Attached files

file filename
EX-32.1 - SECTION 906 CEO CERTIFICATION - SUMMIT FINANCIAL SERVICES GROUP INCdex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - SUMMIT FINANCIAL SERVICES GROUP INCdex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - SUMMIT FINANCIAL SERVICES GROUP INCdex311.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - SUMMIT FINANCIAL SERVICES GROUP INCdex322.htm

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2010.

OR

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission File No: 333-108818

 

 

SUMMIT FINANCIAL SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Florida   05-0577932

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

595 South Federal Highway

Suite 500

Boca Raton, FL 33432

(Address of principal executive offices)

(Zip Code)

(561) 338-2800

(Registrant’s telephone number, including area code)

980 North Federal Highway

Suite 310

Boca Raton, FL 33432

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer     ¨    Accelerated filer     ¨
Non-accelerated filer     ¨ (Do not check if a smaller reporting company)    Smaller reporting company     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 the latest practicable date:

 

Class

 

Outstanding as of May 12, 2010

Common Stock

Par value $0.0001 per share

  25,920,288

 

 

 


SUMMIT FINANCIAL SERVICES GROUP, INC.

INDEX

 

     Page

Part I. Financial Information

  

Item 1.

   Financial Statements   
   Condensed Consolidated Statements of Financial Condition at March 31, 2010 (unaudited) and December 31, 2009    3
   Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2010 and 2009 (unaudited)    4
   Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2010 and 2009 (unaudited)    5
   Notes to Unaudited Condensed Consolidated Financial Statements    6

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    7

Item 4.

   Controls and Procedures    11

Part II. Other Information

  

Item 2.

   Unregistered Sale of Equity Securities and Use of Proceeds    11

Item 6.

   Exhibits    11

Signatures

   12

FORWARD LOOKING STATEMENTS

This Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). When used in this Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project” or “intend” and similar expressions identify forward-looking statements regarding events, conditions and financial trends in connection with our future plan of operations, business strategy, operating results and financial position. Discussions containing such forward-looking statements may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Current shareholders and prospective investors are cautioned that any forward-looking statements are not guarantees of future performance. Such forward-looking statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company’s control, and actual results for future periods could differ materially from those discussed in this Report, depending on a variety of important factors, among which are the success or failure of management’s efforts to implement its business strategy; the level of acquisition opportunities available to the Company and the Company’s ability to price and negotiate such transactions on a favorable basis; the Company’s ability to properly manage growth and successfully integrate acquired companies and operations; the Company’s ability to compete with major established companies; the Company’s ability to attract and retain qualified personnel; the regulatory environment, economic and financial market conditions generally; and other risks and uncertainties which may be described from time to time in the Company’s filings with the Securities and Exchange Commission (the “SEC”), including the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2009.

 

Page 2


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

SUMMIT FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

 

     March 31,
2010
    December 31,
2009
 
     (unaudited)        
ASSETS     

Cash and cash equivalents

   $ 7,707,136      $ 6,301,921   

Deposits held at clearing brokers

     128,703        128,696   

Commissions receivable, net

     1,314,810        1,302,021   

Notes receivable, net

     674,253        826,912   

Other receivables, net

     88,413        162,657   

Securities owned, at fair value

     7,640        9,381   

Prepaid expenses and other assets

     731,675        707,739   

Property and equipment, net

     577,441        216,251   

Goodwill

     500,714        500,714   
                

TOTAL ASSETS

   $ 11,730,785      $ 10,156,292   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

LIABILITIES

    

Accounts payable and accrued expenses

   $ 1,832,070      $ 1,306,597   

Accrued commissions expense

     3,099,885        2,425,738   
                

TOTAL LIABILITIES

     4,931,955        3,732,335   

STOCKHOLDERS’ EQUITY

    

Preferred stock, undesignated; par value $0.0001 per share; authorized 4,850,000 shares; none issued and outstanding

