UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2003
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) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of March 31, 2003:
29,851,570 shares of Common Stock $0.01 par value
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [x ]
INDEX
VFINANCE, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - March 31,2003 (Unaudited)................4
Consolidated Statements of Operations for the three months ended
March 31, 2002 and 2003 (Unaudited) ..............................5
Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2003 (Unaudited) ..............................6
Notes to Consolidated Financial Statements (Unaudited) ............7-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................12-13
Item 3. Controls and Procedures .............................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................14
Item 2. Changes in Securities ...............................................14
Item 6. Exhibits and Reports on Form 8-K ....................................15
Signatures ..................................................................16
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.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31,
2003
------------
Assets:
Cash and cash equivalents ............................. $ 2,117,203
Investments in trading securities ..................... 1,093,148
Accounts receivable, net of allowance for doubtful
accounts of $269,028 ................................. 251,166
Forgivable loans - employees, current portion ......... 140,000
Notes receivable - employees 97,730
Prepaid expenses and other current assets ............. 88,838
------------
Total current assets ................................. 3,788,085
Furniture and equipment, at cost:
Furniture and equipment ............................... 397,419
Internal use software ................................. 158,500
------------
555,919
Less accumulated depreciation .......................... (328,148)
------------
Net furniture and equipment ........................... 227,771
Forgivable loans - employees .......................... 87,160
Goodwill .............................................. 420,000
Other assets .......................................... 234,032
------------
Total Assets ........................................... $ 4,757,048
============
Liabilities and Shareholders' Equity:
Accounts payable ...................................... $ 688,277
Accrued payroll ....................................... 738,470
Other accrued liabilities ............................. 599,716
Due to clearing broker ................................ 85,495
Securities sold, not yet purchased .................... 75,144
Other ................................................. 40,080
------------
Total current liabilities ............................ 2,227,182
Notes payable - long term ............................. 2,048,168
Shareholders' Equity:
Common stock, $0.01 par value, 75,000,000 shares
Authorized, 29,851,570 issued and outstanding ........ 298,520
Additional paid-in-capital on common stock ............ 24,346,798
Accumulated deficit ................................... (24,163,620)
------------
Total Shareholders' Equity ............................ 481,698
------------
Total Liabilities and Shareholders' Equity ............. $ 4,757,048
============
See accompanying notes
4
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2002 2003
------------ ------------
Revenues:
Commissions - agency ............................ $ 2,525,019 $ 2,254,762
Trading profits.................................. 1,034,365 763,861
Success fees .................................... 1,604,196 139,270
Consulting and retainers ........................ 331,597 147,993
Other brokerage related income .................. 320,169 288,263
Other ........................................... 89,256 112,452
------------ ------------
Total revenues ................................... 5,904,602 3,706,601
------------ ------------
Cost of revenues:
Commissions ..................................... 2,297,086 1,915,432
Clearing and transaction costs .................. 249,860 174,007
Success ......................................... 772,420 66,051
Consulting and retainers ........................ 7,500 49,207
Other ........................................... 9,262 4,759
------------ ------------
Total cost of revenues ........................... 3,336,128 2,209,456
------------ ------------
Gross profit ..................................... 2,568,474 1,497,145
------------ ------------
Other expenses:
General and administrative ...................... 2,444,430 1,586,765
Net (gain) loss on trading securities ........... (12,652) 2,728
Professional fees ............................... 239,277 80,212
Provision for bad debts ......................... 60,560 -
Legal litigation ................................ - 65,242
Net unrealized gain on investments held
for trading and stock purchase warrants ........ (60,329) (72,008)
Depreciation and amortization ................... 73,360 29,046
Amounts forgiven under forgivable loans ......... 74,375 27,500
Stock based compensation ........................ - 12,420
------------ ------------
Total other expenses ............................. 2,818,931 1,731,905
------------ ------------
Loss from operations ............................. (250,457) (234,760)
Gain on sale of property ......................... 194 -
