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EX-32.1 - NETWORK 1 FINANCIAL GROUP, INC. | v198659_ex32-1.htm |
EX-32.2 - NETWORK 1 FINANCIAL GROUP, INC. | v198659_ex32-2.htm |
EX-31.2 - NETWORK 1 FINANCIAL GROUP, INC. | v198659_ex31-2.htm |
EX-31.1 - NETWORK 1 FINANCIAL GROUP, INC. | v198659_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
þ
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
Year Ended June 30, 2010
OR
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _______ to _______
Commission
file number: 001-14753
NETWORK
1 FINANCIAL GROUP, INC.
(Exact
Name of Registrant as specified in its charter)
Delaware
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11-3423157
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(State
or other jurisdiction of
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(I.R.S.
Employer
|
|
incorporation
or organization)
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Identification
No.)
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2 Bridge
Avenue, 4thFloor
Red Bank,
NJ 07701
(Address
of principal executive offices)
(732)
758-9001
(Issuer’s
telephone number)
Securities
registered under section 12(b) of the Exchange Act: None.
Securities
registered under section 12 (g) of the Exchange Act:
Common
stock, Par value $0.001
Common
Stock Purchase Warrants
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
YES o NO þ
YES o NO þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
YES o NO þ
YES o NO þ
Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 þ
NO o
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 (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). YES o
NO o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
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.
Large accelerated filer
|
Accelerated filer
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Non-accelerated filer (Do not check if a smaller reporting company)
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Smaller reporting company þ
|
Indicate
by check mark whether the Registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act)
YES o NO þ
YES o NO þ
As of
December 31, 2009, approximately 32,435,057 shares of common stock were
outstanding. The aggregate market value of the common stock held by
non-affiliates of the registrant, as of December 31, 2009, the last business day
of the second fiscal quarter, was approximately $498,724 based on the
last sale price of $0.08 for the registrant’s common stock as quoted on the
Over-the-Counter Bulletin Board on that date. Shares of common stock held by
each director, each officer and each person who owns 10% or more of the
outstanding common stock have been excluded from this calculation in that such
persons may be deemed to be affiliates. The determination of affiliate status is
not necessarily conclusive.
The
registrant had 32,435,057 shares of its common stock outstanding as of October
5, 2010.
Page
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PART
I
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2
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Item
1.
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Business
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2
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Item
1A.
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Risk
Factors
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3
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Item
1B.
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Unresolved
Staff Comments
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3
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Item
2.
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Properties
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3
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Item
3.
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Legal
Proceedings
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3
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Item
4.
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(Removed
and Reserved)
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3
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PART
II
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4
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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4
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Item
6.
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Selected
Financial Data
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5
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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5
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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8
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Item
8.
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Financial
Statements and Supplementary Data
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9
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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10
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Item
9A.
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Controls
and Procedures
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10
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Item
9B.
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Other
Information
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11
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PART
III
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12
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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12
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Item
11.
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Executive
Compensation
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14
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
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16
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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17
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Item
14.
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Principal
Accountant Fees and Services
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18
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Item
15.
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Exhibits
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19
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SIGNATURES
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21
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ii
FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of
1995 and Network 1 Financial Group, Inc. intends that such forward-looking
statements be subject to the safe harbors created thereby. The forward-looking
statements relate to future events or the future financial performance of
Network 1 Financial Group, Inc. (formerly known as International Smart Sourcing,
Inc.), a Delaware corporation, including, but not limited to, statements
contained in: Item 1. “Business” and Item 7. “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” Readers are
cautioned that such statements, which may be identified by words including
‘‘anticipates,’’ ‘‘believes,’’ ‘‘intends,’’ ‘‘estimates,’’ ‘‘expects,’’ and
similar expressions, are only predictions or estimations and are subject to
known and unknown risks and uncertainties. In evaluating such statements,
readers should consider the various factors identified in this Annual Report on
Form 10-K which could cause actual events, performance or results to differ
materially from those indicated by such statements. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by
Network 1 Financial Group, Inc. or any other person that its objectives or plans
will be achieved. Network 1 Financial Group, Inc. does not undertake and
specifically declines any obligation to update any forward-looking statements or
to publicly announce the results of any revisions to any statements to reflect
new information or future events or developments, unless required by law or
regulation.
1
Item
1. Business.
Corporate
Overview
In March
1998, we were incorporated in Delaware under the name “International Plastic
Technologies, Inc.” as a holding company for the purpose of acquiring the common
stock of Electronic Hardware Corp. (“EHC”) and Compact Disc Packaging Corp.,
(“CDP”), an inactive corporation. On December 7, 1998, we changed our name to
“International Smart Sourcing, Inc.” On May 7, 1999, we formed a
company called Smart Sourcing Inc. (“SSI,” and together with EHC and CDP, the
“Subsidiaries”), a Delaware corporation. EHC manufactured,
distributed and warehoused knobs, dials and pointers. SSI specialized in
assisting companies in reducing their cost of manufacturing by outsourcing
manufacturing in China.