     —          —     

Preferred stock, Series A, 12% cumulative convertible; par value $0.0001 per share; authorized 150,000 shares; 125,000 issued and outstanding (liquidation preference of $125,000)

     13        13   

Common stock, par value $0.0001 per share; authorized 100,000,000 shares; 25,935,200 issued and 25,920,288 outstanding at March 31, 2010 and 25,735,200 issued and 25,720,288 outstanding at December 31, 2009

     2,593        2,573   

Additional paid-in capital

     11,597,269        10,612,693   

Unearned stock-based compensation

     (1,584,570     (1,114,477

Treasury stock (14,912 shares, at cost)

     (10,884     (10,884

Accumulated deficit

     (3,205,591     (3,065,961
                

TOTAL STOCKHOLDERS’ EQUITY

     6,798,830        6,423,957   
                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 11,730,785      $ 10,156,292   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

Page 3


SUMMIT FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

 

     For The Three Months Ended
March 31,
 
   2010     2009  
   (Unaudited)     (Unaudited)  

Revenues

    

Commissions

   $ 14,520,117      $ 7,670,490   

Interest and dividends

     339,095        301,176   

Other

     200,048        106,342   
                
     15,059,260        8,078,008   
                

Expenses

    

Commissions and clearing costs

     12,490,593        6,248,791   

Employee compensation and benefits

     1,719,259        1,192,329   

Occupancy and equipment

     214,855        155,777   

Communications

     102,529        112,895   

Depreciation and amortization

     48,676        19,311   

Other operating expenses

     476,228        435,027   
                
     15,052,140        8,164,130   
                

Income (loss) before income taxes

     7,120        (86,122
                

Provision for income taxes

     143,000        —     
                

Net loss

   $ (135,880   $ (86,122
                

Basic loss per common share

   $ (0.01   $ (0.00
                

Diluted loss per common share

   $ (0.01   $ (0.00
                

Weighted average common shares outstanding:

    

Basic

     25,726,863        25,458,634   
                

Diluted

     25,726,863        25,458,634   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

Page 4


SUMMIT FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

 

     For The Three  Months
Ended March 31,
 
   2010     2009  
   (Unaudited)     (Unaudited)  

Cash flows from operating activities:

    

Net loss

   $ (135,880   $ (86,122

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     48,676        19,311   

Stock based compensation, net

     454,503        154,200   

Amortization of advisor notes

     115,910        40,030   

Changes in:

    

Deposits held at clearing brokers

     (7     (10

Commissions receivable

     (12,790     (543,921

Notes receivable

     36,749        (127,799

Other receivables

     74,245        31,909   

Prepaid expenses and other

     (23,937     154.980   

Securities owned

     1,741        (471

Accounts payable and accrued expenses

     525,473        (181,148

Accrued commission expense

     674,148        284,434   
                

Net cash provided by (used in) operating activities

     1,758,831        (254,607 )
                

Cash flows from investing activities–

    

Purchase of property and equipment

     (409,866     (1,496
                

Net cash used in investing activities

     (409,866     (1,496
                

Cash flows from financing activities:

    

Payment of preferred stock dividend

     (3,750     (3,750

Proceeds from exercise of warrants

     60,000        —     
                

Net cash provided by (used in) financing activities

     56,250        (3,750
                

Net increase (decrease) in cash and cash equivalents

     1,405,215        (259,853

Cash and cash equivalents at beginning of period

     6,301,921        5,166,614   
                

Cash and cash equivalents at end of period

   $ 7,707,136      $ 4,906,761   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

Page 5


SUMMIT FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

March 31, 2010

NOTE 1—GENERAL

The condensed consolidated financial statements for the three-month periods ended March 31, 2010 and March 31, 2009 reflect all adjustments (consisting only of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods indicated. The condensed consolidated financial statements herein should be read in conjunction with the audited consolidated financial statements and notes thereto, together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2009 for Summit Financial Services Group, Inc. (the “Company” or “SFSG”). The results of operations for the three-month period ended March 31, 2010 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2010.