Interest and dividend income (expense) ........... (97,158) (27,202)
------------ ------------
Net loss ......................................... (347,421) (261,962)
Less: Preferred stock dividend ................... (30,625) -
------------ ------------
Loss available to common stockholders ............ $ (378,046) $ (261,962)
============ ============
Loss per share:
Basic ........................................... ($ 0.02) ($ 0.01)
============ ============
Weighted average number of common
shares used in computing basic loss
per share ....................................... 23,387,097 28,868,237
============ ============
Diluted ......................................... ($ 0.02) ($ 0.01)
============ ============
Weighted average number of common
shares used in computing diluted loss
per share ....................................... 23,387,097 28,868,237
============ ============
See accompanying notes
5
VFINANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2002 2003
------------ ------------
OPERATING ACTIVITIES
Net loss ........................................ $ (347,421) $ (261,962)
Adjustments to reconcile net loss to net
cash used in operating activities:
Non-cash fees received ........................ (352,235) (20,297)
Depreciation and amortization ................. 74,378 29,045
Provision for doubtful accounts ............... 60,560 -
Accretion of debt discount ................... - 18,348
Unrealized gain on investments, net ........... (36,815) (86,368)
Unrealized (gain) loss on stock purchase warrants (23,515) 14,360
Amount forgiven under forgivable loans ....... 74,375 27,500
Stock based compensation....................... - 12,420
Changes in operating assets and liabilities:
Accounts receivable ......................... (243,843) (21,704)
Forgivable Loans - employees................. 23,438 -
Due from clearing broker .................... 1,167,906 182,129
Notes receivable - employees ................ (7,000) 49,713
Investments ................................. (1,120,212) 241,055
Other current assets ........................ 1,063 14,229
Other assets and liabilities ................ 20,346 1,550
Accounts payable and accrued liabilities .... (71,414) (445,550)
Securities, sold not yet purchased .......... 78,811 5,575
------------ ------------
Net cash used in operating activities ........... (701,578) (239,957)
INVESTING ACTIVITIES
Purchase of equipment ......................... (64,156) -
------------ ------------
Net cash used in investing activities ........... (64,156) -
FINANCING ACTIVITIES
Changes in capital leases ..................... (20,537) -
Changes in current debt ....................... 29,063 -
Proceeds from credit agreement ................ 1,500,000 -
Proceeds from issuance of common stock
related to private placements 123,750 130,000
------------ ------------
Net cash provided by financing activities ....... 1,632,276 130,000
(Decrease) increase in cash and cash equivalents 866,542 (109,957)
Cash and cash equivalents at beginning of year .. 1,826,474 2,227,160
------------ ------------
Cash and cash equivalents at end of period ...... $ 2,693,016 $ 2,117,203
============ ============
See accompanying notes
6
vFinance, Inc.
Notes to Condensed Consolidated Financial Statements March 31, 2003
(Unaudited)
1. DESCRIPTION OF BUSINESS
vFinance, Inc. is a "new-breed" financial services enterprise committed to
building a worldwide audience of individuals looking to create wealth through
equity investments in both their personal portfolios and their businesses. The
Company principally operates in one business segment which can be referred to as
investment management services and consists primarily of financial services,
including retail brokerage and investment banking.
The Company conducts its broker/dealer operations and investment banking and
consulting through vFinance Investments, Inc, a licensed broker dealer. It also
operates its vFinance.com website through vFinance Holdings, Inc., manages its
Critical Infrastructure Fund (BVI) LP through vFinance Advisors, LLC and
vFinance Investors, LLC and processes its mortgage brokerage through vFinance
Financial Lending Services, Inc.
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts have been eliminated in
consolidation. Certain amounts in the prior year's financial statements have
been reclassified to conform to the current year's presentation.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with instructions to Form 10-QSB. 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-month
period ended March 31, 2003 are not necessarily indicative of the results to be
expected for the year ended December 31, 2003. The interim financial statements
should be read in conjunction with the audited financial statements and notes
contained in the Company's Annual Report on Form 10-KSB for the year-ended
December 31, 2002
Revenue Recognition
The Company earns revenue (commissions) from brokerage and trading which are
recognized on the day of the trade - trade date basis. The Company also earns
revenue from investment banking and consulting. Monthly retainer fees for
investment banking and consulting are recognized as services are provided.
Investment banking success fees are generally based on a percentage of the total
value of a transaction and are recognized upon successful completion.
The Company does not require collateral from its customers. Revenues are not
concentrated in any particular region of the country or with any individual or
group.