On June
26, 2000, we changed our name to “CHINAB2BSOURCING.COM, INC.” We
specialized in the outsourcing of manufacturing and the manufacturing of
injection molded plastic components, products and assemblies. We performed the
manufacturing and outsourcing functions for our customers, through our United
States facilities and through our outsourcing contacts and offices in the
People’s Republic of China. On August 17, 2001, we changed our name
back to “International Smart Sourcing, Inc.”
On
September 28, 2006, we sold the Subsidiaries. Effective September 28,
2006, we began reporting as a development-stage company.
On June
9, 2009, we closed certain transactions contemplated in a certain Stock Purchase
Agreement dated as of March 26, 2009 (the “Agreement”) which we entered into
with Network 1 Financial Securities, Inc., a privately held Texas corporation
(“NETW”), and certain former shareholders of NETW. At the closing, we acquired
1,250,528 shares, or approximately 97.55%, of common stock of NETW outstanding
on such date (the “Reverse Merger”). In accordance with the terms of the
Agreement, we issued 21,460,622 shares of our common stock to the former
shareholders of NETW, in exchange for the acquisition, by our Company, of
approximately 97.55% of the outstanding common shares of NETW.
As of the
closing date, the former shareholders of NETW hold approximately 66% of the
issued and outstanding common shares of our Company. The issuance of the
21,460,622 common shares to the former shareholders of NETW was deemed to be a
reverse acquisition for accounting purposes, by ISSI of NETW, as NETW will
control the post-merged company. Accordingly, NETW, the accounting acquirer
entity, is regarded as the predecessor entity as of June 9, 2009.
Upon the
completion of the Reverse Merger, we became the ultimate parent company of NETW
and we changed our name from “International Smart Sourcing, Inc.” to “Network 1
Financial Group, Inc.” (“NETW Group” or the “Company”).
The
address of our principal executive offices is 2 Bridge Avenue, 4th Floor, Red Bank, New Jersey
07701. Our telephone number is (732) 758-9001. Our facsimile number is (732)
758-6671.
Our
common stock is quoted on the Over-the-Counter Bulletin Board under the symbol
“NTFL.”
Current
Business of our Company
As of
June 9, 2009, the closing date of the Reverse Merger, through our wholly owned
subsidiary, NETW, we commenced the business of providing broker-dealer services.
NETW is registered as a broker-dealer with the SEC, 40 states and Puerto Rico.
NETW is an introducing broker-dealer that clears all transactions with and for
customers on a fully disclosed basis with its clearing broker, Southwest
Securities, a NYSE member firm. NETW is a member of the Financial Industry
Regulatory Authority (“FINRA”), the Securities Investor Protection Corporation
(“SIPC”) and NASDAQ.
Our
customer base is made up primarily of individual investors. We generate income
from transactional business, mutual fund sales, business consulting fees,
finder’s fees, annuity sales, register representative investment advisor fees,
fees for providing investment banking services, placement agent fees for capital
raises, bond transactions, and underwriting fees and
concessions.
2
We
compete with other broker-dealers by offering services to small and microcap
public companies which we believe are significantly underserved by the
investment community. These companies may have little or no analysts following
their growth and may be shut out of the capital markets due to their size and
current market cap. Many of our competitors are larger and have substantially
more capital resources than us, and could potentially enter our market
space.
Employees
We
currently have 19 full-time employees and 2 part-time employees. None of our
employees are represented by a union. We believe that our relationship with all
of our employees is good.
Item
1A. Risk Factors.
Not
applicable.
Item
1B. Unresolved Staff Comments.
Not
applicable.
Item
2. Properties.
We
currently lease office space that is approximately 3800 square feet at 2 Bridge
Avenue, 4th Floor, Red
Bank, New Jersey 07701. In August 2009, the term of the lease was extended from
June 30, 2010 to June 30, 2012 and the annual rent was reduced to $108,000 per
year.
Item
3. Legal Proceedings.
There are
no pending, nor to our knowledge threatened, legal proceedings against
us.
Item
4. (REMOVED AND RESERVED).
3
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Our
common stock is traded on NASDAQ’s Over-the-Counter Bulletin Board (“OTCBB”)
under the symbol “NTFL.”
The
following table sets forth the high and low bid prices for the common stock as
reported on the OTCBB for the last two fiscal years. The high and low bid prices
reflect inter-dealer prices, without mark-up, markdown or commission, and may
not necessarily represent actual transactions.