Certain amounts from the prior year have been reclassified to conform to the current-year presentation. These reclassifications had no impact on the reported net loss for the period ended March 31, 2009.

NOTE 2—STOCKHOLDERS’ EQUITY

Basic earnings per share is computed by dividing the net income (loss) available to common shareholders for the relevant period by the weighted average number of shares of common stock issued and outstanding during the period. For purposes of calculating diluted earnings (loss) per share, the denominator includes both the weighted average number of shares of common stock and the number of dilutive common stock equivalents (“CSEs”). The number of dilutive common stock equivalents includes the effect of stock options, warrants, and deferred stock calculated using the treasury stock method and the number of issuable common shares upon the conversion of preferred stock using the “if converted” method. As of March 31, 2010, the Company had options, warrants and deferred shares outstanding entitling the holders thereof to purchase a total of approximately 19.7 million shares of common stock. The Company also had outstanding shares of preferred stock convertible into approximately 140,000 shares of common stock. For purposes of computing the diluted loss per share, the Company has not assumed the exercise of any options and warrants because the effect thereof would be either non- or anti-dilutive. As of March 31, 2009, the Company had options and warrants outstanding entitling the holders thereof to purchase a total of approximately 18.9 million shares of common stock. The Company also had outstanding shares of preferred stock convertible into approximately 140,000 shares of common stock. For purposes of computing the diluted loss per share, the Company did not assume the exercise of any options and warrants because the effect thereof would be either non- or anti-dilutive.

Stock-Based Awards

The Company accounts for stock-based compensation using a fair market value method. Most often, options are granted for the provision of future services, such as continued employment or, in the case of independent financial advisors, their affiliation with the Company. Consequently, the options typically provide for vesting over a period of years, with a certain percentage of the options vesting each year upon the anniversary date of the grant if the grantee is then still affiliated with the Company. Any unearned stock compensation is generally amortized over the period the underlying options are earned, which is typically the vesting period. The fair value of each option grant is estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. The amortization of earned stock expense related to issuances to employees is included in the accompanying condensed consolidated statements of income under the caption “Employee Compensation and Benefits”, while the amortization of earned stock expense related to issuances to non-employees is included under the caption “Other Operating Expenses.”

 

Page 6


The following schedule is intended to reflect the total fair market values of options issued to both employees and non-employees during the three-month periods ended March 31, 2010 and 2009, respectively, as well as the net amortization expense recognized by the Company during those periods related to the issuance of options in the current and prior period:

 

     For The Three Months
Ended March 31,
   2010    2009

Fair market value of options issued—employees, net

   $ 328,764    $ 72,167

Fair market value of options issued—non-employees, net

   $ 48,133    $ 2,495

Fair market value of deferred stock issued, net

   $ 549,096    $ —  

Net amortization expense—options issued to employees

   $ 412,107    $ 131,009

Net amortization expense—options issued to non-employees

   $ 42,396    $ 23,191

In January 2010, options entitling the Chairman, CEO and President of the Company (the “Holder”) to acquire up to 5,600,000 shares of SFSG’s common stock at an exercise price of $.25 per share were cancelled, in consideration, in part, for the issuance of new options to acquire 2,800,000 shares of common stock, together with 2,800,000 shares of deferred stock. The new options and the deferred stock were issued subject to shareholder approval of certain amendments to SFSG’s 2006 Incentive Compensation Plan (the “Plan”), to among other things, increase the number of shares of common stock underlying the Plan. The new options were issued with an exercise price of $.50 per share and are immediately exercisable upon shareholder approval of the amendments to the Plan. The new options will expire, if not sooner exercised, on December 31, 2019. The deferred stock represents a contingent right to receive an equal number of shares of common stock, which will vest ratably over a period of seven years, and will be delivered upon the earlier to occur of: (i) December 31, 2019; (ii) a change in control of SFSG; or (iii) under certain circumstances, the termination of the Holder’s employment with the Company.