The Company periodically receives equity instruments such as stock purchase
warrants, common stock and preferred stock from companies as part of its
compensation for investment-banking services. Such instruments are classified as
investments in trading securities on the Company's balance sheet, if still held
at the financial reporting date. Primarily all of the equity instruments are
received from small public companies. The Company recognizes revenue for the
stock purchase warrants, when received, based on the Black Scholes valuation
model. The revenue recognized related to the other equity instruments is
determined based on available market information. On a monthly basis, the
Company recognizes unrealized gains or losses in its statement of operations
based on the changes in value of equity instruments. Realized gains or losses
are recognized in the Company's statement of operations when the related equity
instrument is sold.
Occasionally, the Company receives equity instruments in private companies with
no readily available market value. Equity interests and warrants for which there
is not a public market are valued based on factors such as significant equity
financing by sophisticated, unrelated new investors, history of positive cash
flow from operations, the market value of comparable publicly traded companies
(discounted for liquidity) and other pertinent factors. Management also
considers recent offers to purchase a portfolio company's securities and the
filings of registration statements in connection with a portfolio company's
initial public offering when valuing equity instruments received from a private
company.
The Company sells two types of listings to its website: (i) perpetual listings
to venture capital vendors, who are interested in providing services to other
companies or individuals; and (ii) three-month listings to entrepreneurs who
have new business ideas to sell. Revenue related to the listings is generally
recognized over the terms of such listings. Website revenues are concentrated
primarily in the United States but are not concentrated in any particular region
of the country or with any individual or group. Fees related to such listings
are included in "other" in the statements of operations.
7
Reclassifications
Certain prior period balances have been reclassified to conform to the current
period's financial statement presentation. These reclassifications had no impact
on previously reported results of operations or shareholders' equity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the accompanying financial
statements. Actual results may differ from those estimates, and such differences
may be material to the financial statements.
Cash and cash equivalents
Cash and cash equivalents include all highly liquid investments with maturities
of three months or less when purchased.
Investments
Investments are classified as trading securities and are held for resale in
anticipation of short-term market movements or until such securities are
registered or are otherwise unrestricted. Trading account assets, consisting of
marketable equity securities and stock purchase warrants, are stated at fair
value. At March 31, 2003 investments consisted of common stock and common stock
purchase warrants held for resale. Realized gains or losses are recognized in
the statement of operations when the related stock purchase warrant is exercised
and the underlying shares are sold. Unrealized gains or losses are recognized in
the statement of operations on a monthly basis based on changes in the fair
value of the security as quoted on national or inter-dealer stock exchanges.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations
in accounting for its employee stock options and employee stock purchase
warrants because the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION ("SFAS 123") and SFAS 148, Accounting for Stock Based Compensation
Transition and Disclosure an amendment of SFAS 123, requires the use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, if the exercise price of the Company's employee stock
options or stock purchase warrants equals or exceeds the market price of the
underlying stock on the date of grant no compensation expense is recognized.
Upon the consummation of an advisory, consulting, capital or other similar
transaction, the Company may distribute equity instruments or proceeds from the
sale of equity instruments to its employees. These distributions are made at the
Company's discretion on a case by case basis as determined by the role of the
employee and the nature of the transaction. At March 31, 2003, there were no
amounts owed to current employees of the Company in connection with equity
investments received as compensation.
Fair Value of Financial Instruments
The fair values of the Company's financial instruments, which includes cash and
cash equivalents, accounts receivable, investments, accounts payable, and
accrued expenses approximate their carrying values.
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable. The
Company places its cash with high quality financial institutions.
Goodwill
The carrying values of goodwill as well as other long-lived assets are reviewed
if the facts and circumstances suggest that they may be impaired. If this review
indicates that the assets will not be recoverable, as determined based on the
undiscounted estimated cash flows of the Company over the remaining amortization
period, the Company's carrying values of the assets would be reduced to their
estimated fair values in accordance with FAS 144.
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.
8
Earnings per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS No. 128"). In
accordance with SFAS No. 128, basic earnings per share is computed using the
weighted average number of shares of common stock outstanding and diluted
earnings per share is computed using the weighted average number of shares of
common stock and the dilutive effect of options and warrants outstanding, using
the "treasury stock" method.