Common Stock Sale
Prices
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||||||||
2010
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High
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Low
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||||||
First
Quarter
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0.14
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0.02
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||||||
Second
Quarter
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0.05
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0.02
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||||||
Common Stock Sale Prices
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||||||||
2009
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High
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Low
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||||||
First
Quarter
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0.18
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0.09
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||||||
Second
Quarter
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0.09
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0.05
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||||||
Third
Quarter
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0.14
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0.04
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||||||
Fourth
Quarter
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0.14
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0.08
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||||||
Common Stock Sale Prices
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||||||||
2008
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High
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Low
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||||||
Third
Quarter
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0.32
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0.12
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||||||
Fourth
Quarter
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0.33
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0.11
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On
September 29, 2010 (the most recent date that our common stock has traded), the
last sale price of the common stock as reported on the OTCBB was $0.05 per
share.
Holders
On
October 5, 2010, there were 122 shareholders of record of our common
stock.
Dividend
Policy on Common Stock
We have
not given any cash dividends to our common stockholders in the last two fiscal
years. In addition, we intend to retain future earnings for use in our business
for the foreseeable future. The payment of cash dividends, if any, in the future
is within the discretion of the Board of Directors and will depend upon our
earnings, capital requirements, financial condition and other relevant
factors.
Securities
Authorized for Issuance Under Equity Compensation Plans
We do not
have any equity compensation plans in place. However, the Company sponsors a
401(k) profit-sharing plan that covers substantially all of its employees. The
plan provides for a discretionary annual contribution, and is allocated in
proportion to compensation. In addition, each participant may elect to
contribute to the Plan by way of a salary deduction. An employee becomes fully
vested in our contribution after 6 years and is fully vested in his own
contributions immediately.
Performance
Graph
Not
applicable.
Repurchase
of Securities
We did not repurchase any of our common
stock during the year ended June 30, 2010.
4
Recent
Sales of Unregistered Securities
None.
Item
6. Selected Financial Data.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
You
should read the following discussion of our financial condition and results of
operations together with the audited financial statements and the notes to the
audited financial statements attached thereto and the other financial
information included elsewhere in this Annual Report. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ significantly from those projected in the forward-looking
statements as a result of many factors.
Basis
of Presentation of Financial Information
On June
9, 2009, we completed the Reverse Merger with NETW and the former shareholders
of NETW. As a result of the Reverse Merger, we abandoned our previous business
and commenced the business of being an introducing broker-dealer. Because we are
the successor business to NETW and because the operations and assets of NETW
represent our entire business and operations from the closing date of the
Reverse Merger, our management’s discussion and analysis and audited financial
statements are based on the consolidated financial results of post-merged NETW
Group for the relevant periods. NETW Group will continue to report on a
quarterly and year-end basis, with a fiscal year end of June 30.
Overview
Our
wholly owned, operating subsidiary, NETW, is an introducing broker-dealer that
clears all transactions with and for customers on a fully disclosed basis with a
clearing broker. NETW is a member of the Financial Industry Regulatory Authority
(“FINRA”).
Management
believes that the trend for smaller companies that are public is to grow through
consolidation or seek investors to help fuel their growth in their market space.
Our management has experience in assisting smaller companies in meeting their
capital needs. The inherent risk of this market space is that smaller companies
could fail to compete with larger competitors and risk the failure of their
business. Since these businesses are not proven in respect of size and
penetration of their product, we may be unable to attract sufficient capital for
our investment banking clients resulting in a decrease of fees generated.
However, management believes that we can attract registered personnel to our
firm because the market we are serving and the opportunities we provide will
provide the ability to increase our sales force.
It is our
goal to provide investment banking support for small and microcap companies who
have had an extremely difficult time finding professional investment banking
assistance in growing their business. We will provide such services as capital
raising, bank financing, merger and acquisition assistance and traditional
financial consulting.
We also
believe that the turmoil surrounding the financial community will allow the firm
to attract talented people in investment banking and sales that would be
difficult to attract in other times. We believe these professionals should help
build the firm’s service and capital-raising abilities.
The
current economic environment has adversely impacted our financial condition as
it has for many financial institutions. Although the revenue has not declined
significantly, the product mix has impacted the firm’s profitability. During
these times the day-to-day transactional business of the firm has declined as
investors have been reluctant to enter the capital markets. The firm’s net worth
has decreased and our liquidity has been impacted. We have taken steps to reduce
expenses and realign our activities into investment
banking. Management believes that the Reverse Merger provided us with
the opportunity to aggressively grow NETW and expand its services at a time when
most financial institutions are retrenching.