NOTE 3—INCOME TAXES

For the three-month period ended March 31, 2010, the Company’s provision for income taxes reflects an estimated tax accrual of $143,000 based on the Company’s estimated effective tax rate for the year ending December 31, 2010. For the three months ended March 31, 2009, the Company did not provide for income taxes based on the Company’s estimate of the effective tax rate for the full year ended December 31, 2009. The Company’s income tax provision in any period will be affected by, among other things, permanent, as well as timing differences in the deductibility of certain items, including stock-based compensation and the amortization of intangible assets. As a result, the Company may experience significant fluctuations in the effective book tax rate (that is, its current tax expense divided by its pre-tax book income) from period to period, regardless of the Company’s effective tax rate for purposes of determining its federal and state income tax liability.

NOTE 4—NET CAPITAL REQUIREMENT

Summit Brokerage Services, Inc., the Company’s wholly-owned broker-dealer subsidiary (“Summit Brokerage” or “SBS”), is subject to the SEC Uniform Net Capital Rule (SEC Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. At March 31, 2010, Summit Brokerage had net capital of approximately $2.04 million, which was $1.71 million in excess of its SEC-required minimum net capital of $330,511. Under SEC Rule 15c3-1, Summit Brokerage’s aggregate indebtedness to net capital ratio was 2.09 to 1 at March 31, 2010.

NOTE 5—CONTINGENCIES

The Company is, or may become, a party to legal proceedings relating to various claims and lawsuits arising in the normal course of business. Management has provided an accrual for estimated probable losses which could result from asserted matters. Management believes that, to the best of its knowledge, the range of potential net losses resulting from the currently asserted proceedings in excess of the accrued amount, if any, will not be material to the Company’s financial position or results of operations.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company’s financial condition and results of its operations for the three-month periods ended March 31, 2010 and 2009 should be read in conjunction with the Company’s condensed consolidated financial statements included as Item 1 herein. When used in the following discussions, the words “believes,” “anticipates,” “intends,” “expects,” and similar expressions are intended to identify forward-looking statements. As further explained in the section entitled “Forward Looking Statements” on page 2 herein, such statements are subject to certain risks and uncertainties, which could cause results to differ materially from those projected.

Overview

The Company is a Florida-based financial services holding company that provides, through its Summit Brokerage Services, Inc. (“Summit Brokerage”) operating subsidiary, a broad range of securities brokerage and investment services to primarily individual investors. Summit Brokerage also sells insurance products, predominantly fixed and variable annuities and life insurance, under licenses held by its SBS Insurance Agency of Florida, Inc. (“SBSIA”) subsidiary (or by SBSIA’s subsidiary entities). Summit Brokerage also provides, through its SEC registered investment advisor subsidiary, Summit Financial Group, Inc. (“SFG”), asset management and investment advisory services. SFSG was incorporated under the laws of the State of Florida in 2003.

 

Page 7


Summit Brokerage is registered as a broker-dealer with the SEC, is a member of the Financial Industry Regulatory Authority (“FINRA”) (f/k/a National Association of Securities Dealers, Inc. (“NASD”)), the Municipal Securities Rule Making Board (“MSRB”), the National Futures Association (“NFA”) and the Securities Investor Protection Corporation (“SIPC”), and is licensed to conduct its brokerage activities in all 50 states, plus the District of Columbia. SFG is registered or eligible to conduct business as an investment advisor in 36 states and the District of Columbia. SBSIA, directly or through its subsidiary entities, is licensed to sell insurance, or is not required to be so licensed, in all jurisdictions where the Company conducts its brokerage activities.

