments has filed an Answer and Affirmative Defenses with the NASD. The
Final Hearing occurred on May 2, 3, 4, 2007. The Company recently received
notification that the case has been dismissed and no payment has been awarded to
the claimants in this matter.
On or about September 27, 2005, John S. Matthews filed an arbitration
action (NASD Case No. 05-014991) against the Company, claiming that the Company
wrongfully terminated his independent contract with the Company and that the
Company "stole" his clients and brokers. Mr. Matthews has obtained a temporary
restraining order and an agreed upon injunction was issued by the NASD panel.
Mr. Matthews and JMS Capital Holding Corp., a plaintiff in the arbitration
action also request unspecified damages resulting from the Company's alleged
improper activity. As discussed in Note 7, the Company and Mr. Matthews entered
into a settlement agreement in July 2007 with respect to this arbitration
action.
The Company engaged in a number of other legal proceedings incidental to
the conduct of its business. These claims aggregate a range of $50.0 thousand to
$260.0 thousand.
As of June 30, 2007 and December 31, 2006, the Company had accrued
approximately $130.0 thousand and $70.0 thousand, respectively, to provide for
these matters. In 2005 the Company acquired an errors and omissions policy for
certain future claims in excess of the policy's $75.0 thousand per claim
deductible, up to an aggregate of $1.0 million. While the Company will
vigorously defend itself in these matters, and will assert insurance coverage
and indemnification to the maximum extent possible, there can be no assurance
that these lawsuits and arbitrations will not have a material adverse impact on
its financial position.
14
7. SUBSEQUENT EVENTS
On August 7, 2007, the Company received information from one of its
clearing firms that the clearing firm improperly calculated the fees paid to the
Company from the inception of the arrangement in May 2004. The Company has
treated this new information as a change in accounting estimate by recording
other brokerage related income and a receivable of $713.5 thousand during the
three months ended June 30, 2007. This change in accounting estimate resulted in
additional net income of $680.0 thousand ($.01 per basic and diluted share) in
the three and six months ended June 30, 2007. Additionally, based on current
transaction volumes, the Company expects that future annual revenues and
operating income derived from this arrangement will increase by approximately
$300.0 thousand - $350.0 thousand compared to historical performance through the
expiration of the agreement in March 2009.
In July 2007, the Company entered into a settlement agreement with Mr. John
S. Matthews regarding the arbitration action described in Note 6 (NASD Case No.
05-014991). Pursuant to the terms of the settlement agreement, the Company paid
$50.0 thousand to Mr. Matthews in July 2007 and is further obligated to make
payments to Mr. Matthews totaling $250.0 thousand ($50.0 thousand in cash
payable over 10 months and an additional $200.0 thousand in cash or the
Company's stock, at the Company's option over the next three years). In
connection with this settlement, the Company recorded $250.0 thousand of
arbitration settlement expense (a component of general and administrative costs)
during the three months ended June 30, 2007.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Condensed Consolidated Financial Statements and notes thereto included under
Item 1. In addition, reference should be made to our audited consolidated
financial statements and notes thereto and related Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our most
recent Annual Report on Form 10-K.
Certain amounts have been reclassified from the previously reported
financial statements to conform to the income statement presentation of the
current period.
We have restated certain amounts in the Unaudited Condensed Consolidated
Statements of Income for the three and six months ended June 30, 2006 as a
result of comments to us from the Securities and Exchange Commission, as
previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 2006.
The following table and discussion summarizes the changes in major revenue
and expense categories for the three and six months ended June 30, 2007 and
2006.
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------------- -------------------------------------------
2006 2006
(Restated (Restated
2007 and Revised) Change % Chg. 2007 and Revised) Change % Chg.