5
During
the year ended June 30, 2010, NETW investment banking fees decreased, however
its investment advisory consulting fees increased. In the same
period, we had a decrease in commission income and trading
profits. The decrease in investment banking fees was attributable to
institutional investments in a number of funds and the increase in advisory
consulting fees was due to a greater number of companies seeking our
services. The decrease in commissions earned in NETW’s daily
transaction business was due primarily to a reduction in activity from NETW’s
retail clients. The decrease in trading profits was due to increased
market volatility. Overall, NETW experienced an increase in losses in
the year ended June 30, 2010 compared to the same period in the prior
year.
NETW had
a net loss of approximately $608,236 for the year ended June 30, 2010, which
represents an increase of $234,004 from our net loss in the same period in the
prior year (which was approximately $374,232), due to increased operating
expenses. NETW’s management continues to seek income stabilization from
consulting and investment banking fees as well as by reducing its exposure to
market positions.
Management believes that in order to expand its marketing and recruitment
of experienced registered representatives it will
need to seek additional sources of funding.
Pursuant
to FASB ASC 810-10 Consolidations – Variable Interest Entities, NETW has
determined that the following entities are variable interest entities (“VIEs”):
Network 1 Financial Advisors, Inc., Network 1 Financial Assurance, Inc, National
Financial Services Group, Inc. and Shark Rivers Investors, LLC. Post-merger, as
a result of agreements executed with the VIE’s, the Company determined that it
was no longer the sole source of financial support and the primary beneficiary
for the variable interest entities (Network 1 Financial Advisors, Inc., Network
1 Financial Assurance, Inc, National Financial Services Group, Inc. and Shark
Rivers Investors, LLC). Accordingly, we deconsolidated the variable
interest entities effective June 9, 2009 from our financial position and results
of operations. No gain or loss was recorded upon deconsolidation as
the estimated fair values of variable interest entities’ net assets equaled
their carrying values. For more
information regarding VIEs, see “Certain Relationships and Related Transactions,
and Director Independence” on page 17. The accompanying audited
consolidated financial statements for 2009 consolidate NETW’s
VIEs.
Results
of Operations
For
the Fiscal Years Ended June 30, 2010 and 2009
For the
years ended June 30, 2010 and 2009, NETW generated $2,929,721 and $3,305,967 of
consolidated revenue, respectively. The decreased revenue of $376,246 in 2010
represents a 11.4% decrease in revenue over 2009, which is the result of an
decrease in investment banking fees earned from private placements and
institutional investments in funds.
NETW’s
consolidated operating expenses were $3,535,550 and $3,764,792 for the years
ended June 30, 2010 and 2009, a decrease of $229,242, or 6.1% from the prior
period, and represent 121% and 114% of revenue, respectively. The increase in
NETW’s expenses is primarily due to an increase in commissions related to change
in the mix of product fees experienced and professional fees related to being a
public company.
Loss from
operations was $607,301 and $458,825 for the years ended June 30, 2010 and 2009,
and represents 20% and 14% of revenue, respectively.
Interest
expense was $19,021 and $93,068 for the years ended June 30, 2010 and 2009,
respectively, a decrease of $74,047 or 79%. The decrease was due to a reduction
of interest rates and a reduction in debt financing.
NETW’s
consolidated loss was $608,236 and $374,232 for the years ended June 30, 2010
and 2009, respectively. The income attributable to non-controlling interest in
subsidiaries was $0 and $19,305 for 2010 and 2009, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary source of liquidity is cash generated from operations and from
short-term financing arrangements. We had $2,635 in cash as of June 30, 2010 and
$91,882 in cash and $550,942 in certificates of deposit as of June 30, 2009. We
believe that we will need capital investment in order to meet our liquidity
requirements, including debt service, for the next twelve months. Our cash flow
from operations is currently insufficient to fund our debt service and other
obligations. As a result, we have decreased our borrowings, reduced
or delayed capital expenditures, and are seeking additional capital. There can
be no assurance, however, that we will return generating cash flows sufficient
to meet our obligations.
We
generated a deficit in cash flow from operations of $615,021 for the year ended
June 30, 2010. Cash flows provided by financing activities for the
year ended June 30, 2010 were $525,773.
6
In the
upcoming year, we plan to finance operations with working capital and external
financing. We believe that we will need additional funds in the near term to
finance operations and meet revenue, profitability, growth, diversification and
other strategic goals for the foreseeable future. We expect to be able to
procure financing upon reasonable terms in order to finance operations. However,
if we are unable to do so, or if we do not meet anticipated future revenue
goals, management is committed to taking actions necessary to ensure the
conservation of adequate cash to continue to finance its
operations.