As of April 30, 2010, we had approximately 305 financial advisors operating from approximately 193 offices located throughout the country. Our financial advisors service retail, and to a much lesser extent, institutional clients. The number of financial advisors in each affiliate office typically ranges from one to five, although the number of financial advisors in certain offices may exceed this amount. With the exception of our Boca Raton, Florida branch (the “Boca Branch”), all of our branch offices and satellite locations are owned and operated by independent owners, whom we refer to as affiliates, who maintain all appropriate licenses and are responsible for all of their respective office overhead and expenses. Our financial advisors offer a broad range of investment products and services. These products and services allow us to generate both commissions (from transactions in securities and other investment products) and fee income (for providing investment advisory services, namely managing a client’s account). The investment products and services offered include mutual funds, annuities, insurance, individual stocks and bonds, and managed money accounts. Historically, many of our affiliates have also provided financial planning services to their clients, wherein the financial advisor evaluates a client’s financial needs and objectives, develops a detailed plan, and then implements the plan with the client’s approval. When the implementation of such objectives involves the purchase or sale of securities (including the placement of assets within a managed account) such transactions are effected through Summit Brokerage, for which we earn either a commission or a fee. The following table reflects the various sources of revenue and the percentage of total revenues for the quarters ended March 31, 2010 and 2009:

 

     March 31, 2010     March 31, 2009  

Insurance related products

   $ 5,224,319    35   $ 2,680,681    33

Equities

     3,114,632    21        1,867,361    23   

Mutual funds

     2,120,707    13        863,036    11   

Investment advisory fees

     2,588,151    17        1,210,492    15   

Other commission income

     1,472,308    10        1,048,920    13   

Miscellaneous

     539,143    4        407,518    5   
                          

Total

   $ 15,059,260    100   $ 8,078,008    100
                          

We do not hold any funds or securities of our customers, but instead utilize, on a fully disclosed basis, the services of First Clearing, LLC (a division of Wachovia Corporation) and Pershing LLC (an affiliate of the Bank of New York Mellon) as our clearing brokers (the “Clearing Brokers”). Our clearing arrangements provide us with back office support, transaction processing services on all principal national and international securities exchanges, and access to many other financial services and products. These arrangements allows us to offer a range of products and services that are generally offered only by firms that are larger and have more capital than Summit Brokerage.

By their nature, our business activities are highly competitive and are subject to, among other things, general market conditions, including the volatility of the trading markets and the attractiveness of various forms of investment products. Consequently, our revenues and net income or loss are subject to substantial positive and negative fluctuations due to a variety of factors that cannot be predicted with great certainty and may result in revenues and net income or loss in any particular period that may not be representative of future results, and may vary significantly from period to period. Furthermore, our mix of business in any particular period will be impacted by several factors, including the attractiveness of any particular type of investment when compared with other types of investments, and the types of investments sold by newly added financial advisors to our Company, many of whom specialize in the sale of specific types of investment products.

In general, our financial results can be impacted by a number of factors, including general market conditions and volatility, as well as our ability to recruit and retain financial advisors. During the quarter ended March 31, 2010, our revenues were positively impacted (when compared with the same period of the prior year) by a significant net addition of new financial advisors as well as an improvement in investor confidence.

 

Page 8


Although we expect our results, in general, to be impacted by macroscopic forces such as the state of the economy, as well as overall market conditions and investor confidence, we may experience fluctuations in our revenue that do not follow such trends, or mirror trends experienced by the financial services industry as a whole. This is because, given our size, we may add, or lose, financial advisors who generate a significant amount of commissions from the sale of a particular type of investment product. As we grow larger, we anticipate that the ability of any branch office to impact the overall revenue mix will be diminished. However, due to our size, it is possible that the addition or loss of financial advisors (and their customers) who focus on certain products over other products will be a factor in causing fluctuations in our revenue and/or revenue mix from period to period which may not be representative of results in other periods or reflective of general market conditions or economic trends.