------------ ------------ ---------- ---------- ------------ ----------- --------- --------
Revenues:
Commissions - agency $ 6,878.1 $ 4,769.5 2,108.6 44.2 % $ 12,507.3 $ 9,524.9 2,982.4 31.3 %
Trading profits 3,238.8 2,503.0 735.8 29.4 % 6,835.1 4,004.0 2,831.1 70.7 %
Success fees 940.5 1,367.2 (426.7) (31.2)% 2,538.8 3,003.4 (464.6) (15.5)%
Other brokerage related income 2,075.1 753.6 1,321.5 175.4 % 3,228.0 1,546.0 1,682.0 108.8 %
Consulting fees 17.6 151.6 (134.0) (88.4)% 36.1 303.0 (266.9) (88.1)%
Other 46.3 109.6 (63.3) (57.8)% 70.4 280.8 (210.4) (74.9)%
------------ ------------ ---------- ---------- ------------ ----------- --------- --------
Total revenues 13,196.4 9,654.5 3,541.9 36.7 % 25,215.7 18,662.1 6,553.6 35.1 %
------------ ------------ ---------- ---------- ------------ ----------- --------- --------
Compensation, commissions and benefits 10,250.1 7,770.9 2,479.2 31.9 % 19,912.7 14,555.7 5,357.0 36.8 %
Clearing and transaction costs 1,139.7 1,053.5 86.2 8.2 % 2,243.8 1,990.8 253.0 12.7 %
General and administrative costs 1,323.2 658.7 664.5 100.9 % 1,980.0 1,230.2 749.8 60.9 %
Occupancy and equipment costs 291.5 321.2 (29.7) (9.2)% 532.2 524.8 7.4 1.4 %
Depreciation and amortization 320.6 211.7 108.9 51.4 % 639.0 333.7 305.3 91.5 %
------------ ------------ ---------- ---------- ------------ ----------- --------- --------
Total operating costs 13,325.1 10,016.0 3,309.1 33.0 % 25,307.7 18,635.2 6,672.5 35.8 %
------------ ------------ ---------- ---------- ------------ ----------- --------- --------
Income (loss) from operations (128.7) (361.5) 232.8 (64.4)% (92.0) 26.9 (118.9) (442.0)%
------------ ------------ ---------- ---------- ------------ ----------- --------- --------
Other income (expenses):
Interest income 10.6 9.9 0.7 7.1 % 25.2 37.2 (12.0) (32.3)%
Interest expense (17.9) (17.9) - 0.0 % (36.2) (30.1) (6.1) 20.3 %
Dividend income 3.8 9.7 (5.9) (60.8)% 7.2 13.8 (6.6) (47.8)%
Other income, net 2.3 17.0 (14.7) (86.5)% 3.7 21.0 (17.3) (82.4)%
------------ ------------ ---------- ---------- ------------ ----------- --------- --------
Total other income (expense), net (1.2) 18.7 (19.9) (106.4)% (0.1) 41.9 (42.0) (100.2)%
------------ ------------ ---------- ---------- ------------ ----------- --------- --------
Income (loss) before income taxes (129.9) (342.8) 212.9 (62.1)% (92.1) 68.8 (160.9) (233.9)%
============ ============ ========== ========== ============ =========== ========= ========
16
Our results of operations for the three and six months ended June 30, 2007
were affected by two subsequent events. As discussed in Note 7 to our unaudited
condensed consolidated financial statements, during the three months ended June
30, 2007, we recorded $713.5 thousand of other brokerage-related income related
to a calculation error made by one of our clearing firms, resulting in
additional net income of $680.0 thousand in the three and six months ended June
30, 2007. Also as discussed in Note 7 to our unaudited condensed consolidated
financial statements, during the three months ended June 30, 2007, we recorded
$250.0 thousand of arbitration settlement expense (a component of general and
administrative costs) in connection with a legal settlement. The net effect of
these two items on net income for the three and six months ended June 30, 2007
was $430.0 thousand ($0.01 per basic and diluted share).
THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2006
STATEMENT OF OPERATIONS
Revenues
Total revenues for the three months ended June 30, 2007 increased 37%, or
$3.5 million, compared to the three months ended June 30, 2006. The $3.5 million
increase is attributable to higher agency commissions, increased trading
profits, and other brokerage related income, all driven primarily by the
addition of new brokers in 2006 and 2007, including through the May 2006
Sterling Financial Acquisition. Other brokerage related income for the three
months ended June 30, 2007 increased 175%, or $1.3 million, compared to the
three months ended June 30, 2006 and included $713.5 thousand related to an
amount owed to us by one of our clearing firms. (See Note 7 to the unaudited
condensed consolidated financial statements.) The remaining increases in other
brokerage related income were derived from the overall increase in brokerage
transactions.