Off
Balance Sheet Arrangements
We do not
have any off-balance sheet arrangements that we are required to disclose
pursuant to these regulations. In the ordinary course of business, we
enter into operating lease commitments, purchase commitments and other
contractual obligations. These transactions are recognized in our
financial statements in accordance with generally accepted accounting principles
in the United States.
Inflation
We
believe that inflation has not had a material effect on our operations to
date.
Significant
Accounting Policies
The
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the U.S. While these significant
accounting policies are described in more detail in Note 2 to our financial
statements, our management believes the following accounting policies to be
critical to the judgments and estimates used in preparation of the financial
statements:
Use of Estimates: The
preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Principles of Consolidation and
Basis of Presentation: FASB ASC 810-10 Consolidations – Variable Interest
Entities requires a variable interest entity, as defined, to be consolidated by
a company, if that company is subject to a majority of the risk of loss from the
variable interest entity’s activities, entitled to receive a majority of the
entity’s residual returns, the purpose of the entity is for the benefit of the
reporting entity, or if the entity is substantially financed by the reporting
entity. For these purposes, variable interests held by related parties should be
consolidated with the reporting entity.
The
accompanying consolidated financial statements for 2009 (through the date of the
reverse merger) include the following variable interest entities in accordance
with the provisions of FASB ASC 810-10 Consolidations – Variable Interest
Entities: Network 1 Financial Advisors, Inc., Network 1 Financial Assurance,
Inc, National Financial Services Group, Inc. and Shark Rivers Investors,
LLC.
|
·
|
Network
1 Financial Advisors, Inc. provides advisory services and the in-house
management of client accounts.
|
|
·
|
Network
1 Financial Assurance, Inc. acts as an agent providing life and health
insurance products for certain clients on behalf of the
Company.
|
|
·
|
National
Financial Services Group, Inc. enters into leases and to function as the
guarantor for any leases or investments on behalf of the
Company.
|
|
·
|
Shark
Rivers Investors, LLC is a real estate investment company that owns and
operates two building facilities in New
Jersey.
|
7
Revenue Recognition: Customer
security transactions and the related commission income and expense are recorded
as of the trade date. Investment banking revenues include gains, losses, and
fees, net of syndicate expenses, arising from securities offerings in which NETW
acts as an underwriter or agent. Investment banking revenues also include fees
earned from providing financial advisory services. Investment banking management
fees are recorded on the offering date, sales concessions on the settlement
date, and underwriting fees at the time the underwriting is completed and the
income is reasonably determinable. Customers who are financing their transaction
on margin are charged interest. NETW’s margin requirements are in accordance
with the terms and conditions mandated by its clearing firm. The interest is
billed on the average daily balance of the margin account. Net dealer inventory
gains result from securities transactions entered into for the account and risk
of NETW. Net dealer inventory gains are recorded on a trade date basis.
Investment advisory fees are account management fees for high net worth clients
based on the amount of the assets under management. These fees are billed
quarterly and recognized at such time that the service is performed and
collection is probable.
NETW
generally acts as an agent in executing customer orders to buy or sell listed
and over-the-counter securities in which it does not make a market, and charges
commissions based on the services it provides to its customers. In executing
customer orders to buy or sell a security in which it makes a market, NETW may
sell to, or purchase from, customers at a price that is substantially equal to
the current inter-dealer market price plus or minus a mark-up or mark-down. NETW
may also act as agent and execute a customer's purchase or sale order with
another broker-dealer market-maker at the best inter-dealer market price
available and charge a commission. Mark-ups, mark-downs and commissions are
generally priced competitively based on the services it provides to its
customers. In each instance the commission charges, mark-ups or mark-downs, are
in compliance with guidelines established by the FINRA.
Marketable
securities are carried at fair value, with changes in value included in the
statement of income in the period of change. Fair value is generally determined
by quoted market prices. Non-marketable securities are valued at fair value as
determined by management.
Fair Value of Financial
Instruments. FASB requires that the Company disclose estimated fair
values of financial instruments. The carrying amounts reported in the statement
of financial position for current assets and current liabilities qualifying as
financial instruments approximate fair value because of their short
maturities.
In April
2009, the FASB issued provisions that require that companies also disclose the
fair value of financial instruments during interim reporting periods similar to
those that are currently provided annually. These pronouncements are effective
for interim reporting periods ending after June 15, 2009.