Forgivable Loans
In order to remain competitive in the marketplace, the Company granted
forgivable loans to certain employees. The terms of the loans range from two to
five years with scheduled maturity dates from 2002 to 2005. For each year the
employee is in good standing with the Company, the Company forgives a ratable
portion of the principal and related interest and charges this amount to
compensation expense. If the employee is terminated, the principal balance is
due and payable within 120 days. The loans do not bear interest and interest is
not imputed as collectibility of any such interest would not be probable. As of
March 31, 2003. the balance of the forgivable loans was $227,160 of which
$140,000 is classified as current. The remaining long-term portion of $87,160 is
scheduled for forgiveness as follows: $77,660 in 2004 and $9,500 in 2005.
3. IMPAIRMENT OF GOODWILL
Management determined that there was no impairment of goodwill during the
quarters ended March 31, 2002 and 2003. Goodwill carried on the balance sheet as
of March 31, 2003 was $420,000.
4. SHAREHOLDER'S EQUITY
On November 28, 2001, the Company entered into a Note Purchase Agreement, as
amended by subsequent letter agreements dated November 30, 2001, December 14,
2001, and December 28, 2001, February 13, 2002 and March 4, 2002 (collectively,
the "Note Purchase Agreement"), with SBI Investments (USA) Inc. ("SBI"). Under
the terms of the Note Purchase Agreement, SBI may provide a subordinated loan to
the Company of up to $1,500,000 in the form of a 48-month non-interest bearing,
convertible note. As of December 31, 2002, the Company had received $975,000
under the Note Purchase Agreement and could have received, at SBI's option
alone, an additional $525,000 no later than June 30, 2002. The additional
$525,000 was not funded. The note is convertible, at SBI's option, into as many
as 3,421,053 shares of our common stock at $0.285 per share. The Company, at any
time during the first three years of the agreement, can call for redemption of
the note at a price equal to 116.67% of the then outstanding principal amount of
the Note, in whole (but not in part), or force the conversion of the note into
shares of the Company's common stock.
In July 2002, certain SBI Note holders converted $177,500 of principal into
622,807 shares of common stock of the Company. The Company reflected an
adjustment to its par value of Common Stock equal to $6,228 and reduced its note
payable and unamortized beneficial conversion/imputed interest amount by
$177,500.
In November 2002, an SBI Note holder converted $47,500 of principal into 166,667
shares of common stock of the Company. The Company reflected an adjustment to
its par value of Common Stock equal to $1,667 and reduced its note payable and
unamortized beneficial conversion/imputed interest amount by $47,500.
In accordance with EITF Issue No. 00-27, (APPLICATION OF ISSUE NO. 98-5),
ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OF
CONTINGENTLY ADJUSTABLE CONVERSION RATIOS, IN CERTAIN CONVERTIBLE INSTRUMENTS,
and APB #21 (INTEREST ON RECEIVABLES AND PAYABLES) the Company recorded an
imputed interest factor related to the Note Purchase Agreement of $563,000. The
Company fully expensed the beneficial conversion factor due to the fact that the
SBI Note was immediately convertible. The net one time charge to the financial
statements was $412,000. The imputed interest is accreted ratably over the term
of the loan as additional interest expense. Amortization of the imputed interest
began in January 2002.
The Company has elected to follow Accounting Principle Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided under FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, ("SFAS 123") requires the use of option valuation models that were
not developed for use in valuing employee stock options. As permitted, the
Company adopted the disclosure alternative of SFAS 123 and SFAS 148, which
require pro forma disclosure of net income and earnings per share as if the fair
value method of accounting had been applied. Under APB 25, when the exercise
price of the Company's stock options equals or exceeds the fair value of the
underlying stock on the date of grant, no compensation expense is recorded.