Success fees from investment banking decreased 31%, or $426.7 thousand in
the three months ended June 30, 2007 compared to the three months ended June 30,
2006. Non-cash success fee revenues increased slightly to $443.6 thousand for
the three months ended June 30, 2007, while success fees received in cash
decreased by $429.6 thousand to $496.9 million for the three months ended June
30, 2007.
Operating Expenses
Compensation, commissions and benefits.
Compensation, commissions and benefits for the three months ended June 30,
2007 increased 32%, or $2.5 million, compared to the three months ended June 30,
2006. Commissions are correlated with our revenues, primarily agency
commissions, trading profits and success fees from investment banking.
Additional increases in compensation, commissions and benefits are primarily
attributable to increased salaries.
Clearing and transaction costs.
Clearing and transaction costs for the three months ended June 30, 2007
increased $86.2 thousand, or 8%, compared to the three months ended June 30,
2006, primarily as a result of an increase in transaction volume attributable to
the addition of new brokers, partially offset by a shift in our revenue mix to
lower-cost institutional trading transactions.
17
General and administrative costs.
General and administrative costs for the three months ended June 30, 2007
increased $664.5 thousand in 2006, or 101%, compared to the three months ended
June 30, 2006. General and administrative costs for the three months ended June
30, 2007 included $250.0 thousand of settlement expense associated with the
settlement of an arbitration matter, as described in Note 7 to our unaudited
condensed consolidated financial statements, as well as $310.0 thousand for
professional fees associated with certain arbitration and litigation matters and
the expansion of our Sarbanes - Oxley compliance program. Remaining increases
resulted from temporary labor and other increased professional fees to support
our growth.
Occupancy and equipment costs.
Occupancy and equipment costs for the three months ended June 30, 2007
decreased $29.7 thousand, or 9%, compared to the three months ended June 30,
2006, primarily because in December 2006 we subleased office space acquired
under a lease assumed in connection with the Sterling Financial Acquisition.
Depreciation and amortization.
Depreciation and amortization for the three months ended June 30, 2007
increased $108.9 thousand, or 51.4%, compared to the three months ended June 30,
2006, primarily as a result of the amortization expense associated with the
customer relationships from the May 2006 Sterling Financial Acquisition.
SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2006
STATEMENT OF OPERATIONS
Revenues
Total revenues for the six months ended June 30, 2007 increased 35%, or
$6.6 million, compared to the six months ended June 30, 2006. The $6.6 million
increase is attributable to higher agency commissions, increased trading
profits, and other brokerage related income, all driven primarily by the
addition of new brokers in 2006 and 2007, including through the May 2006
Sterling Financial Acquisition. Other brokerage related income for the six
months ended June 30, 2007 increased 109%, or $1.7 million, compared to the six
months ended June 30, 2006 and included $713.5 thousand related to an amount
owed to us by one of our clearing firms. (See Note 7 to the unaudited condensed
consolidated financial statements.) The remaining increases in other brokerage
related income were derived from the overall increase in brokerage transactions.
Success fees from investment banking decreased 16%, or $464.6 thousand, in
the six months ended June 30, 2007 compared to the six months ended June 30,
2006. Non-cash success fee revenues decreased $336.4 thousand to $680.6 for the
six months ended June 30, 2007, while success fees received in cash decreased by
$128.2 thousand to $1.9 million for the six months ended June 30, 2007.
18
Operating Expenses
Compensation, commissions and benefits.
Compensation, commissions and benefits for the six months ended June 30,
2007 increased 37%, or $5.4 million, compared to the six months ended June 30,
2006. Commissions are correlated with our revenues, primarily agency
commissions, trading profits and success fees from investment banking.
Additional increases in compensation, commissions and benefits are primarily
attributable to increased salaries.
Clearing and transaction costs.
Clearing and transaction costs for the six months ended June 30, 2007
increased $253.0 thousand, or 13%, compared to the six months ended June 30,
2006, primarily as a result of an increase in transaction volume attributable to
the addition of new brokers, partially offset by a shift in our revenue mix to
lower-cost institutional trading transactions.