On July
1, 2008, the Company adopted the provisions of Accounting Standard Codification
(“ASC”) Topic 820, which defines fair value for accounting purposes, establishes
a framework for measuring fair value and expands disclosure requirements
regarding fair value measurements. The Company’s adoption of ASC 820
did not have a material impact on its condensed consolidated financial
statements. Fair value is defined as an exit price, which is the
price that would be received upon sale of an asset or paid upon transfer of a
liability in an orderly transaction between market participants at the
measurement date. The degree of judgment utilized in measuring the
fair value of assets and liabilities generally correlates to the level of
pricing observability. Financial assets and liabilities with readily
available, actively quoted prices or for which fair value can be measured from
actively quoted prices in active markets generally have more pricing
observability and require less judgment in measuring fair
value. Conversely, financial assets and liabilities that are rarely
traded or not quoted have less price observability and are generally measured at
fair value using valuation methods that require more judgment. These
valuation techniques involve some level of management estimation and judgment,
the degree of which is dependent on the price transparency of the asset,
liability or market and the nature of the asset or liability. The
Company has categorized its financial assets and liabilities measured at fair
value into a three level hierarchy in accordance with ASC 820.
Not
applicable.
8
Index to Financial Statements
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F–1
|
|
Consolidated
Statements of Financial Condition
|
F–2
|
|
Consolidated
Statements of Operations
|
F–3
|
|
Consolidated
Statements of Stockholders’ Equity
|
F–4
|
|
Consolidated
Statements of Cash Flows
|
F–5
|
|
Notes
to Consolidated Financial Statements
|
F–6
|
9
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors of
Network 1
Financial Group, Inc. and Subsidiaries
We have
audited the accompanying consolidated statement of financial condition of
Network 1 Financial Group, Inc and Subsidiaries (the “Company”) as of June 30,
2010 and 2009 and the related consolidated statements of operations, changes in
stockholders’ equity and cash flows for each of the two years in the
period ended June 30, 2010. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Network 1 Financial Group,
Inc, and Subsidiaries as of June 30, 2010 and 2009, and the results of its
operations and its cash flows for each of the two years in the period ended
June 30, 2010 in conformity with United States generally accepted
accounting principles.
/s/ RBSM LLP
|
|
New
York, New York
|
|
October
13, 2010
|
F-1
NETWORK 1 FINANCIAL GROUP, INC.
AND SUBSIDIARIES
|
CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION
|
JUNE 30, 2010 and
2009
|
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Cash
|
$ | 2,635 | $ | 91,882 | ||||
Certificates
of Deposit
|
- | 550,942 | ||||||
Notes
Receivable from Affiliates
|
90,212 | 100,000 | ||||||
Deposit
with clearing organization
|
685,612 | 751,319 | ||||||
Due
from Affiliates
|
42,764 | 46,881 | ||||||
Advances
to Registered Representatives: net of reserve
|
||||||||
for
uncollectible accounts of $90,000
|
76,286 | 65,584 | ||||||
Securities
held for resale, at market
|
152,025 | 84,184 | ||||||
Property
and Equipment, net.
|
3,878 | 12,797 | ||||||
Other
Assets
|
28,433 | 26,600 | ||||||
TOTAL
ASSETS:
|
$ | 1,081,845 | $ | 1,730,189 | ||||
LIABILITIES
AND EQUITY
|
||||||||
LIABILITIES
|
||||||||
Line
of Credit
|
$ | 55,000 | $ | 93,000 | ||||
Notes
Payable
|
12,966 | 32,469 | ||||||
Due
to affiliates
|
2,413 | - | ||||||
Due
to clearing organization
|
- | 17,477 | ||||||
Commissions
Payable
|
51,128 | 41,303 | ||||||
Securities
Sold, but not yet purchased, at market
|
- | 1,215 | ||||||
Capital
Leases payable
|
7,626 | 13,023 | ||||||
Warrant
Liability
|
23,831 | 22,896 | ||||||
Accounts
Payable, accrued expenses and other liabilities
|
223,484 | 249,493 | ||||||
Bank
Overdraft
|
21,413 | - | ||||||
TOTAL
LIABILITIES
|
397,861 | 470,876 | ||||||
Commitments