Our operating results may also be negatively impacted by other factors facing the financial services industry, in general, and the independent broker-dealer channel, specifically. Increased competition among broker-dealers to hire financial advisors has increased the amounts that we are required to pay certain financial advisors. Additionally, certain sources of revenues that have historically been available to the Company may be reduced or eliminated. For example, the Company currently receives 12b-1 fees, or trail commissions, from the sale of mutual fund shares. The SEC is currently reviewing its policies with respect to such payments. In the event the SEC were to limit the ability of Summit Brokerage to receive such fees, our revenues and earnings would be negatively impacted. Our earnings may also be negatively impacted by reductions in interest rates, as well as from decreases in certain compensation amounts paid by insurance companies and mutual funds with whom we do business. Additionally, increased regulations, and the related cost of compliance therewith, could also impact our margins. A recent proposal to treat financial advisors licensed with independent broker-dealers as employees, rather than as independent contractors, could also adversely affect our business.

We continue to focus our business plan on increasing our network of affiliated financial advisors, primarily through recruiting efforts. Although we will continue to attempt to recruit those financial advisors who serve as financial planners (who sell primarily annuities, insurance, mutual funds and fee-based products), we also intend to pursue the addition of financial advisors who focus on the sale of different types of securities, namely equities, fixed income and investment advisory products. There can be no assurance that we will be successful in our recruiting efforts. By focusing our business plan on increasing our network of affiliated financial advisors, we believe we can expand our base of revenue and our network for the retail brokerage of securities without the capital expenditures that would be required to open Company-owned offices and the additional administrative and other costs of hiring financial advisors as in-house employees. As was the case with the Boca Branch, however, we may evaluate potential acquisitions, including those that would result in acquired financial advisors becoming employees of Summit Brokerage. Historically, Summit Brokerage has recruited offices comprised of between one and three financial advisors. Prospectively, we expect to continue to recruit smaller offices, although we will also target larger offices comprised of many financial advisors. Because of the size of these larger offices, we may be required to pay a greater percentage of the office’s commissions then we would pay to a smaller office. As a result, if we are successful, of which no assurance can be given, we may experience a potential decline in our gross margin percentage.

We may also pursue mergers with, or the acquisition of the assets of, other brokerage firms. Our ability to realize growth through acquisitions, however, will depend on the availability of suitable broker-dealer candidates and our ability to successfully negotiate favorable terms (from both sellers as well as financing sources, if necessary), and there can be no assurance that we will be able to consummate any such acquisitions. Further, there are costs associated with the integration of new businesses and personnel, which may be more than we anticipate at that time. Thus, there is no assurance that we will be able to successfully execute such growth strategy.

As we continue to grow, we may also incur increases in expenses related to, among other things, marketing and recruiting, personnel, office space, and the amortization of forgivable loans provided to newly recruited financial advisors. There can be no assurance that any increased revenue from growth will be sufficient to offset any increased expenses. In addition, the Company may elect to expand the types of trading activities in which it serves as a principal, which transactions are inherently more risky than transactions in which the Company serves as an agent. Furthermore, the Company has determined that its long term growth strategy can best be maximized through the reinvestment of its earnings into the development of its infrastructure and its recruiting and business development efforts, including through the payment of upfront amounts to financial advisors. As a result, the Company’s future earnings may be significantly less than in prior years should our revenue growth be less than anticipated.

For our current level of operating activities, we believe that our operations and current capital resources will be sufficient to fund our working capital needs through 2010. The Company may, however, seek additional capital within the next 12 months should it elect to continue pursuing a strategy that incorporates the use of both forgivable and non-forgivable loans to induce newly recruited financial advisors to affiliate with the Company. In addition, we anticipate that our strategy of growth through acquisitions may necessitate additional debt and/or equity financing, although there can be no assurances that this will happen. Our failure to obtain sufficient financing for either of these purposes could have a materially adverse affect on our ability to execute our growth strategy to the extent desired.

Results of Operations

The following discussion relates to the results of operations for the three months ended March 31, 2010 (the “2010 Quarter”) and the comparable period in the prior year (the “2009 Quarter”).