General and administrative costs.
General and administrative costs for the six months ended June 30, 2007
increased $749.8 thousand, or 61%, compared to the six months ended June 30,
2006. General and administrative costs for the six months ended June 30, 2007
included $250.0 thousand of settlement expense associated with the settlement of
an arbitration matter, as described in Note 7 to our unaudited condensed
consolidated financial statements, as well as $367.1 thousand for professional
fees associated with arbitration and litigation matters and the expansion of our
Sarbanes - Oxley compliance program. Remaining increases resulted from temporary
labor and other increased professional fees to support our growth.
Occupancy and equipment costs.
Occupancy and equipment costs for the six months ended June 30, 2007
increased $7.4 thousand, or 1%, compared to the six months ended June 30, 2006,
primarily as a result of the occupancy and equipment costs associated with the
Sterling Financial Acquisition, partially offset by sublease income commencing
in December 2006.
Depreciation and amortization.
Depreciation and amortization for the six months ended June 30, 2007
increased $305.3 thousand, or 92%, compared to the six months ended June 30,
2006, primarily as a result of the amortization expense associated with the
customer relationships from the Sterling Financial Acquisition.
19
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our liquidity and regulatory capital needs
through the issuance of equity and debt securities. As of June 30, 2007, liquid
assets consisted primarily of cash and cash equivalents of $5.1 million and
marketable securities of $2.7 million (net of $402.7 thousand in restricted
securities), for a total of $7.8 million, which is approximately $2.6 million
higher than $5.2 million in liquid assets (net of $400.0 thousand in restricted
securities) as of December 31, 2006. As of June 30, 2007, we had long-term
capital lease obligations of $76.7 thousand, net of current obligations of
$180.7 thousand.
Both vFinance Investments and EquityStation are subject to the SEC Uniform
Net Capital Rule (rule 15c3-1), which requires the maintenance of minimum net
capital. Both vFinance Investments and EquityStation have elected to use the
alternative standard method permitted by the rule. This method requires that
vFinance Investments maintain minimum net capital equal to the greater of
$250,000 or a specified amount per security based on the bid price of each
security for which vFinance Investments is a market maker and requires
EquityStation to maintain minimum capital equal to $100,000. As of June 30,
2007, vFinance Investments and EquityStation net capital exceeded the
requirement by $715.2 thousand and $315.1 thousand, respectively.
Advances, dividend payments and other equity withdrawals from the Company's
broker-dealer subsidiary are restricted by the regulations of the SEC and other
regulatory agencies. These regulatory restrictions may limit the amounts that a
broker-dealer subsidiary may dividend or advance to the Company.
Cash and cash equivalents increased by $865.9 thousand during the six
months ended June 30, 2007. Cash and cash equivalents decreased by $518.7
thousand during the six months ended June 30, 2006. The major components of
these changes are discussed below.
Cash provided by (used in) operating activities for the six months ended
June 30, 2007 was $998.2 thousand compared to $(317.4) thousand for the six
months ended June 30, 2006. Cash provided by (used in) operating activities
includes net income adjusted for non-cash items and the effects of changes in
working capital including changes in working capital related to trading security
positions. Cash provided by (used in) operating activities increased for the six
months ended June 30, 2007 compared to the six months ended June 30, 2006
primarily as a result of increases in accrued compensation and securities sold,
not yet purchased, as well as a decrease in non-cash fees received, net of
non-cash compensation paid. Partially offsetting these factors were increases in
receivables, based on transaction timing.
Cash used in investing activities for the six months ended June 30, 2007
was $6.1 thousand compared to $107.6 thousand for the six months ended June 30,
2006, when we made a $161.9 thousand investment in an unconsolidated affiliate.
Capital expenditures decreased by $90.2 thousand for the six months ended June
30, 2007 compared to the six months ended June 30, 2006, as certain 2007
investments are planned for the third and fourth quarters, when we expect an
increase in capital expenditures compared to the first six months of 2007. Cash
proceeds from the sales of securities available-for-sale decreased by $150.6
thousand for the six months ended June 30, 2007 compared to the six months ended
June 30, 2006, primarily as a result of variances in the timing of restriction
expirations and sales transactions during these six month periods.