9
A summary of the stock option activity for the three months ended March 31, 2003
is as follows:
Weighted
Average
Exercise Number Exercise Price
Price of Shares Per Option
-------- --------- -------------
Outstanding options at December 31, 2002 $0.50 4,471,664 $0.15 - $6.00
Granted ................................ $0.19 1,390,000 $0.15 - $0.20
Cancelled .............................. $0.57 (468,450) $0.32 - $2.25
----------
Outstanding options at March 31, 2003 .. $0.41 5,393,214 $0.15 - $6.00
----------
A summary of the stock purchase warrant activity for the three months ended
March 31, 2003 is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Warrants Per Option
-------- --------- -------------
Outstanding warrants at December 31, 2002 $2.15 4,108,499 $0.35 - $7.20
Granted ................................. $0.20 1,000,000 $0.20
Cancelled ............................... - - -
Outstanding options at March 31, 2003 ... $1.77 5,108,499 $0.20 - $7.20
=========
The following table summarizes information concerning stock options outstanding
at March 31, 2003.
Option Options
Price Outstanding
----- -----------
0.15 410,000
0.20 1,050,000
0.32 1,765,000
0.35 1,539,215
0.50 100,000
0.55 69,000
0.63 182,500
0.70 39,000
1.00 31,000
2.25 157,499
4.00 10,000
4.13 20,000
5.00 10,000
6.00 10,000
----------
5,393,214
==========
10
The following table summarizes information concerning warrants outstanding at
March 31, 2003.
Exercise Warrants
Price Outstanding
----- -----------
0.20 1,000,000
0.35 1,993,500
0.63 400,000
2.25 585,000
2.50 300,000
6.00 129,999
7.20 700,000
---- ---------
5,108,499
=========
Pro forma information regarding net loss is required by SFAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options under the fair value method. The fair value for
options and warrants granted was estimated at the date of grant using the Black
Scholes option pricing model with the following weighted-average assumptions:
for 2003 risk free interest rates of 4.25%; no dividend yields; volatility
factor of the expected market price of the Company's common stock of 2.345 for
options and warrants and an expected life of the options and warrants of 4-5
years. The Company's pro forma net loss for the period ended March 31, 2003 was
$366,207. The Company's pro forma basic and diluted net loss per share for the
period ended March 31, 2003 was $0.03. The impact of the Company's pro forma net
loss and loss per share of the SFAS 123 pro forma requirements are not likely to
be representative of future pro forma results.
5. DEBT
On January 25, 2002, the Company entered into a Credit Agreement with UBS
Americas, Inc. ("UBS"). Under the terms of the Credit Agreement, UBS provided a
revolving credit facility of up to $3,000,000 to the Company for the purpose of
supporting the expansion of its brokerage business or investments in
infrastructure to expand its operations or its broker-dealer operations. The
loan has a term of 4 years, must be repaid in full by January 2005, and bears
interest at one month LIBOR plus a LIBOR margin of 2% if the loan is repaid
within a month or 5% if it is outstanding more than a month. Among other
covenants, Section 5.10 of the Credit Agreement requires the Company to maintain
shareholder's equity of at least $7,000,000. On April 12, 2002 UBS waived this
requirement of the Credit Agreement to the extent necessary to exclude the
Company's write-off of goodwill aggregating $8,852,020 included in the Company's
consolidated financial statements for the year ended December 31, 2001.
The Company must make early repayments under the Credit Agreement if it acquires
a new broker dealer firm, enters a new line of business, or hires more than 4
brokers in a single or related transaction. This repayment is made by adding
$1.00 to the cost of each incremental clearing transaction the Company makes
through CSC, a wholly owned subsidiary of Paine Webber which is a wholly owned
subsidiary of UBS. All determinations as to required early repayment shall be
made by UBS, in its reasonable judgment. To date, UBS has not notified the
Company of any such determination. The Company borrowed $1,500,000 under the
credit facility on January 28, 2002. The Credit Agreement does not provide for
conversion of the debt into equity securities.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2002
STATEMENTS OF OPERATIONS
Operating revenues were $3,706,601 for the three months ended March 31, 2003 as
compared to $5,904,602 for the three months ended March 31, 2002 a decrease of
$2,198,001 or 37%. The primary reason for the decrease was a significant
reduction in success fees generated from Investment Banking efforts. The Company
is strengthening its efforts in this area by the recruitment of several
seasoned, high-level investment bankers.