and Contingencies
|
||||||||
EQUITY
|
||||||||
Common
Stock, $.001 par value;
|
||||||||
100,000,000 shares
authorized; 40,360,057
|
||||||||
issued
and 32,435,075 outstanding, respectively
|
40,360 | 40,360 | ||||||
Additional
Paid In Capital
|
1,430,088 | 1,397,181 | ||||||
Treasury
Stock at cost; 7,925,000 shares
|
(5,129 | ) | (5,129 | ) | ||||
Accumulated
(Deficit) Earnings
|
(996,335 | ) | (388,099 | ) | ||||
TOTAL
STOCKHOLDERS EQUITY
|
468,984 | 1,044,313 | ||||||
Non-controlling interest | 215,000 | 215,000 | ||||||
TOTAL EQUITY | 683,984 | 1,259,313 | ||||||
TOTAL
LIABILITIES AND EQUITY
|
$ | 1,081,845 | $ | 1,730,189 |
(the accompanying notes are an integral part of these consolidated financial statements)
F -
2
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For
the years ended June 30, 2010 and
2009
|
2010
|
2009
|
|||||||
Revenues:
|
||||||||
Commissions
|
$ | 920,368 | $ | 1,116,208 | ||||
Net
dealer inventory gains
|
28,619 | 76,733 | ||||||
Investment
banking
|
1,244,780 | 1,593,112 | ||||||
Interest
and dividends
|
37,761 | 57,262 | ||||||
Transfer
fees and clearing services
|
27,242 | 33,469 | ||||||
Investment
advisory
|
649,459 | 293,823 | ||||||
Other
|
21,492 | 135,360 | ||||||
Total
Revenue
|
2,929,721 | 3,305,967 | ||||||
Operating
Expenses:
|
||||||||
Commissions
|
1,643,558 | 1,899,214 | ||||||
Compensation
and related expenses
|
694,869 | 562,218 | ||||||
Clearing
Fees
|
260,680 | 201,844 | ||||||
Communications
and data processing
|
116,450 | 151,723 | ||||||
Interest
|
19,021 | 93,068 | ||||||
Occupancy
and related expenses
|
133,621 | 271,109 | ||||||
Office
expenses
|
298,930 | 394,630 | ||||||
Professional
fees
|
360,974 | 178,932 | ||||||
Depreciation
|
8,919 | 12,054 | ||||||
Total
Operating Expenses
|
3,537,022 | 3,764,792 | ||||||
Loss
from Operations
|
(607,301 | ) | (458,825 | ) | ||||
Other
Income
|
||||||||
Loss
(Gain) on change in derivative liability
|
935 | (84,593 | ) | |||||
Total
Other Income
|
935 | (84,593 | ) | |||||
Net
loss
|
(608,236 | ) | (374,232 | ) | ||||
Preferred
stock dividends
|
- | 4,300 | ||||||
Income
attributable to non-controlling interest
|
- | 19,305 | ||||||
Net
loss attributable to common shareholders
|
$ | (608,236 | ) | $ | (397,837 | ) | ||
Loss
per common share (basic and diluted)
|
$ | (0.015 | ) | $ | (0.017 | ) | ||
Weighted
average common shares outstanding
|
40,360,057 | 23,393,529 |
(the
accompanying notes are an integral part of these consolidated financial
statements)
F -
3
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
|
For
the Years Ended June 30, 2010 and
2009
|
Additional
|
Treasury
|
Accumulated
|
Non-Controlling
|
|||||||||||||||||||||||||
Common
Stock
|
Pain
in Capital
|
Stock
|
Earnings
(Defecit)
|
Interest
|
Total
|
|||||||||||||||||||||||
Shares
|
Amount
|
|||||||||||||||||||||||||||
Balance
- June 30, 2008
|
29,943,084 | 29,943 | 541,117 | (5,129 | ) | 9,738 | 483,504 | 1,144,173 | ||||||||||||||||||||
Sales
of common stock
|
1,716,125 | 1,716 | 98,284 | 100,000 | ||||||||||||||||||||||||
Common
stock issued to ISSI’s shareholders in June 2009
|
8,700,848 | 8,701 | 757,780 | 766,481 | ||||||||||||||||||||||||
Deconsolidation
of variable interest entities
|
(372,809 | ) | (372,809 | ) | ||||||||||||||||||||||||
Income
attributable to non-controlling interest
|
19,305 | 19,305 | ||||||||||||||||||||||||||
Preferred
dividends
|
(4,300 | ) | (4,300 | ) | ||||||||||||||||||||||||
Net
loss
|
(393,537 | ) | (393,537 | ) | ||||||||||||||||||||||||
Balance
- June 30, 2009
|
40,360,057 | $ | 40,360 | $ | 1,397,181 | $ | (5,129 | ) | $ | (388,099 | ) | $ | 130,000 | $ | 1,259,313 | |||||||||||||
Capital
Contributions
|
32,907 | 32,907 | ||||||||||||||||||||||||||
Net
Loss
|
(608,236 | ) | (608,236 | ) | ||||||||||||||||||||||||
Balance
- June 30, 2010
|
40,360,057 | $ | 40,360 | $ | 1,430,088 | $ | (5,129 | ) | $ | (996,335 | ) | $ | 130,000 | $ | 683,984 |
(the
accompanying notes are an integral part of these consolidated financial
statements)
F -
4
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
For
the Years Ended June 30, 2010 and
2009
|
2010
|
2009
|
||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|||||||||
Net
Loss
|