20
Cash used in financing activities for the six months ended June 30, 2007
increased to $126.2 thousand compared to $93.7 thousand for the six months ended
June 30, 2006 as a result of capital lease payments for equipment acquired under
capital leases that commenced in 2007 and in the third and fourth quarters of
2006.
We believe cash on hand is sufficient to meet our working capital
requirements over the next twelve months. However, we may seek additional debt
or equity financing in order to carry out our long-term business strategy. Such
funding may be a result of bank borrowings, public offerings, private placements
of equity or debt securities, or a combination thereof. We cannot be certain
that additional debt or equity financing will be available when required or, if
available, that we can secure it on terms satisfactory to us.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 to our Unaudited Condensed Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk, and does periodically hedge
against that risk. The Company does not hold or issue any derivative financial
instruments for trading or other speculative purposes. The Company is exposed to
market risk associated with changes in the fair market value of the marketable
securities that it holds. The Company's revenue and profitability may be
adversely affected by declines in the volume of securities transactions and in
market liquidity, which generally result in lower revenues from trading
activities and commissions. Lower securities price levels may also result in a
reduced volume of transactions, as well as losses from declines in the market
value of securities held by the Company in trading and investment positions.
Sudden sharp declines in market values of securities and the failure of issuers
and counterparts to perform their obligations can result in illiquid markets in
which the Company may incur losses in its principal trading activities.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer
and principal financial officer, has evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this quarterly report
(the "Evaluation Date"). Based on such evaluation, our principal executive
officer and principal financial officer have concluded that, as of the
Evaluation Date, our disclosure controls and procedures are effective.
Changes in Internal Controls
There was no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in
connection with the evaluation of our internal controls that occurred during our
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, such controls.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 2005 Gregory F. and Ruth A. Whitten filed an arbitration action
(NASD Case No. 05-02103) with NASD naming vFinance Investments as a
Co-Respondent. The Statement of Claim filed in this action alleges negligent and
intentional misrepresentations, breach of fiduciary duty, violation of
Washington State Securities Act, and violation of the Washington Consumer
Protection Act, in connection with the handling of claimants' brokerage accounts
by Robert Agriogianis. The Statement of Claim alleges compensatory damages in
excess of $445.0 thousand plus interest, costs, and attorney's fees. vFinance
Investments has filed an Answer and Affirmative Defenses with the NASD. The
Final Hearing occurred on May 2, 3, 4, 2007. The Company recently received
notification that the case has been dismissed and no payment has been awarded to
the claimants in this matter.
On or about September 27, 2005, John S. Matthews filed an arbitration
action (NASD Case No. 05-014991) against the Company, claiming that the Company
wrongfully terminated his independent contact with the Company and that the
Company "stole" his clients and brokers. Mr. Matthews has obtained a temporary
restraining order and an agreed upon injunction was issued by the NASD panel.
Mr. Matthews and JMS Capital Holding Corp., a plaintiff in the arbitration
action also request unspecified damages resulting from the Company's alleged
improper activity. In July 2007, the Company entered into a settlement agreement
with Mr. Matthews regarding this arbitration action. Pursuant to the terms of
the settlement agreement, the Company paid $50.0 thousand to Mr. Matthews in
July 2007 and is further obligated to make payments to Mr. Matthews totaling
$250.0 thousand ($50.0 in cash payable over 10 months and an additional $200.0
thousand in cash or the Company's stock, at the Company's option over the next
three years).
ITEM 6. EXHIBITS
Number of
Exhibit Exhibit Description
31.1** Certification by Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2** Certification by Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification by Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2** Certification by Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley act of 2002.
** Filed herewith.
22
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Signature Title Date
Chairman of the Board and Chief
/s/ Leonard J. Sokolow Executive Officer
------------------------ (Principal Executive Officer) August 14, 2007
Leonard J. Sokolow
/s/ Alan B. Levin Chief Financial Officer and
----------------------- (Principal Financial and
Alan B. Levin Accounting Officer) August 14, 2007
23