 

Page 9


Comparison of Three Months Ended March 31, 2010 and March 31, 2009

Revenue:

Commission revenue of approximately $14.52 million for 2010 Quarter represents an increase of approximately $6.85 million, or 89%, over the $7.67 million of commission revenue reported for the 2009 Quarter. For the 2010 Quarter, our revenues were positively impacted by significant net additions of new financial advisors as well as an improvement in investor confidence. For the 2009 Quarter, our revenues were negatively impacted by the turmoil experienced by the financial markets, and the related loss of investor confidence, which resulted in a decline in the average production per financial advisor. For the balance of 2010, we believe general market conditions, and therefore investor confidence, may continue to improve which may therefore positively affect our operating results.

In any period, our mix of business will be impacted by several factors, including, among other things, investor confidence, as reflected by the movements of the equities markets, and the attractiveness of non-equity-related investment products, such as fixed income securities. Additionally, during any period, we may add, or lose, a significant number of financial advisors who focus only on the sale of a particular type or types of investment product(s) (e.g., insurance, equities, fixed income, etc.).

Interest and dividends increased by approximately $38,000 from approximately $301,000 in the 2009 Quarter to approximately $339,000 in the 2010 Quarter. Interest and dividend income is comprised primarily of that portion of the interest income earned from, and the interest expense charged to, clients of Summit Brokerage that are received from our Clearing Brokers. Should interest rates remain at their current levels, or decline even further, we expect that the amounts received by Summit Brokerage will decline over amounts paid in prior years. The loss of a significant amount of these payments could have a material adverse impact on the Company’s operating results.

Expenses:

Commissions and clearing costs increased to approximately $12.49 million in the 2010 Quarter, which represents a increase of $6.24 million, or 100%, from the approximately $6.25 million reported for the 2009 Quarter. In general, commissions and clearing costs are directly related to commission revenue, and will typically increase or decrease proportionately as commission revenue rises or falls. Commissions and clearing costs, as a percentage of commission revenue, increased in the 2010 Quarter to 86.0% from 81.5% in the 2009 Quarter. Prospectively, we would expect this percentage to continue to increase as we recruit more independent financial advisors. Because our independent financial advisors are responsible for the payment of all costs associated with operating their offices, we must pay them a higher percentage of the commissions they generate (typically 80% to 90%), than we pay to those financial advisors working from the Boca Branch, where Summit pays the costs associated with operating the Boca Branch. Additionally, commissions and clearing costs as a percentage of commission revenue increased as a result of certain newly recruited advisors electing to take a greater payout for a limited period of time in lieu of upfront, forgivable loans.

Employee compensation and benefits increased to approximately $1.72 million in the 2010 Quarter, which represents an increase of approximately $0.53 million, or 44%, from the approximately $1.19 million reported for the 2009 Quarter. This increase was due primarily to an increase in salaries and wages, accrued compensation, and certain employee benefit costs. We include within employee compensation and benefits those net expenses related to the issuance of common stock and common stock equivalents, such as options, to our employees. For the 2010 and 2009 Quarters, a total of approximately $412,000 and $131,000, respectively, was expensed (net of recaptured amortization), all of which related to the amortization of unearned stock compensation for employees.

Occupancy and equipment costs increased by approximately $59,000, or 38%, from approximately $156,000 in the 2009 Quarter to $215,000 in the 2010 Quarter. This increase was due to an overall increase in the Company’s lease expense related to its move to its new corporate headquarters, as well as to certain additional rent that was paid in connection with the expiration of a lease on its prior headquarters. Prospectively, the Company anticipates that its monthly rent expense will increase from approximately $42,000 at its prior location to approximately $53,000 at its new location.

Communications costs decreased by approximately $10,000, or 9.2%, to approximately $103,000 in the 2010 Quarter from approximately $113,000 in the 2009 Quarter.