Cost of revenues were $2,209,456 for the three months ended March 31, 2003 as
compared to $3,336,128 for the three months ended March 31, 2002 a decrease of
$1,126,672 or 33%. The decrease was primarily due to the reduction in Investment
Banking success fees, referred to above, and the corresponding decrease in
payouts to the Company's bankers. As a consequence, gross profit was $1,497,145
for the three months ended March 31, 2003 as compared to $2,568,474 for the
three months ended March 31, 2002, a decrease of $1,071,329. The corresponding
gross margin was 40% for the three months ended March 31, 2003 as compared to
44% for the three months ended March 31, 2002. The reduced gross margin
percentage during the current quarter is also a result of the significant
reduction in success fees which have comparatively higher margins than the
Company's brokerage and trading revenues.
General and administrative expenses were $1,586,765 for the three months ended
March 31, 2003 as compared to $2,444,430 for the three months ended March 31,
2002, a decrease of $857,665, or 35%. This decrease is primarily related to the
Company's cost savings measures including headcount reductions and consolidation
of its facility space. The Company has been consciously limiting its spending in
this difficult economic environment.
Net loss (gain) on trading securities was $2,728 for the three months ended
March 31, 2003 as compared to ($12,652) for the three months ended March 31,
2002. The net loss (gain) is a result of the value realized upon the disposition
of a particular security.
Professional fees were $80,212 for the three months ended March 31, 2003 as
compared to $239,277 for the three months ended March 31, 2002, a decrease of
$159,065, or 66%. The decrease in cost was primarily attributable to better
utilization of the Company's internal professional staff thereby reducing its
reliance on outside consultants.
The provision for bad debt was $0 for the three months ended March 31, 2003 as
compared to $60,560 for the three months ended March 31, 2002, a decrease of
$60,560, or 100%. The Company provides for credit losses at the time it believes
accounts receivable may not be collectible. Such evaluations are made and
recorded on a monthly basis.
Legal litigation fees were $65,242 for the three months ended March 31, 2003 as
compared to $0 for the three months ended March 31, 2002, an increase of
$65,242, or 100%. As is typical in the industry, the Company defends itself
vigorously against customer claims. As a result, legal litigation costs may be
higher at certain times. While the Company's reserve for anticipated settlements
has remained relatively constant year to year, its cost to defend itself varies
from quarter to quarter.
The net unrealized gain on investments held for trading and stock purchase
warrants was ($72,008) for the three months ended March 31, 2003, as compared to
$(60,329) for the three months ended March 31, 2002. The respective gains were
primarily due to an increase in the market value of investments held by the
Company in conjunction with equity instruments received from various investment
banking clients.
Depreciation and amortization was $29,046 for the three months ended March 31,
2003 as compared to $73,360 for the three months ended March 31, 2002, a
decrease of $44,314, or 60%. The decrease was primarily due to certain fixed
assets becoming fully depreciated and not subsequently replaced. Additionally,
as facilities were consolidated and headcount reduced, there was a reduction in
requirements for additional fixed asset purchases.
The amount forgiven under forgivable loans was $27,500 for the three months
ended March 31, 2003 as compared to $74,375 for the three months ended March 31,
2002, a decrease of $46,875, or 63%. The decrease is attributable to the fact
that the Company, several years ago, discontinued its practice of providing
forgivable loans to brokers as part of its recruitment efforts. Accordingly,
there have been no additions to the outstanding balance and it is being reduced
over time.
Stock based compensation was $12,420 for the three months ended March 31, 2003
as compared to $0 for the three months ended March 31, 2002, an increase of
$12,420, or 100%. This amount represents the amortization of deferred
compensation to an outside consultant who was granted options from the Company
in return for his services during late 2002. The amount of deferred compensation
was fully recognized as of March 31, 2003.
12
Liquidity and Capital Resources
The Company had $2,117,203 of unrestricted cash at March 31, 2003.
Net cash used in operating activities for the three months ending March 31,
2003, was $239,957 as opposed to net cash used in operating activities of
$701,578 for the three months ending March 31, 2002. The decrease in net cash
used in operating activities was primarily due to reduced accounts receivable
and a reduction of non-cash fees received.
Net cash used in investing activities for the three months ending March 31,
2003, was $0 as opposed to net cash used in operating activities of $64,156 for
the three months ending March 31, 2002. The primary reason for the decrease in
net cash used in investing activities was that the Company has reduced its
headcount and facility space resulting in reduced fixed asset requirements.