Other operating expenses include the general and administrative costs incurred by the Company, to the extent such costs are not included elsewhere. Other operating expenses increased by approximately $41,000 or 9%, to approximately $476,000 during the 2010 Quarter from approximately $435,000 for the 2009 Quarter. During the 2010 Quarter, we experienced increases in costs related to, among other things, fees paid to consultants, advertising and marketing, and attracting and hiring financial advisors, which increases were only partially offset by decreases in our net insurance costs, as well as licensing and regulatory costs. Additionally, we include within other operating expenses those net expenses related to the issuance of common stock and common stock equivalents, such as options, to non-employees. For the 2010 and 2009 Quarters, a total of approximately $42,000 and $23,000, respectively, was expensed (net of recaptured amortization) for such issuances, all of which related to the amortization of unearned stock compensation.

Net Income:

For the 2010 Quarter, we recorded a net loss of approximately $136,000, or $0.01 per basic and diluted share, as compared to a net loss reported for the 2009 Quarter of approximately $86,000, or $0.00 per basic and diluted share.

Liquidity and Capital Resources

Net cash provided by operating activities during the 2010 Quarter totaled approximately $1,759,000 compared to net cash used by operating activities of approximately $255,000 during the 2009 Quarter. Cash provided by, or used in, operating activities for any period includes net income or loss for that period adjusted for non-cash items and the effects of changes in working capital. For the 2010 Quarter, cash flows from operating activities were positively impacted by non-cash stock-based compensation of approximately $455,000, versus approximately $154,200 during the 2009 Quarter. During the 2010 Quarter, cash provided by operating activities also increased as a result of the net change in certain balance sheet accounts, primarily increases in accounts payable and accrued expenses of approximately $525,000 and accrued commission expense of approximately $674,000.

Cash and cash equivalents increased during the 2010 Quarter by approximately $1,400,000 to approximately $7,700,000 at March 31, 2010 from approximately $6,300,000 at December 31, 2009. This increase was driven by the increase in net cash provided by operating activities as discussed.

During the 2010 Quarter, we purchased approximately $410,000 of property and equipment, which amount was approximately $408,500 more than the approximately $1,500 purchased during the 2009 Quarter. This significant increase is attributed to the Company’s move to its new headquarters during the 2010 Quarter. We do not project material capital expenditures over the next twelve months.

Financing activities provided cash of $56,250 during the 2010 Quarter as a result of proceeds from the exercise of a common stock purchase warrant partially offset by dividends paid on our Series A preferred stock. For the 2009 Quarter, financing activities used cash of $3,750 which was entirely for dividends paid on our Series A preferred stock.

 

Page 10


Inflation. Inflation has not been a major factor in our business since inception.

 

Item 4. Controls and Procedures

The Company’s Chief Executive Officer and the Company’s Chief Financial Officer evaluated the Company’s disclosure controls and procedures as of March 31, 2010. Based upon this evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that it files with the Securities and Exchange Commission.

During the quarter ended March 31, 2010, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

In March 2010, the Company issued 200,000 shares of its common stock to one person upon such person’s exercise of a common stock purchase warrant with an exercise price of $.30 per share. All of the shares of common stock were issued in reliance upon the exemption from the registration requirements under the Securities Act of 1933, as amended, afforded by Section 4(2) of such Act.

 

Item 6. Exhibits

 

Number

  

Name

31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Page 11


SUMMIT FINANCIAL SERVICES GROUP, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: May 17, 2010     Summit Financial Services Group, Inc.
    (Registrant)
    /s/    MARSHALL T. LEEDS        
   

Marshall T. Leeds,

Chairman of the Board, Chief Executive Officer and President

    (Principal Executive Officer)
Date: May 17, 2010     /s/    STEVEN C. JACOBS        
   

Steven C. Jacobs,

Executive Vice President and Chief Financial Officer

    (Principal Accounting Officer)

 

Page 12


EXHIBIT INDEX

 

EXHIBIT

NUMBER

  

DESCRIPTION

31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Page 13