Net cash provided in financing activities for the three months ending March 31,
2003, was $130,000 as opposed to net cash provided in financing activities of
$1,632,276 for the three months ending March 31, 2002. The decrease in net cash
provided by financing activities is due to the fact that the Company entered
into a debt agreement with UBS Paine Webber borrowing $1,500,000 during the
first quarter of 2002. The Company has had no further need to increase its debt
position since that time.
The Company anticipates that it may need additional debt or equity financing in
order to carry out its long-term business strategy. Such strategy may be
financed by 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 however they
are to some extent reliant on the continuation of mergers and acquisitions and
related financings in the entrepreneurial marketplace.
ITEM 3. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for us. Based upon such officers' evaluation
of these controls and procedures as of a date within 45 days of the filing of
this Quarterly Report, and subject to the limitations noted hereinafter, the
Certifying Officers have concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in this
Quarterly 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. Over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
13
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On or about May 6, 2003 an Answer and Counterclaim was filed by FreeStar
Technology Corporation and Paul Egan (collectively, the "Defendants") in
response to a Complaint, as amended, previously filed against the Defendants in
the United States District Count, Southern District of New York by the
Plaintiffs, Boat Basin Investors, LLC, Papell Holdings, Ltd., Marc Siegel, David
Stefansky and Richard Rosenblum. In the Answer and Counterclaim, which as of the
date of this filing was not served upon vFinance Investments, Inc., Defendants
counter claimed against the Plaintiffs and also named vFinance Investments,
Inc., a wholly-owned subsidiary of the Company, as a counter defendant in such
counter claim. Defendants'claims against vFinance Investments, Inc. include
breach of fiduciary duty, breach of contract, negligence, and negligent
misrepresentation and omission. Defendants are seeking judgment against vFinance
Investments, Inc. for general and special damages in an amount of at least $18
million and punitive damages in an amount of at least $6 million. vFinance
Investments, Inc., if and when served with this counterclaim, will vigorously
defend the action. The Company believes the counter claims against vFinance
Investments Inc. are totally without merit.
Item 2. CHANGES IN SECURITIES
On February 27, 2003 the Company sold 1,500,000 unregistered shares at a price
of $0.0867 per share for a total consideration of $130,000. These shares were
sold to Arend Verweij and Hoss Bozorgzad , independent contractors of the
Company.
The above noted securities were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933, as amended, because the securities were
acquired in a privately negotiated transaction by sophisticated investors.
During the first quarter of 2003, the Company granted stock options to purchase
an aggregate of 1,390,000 shares of the Company 's common stock to five
employees of the Company. The exercise prices of these options range from $.15
to $0.20. The option grants were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933, as amended, because the individuals
receiving the options are sophisticated investors who have knowledge of all
material information about the Company.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
99.1 - Certification by Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley act of 2002.
99.2 - Certification by Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley act of 2002.
(b) REPORTS ON FORM 8-K
None.
15
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 May 15, 2003
---------------------- and President
Leonard J. Sokolow (Principal Executive Officer)
By: /s/ Mark Kacer Chief Financial Officer and May 15, 2003
---------------------- (Principal Financial and
Mark Kacer Accounting Officer)
16
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of vFinance, Inc. on Form 10-QSB for the
quarter ended March 31, 2003, as filed with the Securities and Exchange
Commission on the date hereof, I, Leonard J. Sokolow, the Chief Executive
Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, that:
1. I have reviewed this quarterly report on Form 10-QSB of vFinance, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order; to make the statements made, in light of the circumstances under which
such statements were made not, not misleading;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Leonard J. Sokolow
---------------------------
Name: Leonard J. Sokolow
Title: Chief Executive Officer
17
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of vFinance, Inc. on Form 10-QSB for the
quarter ended March 31, 2003, as filed with the Securities and Exchange
Commission on the date hereof, I, Mark Kacer, the Chief Financial Officer of the
Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that:
1. I have reviewed this quarterly report on Form 10-QSB of vFinance, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order; to make the statements made, in light of the circumstances under which
such statements were made not, not misleading;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Mark Kacer
------------------------------
Name: Mark Kacer
Title: Chief Financial Officer