$ | (608,236 | ) | $ | (374,232 | ) | |||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||||
Depreciation
|
8,920 | 12,054 | |||||||
Gain
on change in derivative liability
|
935 | (84,591 | ) | ||||||
Net
income (loss) of non-controlling interest in subsidiaries
|
(19,305 | ) | |||||||
Allowance
for officer advances
|
106,922 | ||||||||
Changes
in operating assets and liabilities
|
|||||||||
Due
from clearing organization
|
65,707 | 2,596 | |||||||
Securities
held for resale, at market
|
(34,934 | ) | (26,677 | ) | |||||
Advances
to/from registered representatives
|
(10,702 | ) | (17,003 | ) | |||||
Other
assets
|
(1,833 | ) | - | ||||||
Commissions
payable
|
9,825 | (16,217 | ) | ||||||
Securities
sold, but not yet purchased, at market
|
(1,215 | ) | (4,677 | ) | |||||
Due
to clearing organization
|
(17,477 | ) | 17,477 | ||||||
Accounts
Payable, accrued expenses and other Liabilities
|
(26,011 | ) | 94,480 | ||||||
TOTAL
ADJUSTMENTS
|
(6,785 | ) | 65,059 | ||||||
NET
CASH (USED IN) OPERATING ACTIVITIES
|
(615,021 | ) | (309,173 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
- | - | |||||||
CASH FLOWS
FROM FINANCING ACTIVITIES
|
|||||||||
Repayment
of line of credit
|
(38,000 | ) | - | ||||||
Cash
bank overdraft
|
21,413 | - | |||||||
Cash
from certificate of deposit
|
550,942 | - | |||||||
Cash
acquired in acquisition
|
- | 197,054 | |||||||
Cash
proceeds from issuance of stock
|
- | 100,000 | |||||||
Net
Advances from affiliated companies
|
16,318 | 111,443 | |||||||
Advance
to Officers
|
- | (59,199 | ) | ||||||
Advances
repaid from Officers
|
- | 58,134 | |||||||
Cash
Contribution from owner in non-controlling interest
|
- | 21,229 | |||||||
Repayment
of Notes Payable
|
(19,503 | ) | (34,979 | ) | |||||
Repayment
of Mortgage Payable
|
- | (21,599 | ) | ||||||
Preferred
dividends paid
|
- | (4,300 | ) | ||||||
Repayment
of capital lease
|
(5,397 | ) | (6,462 | ) | |||||
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
525,773 | 361,321 | |||||||
NET
INCREASE (DECREASE) IN CASH
|
(89,248 | ) | 52,148 | ||||||
CASH
- Beginning of Year
|
91,882 | 39,734 | |||||||
CASH
- End of Year
|
$ | 2,635 | $ | 91,882 | |||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|||||||||
Cash
paid during year
|
|||||||||
Interest
|
$ | 19,020 | $ | 30,950 | |||||
Income
Taxes
|
$ | 725 | $ | 2,222 | |||||
SUPPLEMENTAL
DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES
|
|||||||||
Shares
issued related to assumption of net assets (excluding
cash)
|
|||||||||
acquired
with reverse merger
|
$ | - | $ | 566,732 |
(the
accompanying notes are an integral part of these consolidated financial
statements)
F -
5
NETWORK 1
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009
NOTE
1 – Basis of Presentation (Reverse Merger and Corporate Structure)
Network 1
Financial Securities, Inc. (the "Company" or "NETW") was organized as a Texas
corporation on March 15, 1983 and is registered as a broker-dealer with the
Securities and Exchange Commission (SEC), the State of Texas and various other
states. The Company is an introducing broker-dealer that clears all transactions
with and for customers on a fully disclosed basis with a clearing broker. The
accompanying consolidated statement of operations for 2009 consolidate, the
following variable interest entities: Network 1 Financial Advisors, Inc, Network
1 Financial Assurance, Inc., National Financial Services Group, Inc. and Shark
Rivers Investors, LLC through the companies merger date of June 9,
2009. As of June 30, 2009, none of the assets or liabilities of the
VIE’s are included as part of the Reverse Merger.
On June
9, 2009, the Company completed a merger transaction with, International Smart
Sourcing, Inc. (“ISSI”) an inactive publicly registered shell corporation with
no significant assets or operations. ISSI was incorporated in
February 1998 in Delaware. As a result of the Reverse
Merger, NETW became a wholly owned subsidiary of ISSI, with the exception
of the following consolidated entities which have been deemed to no longer be
variable interest entities (“VIEs”) by NETW: Network 1 Financial Advisors, Inc.,
Network 1 Financial Assurance, Inc., National Financial Services Group, Inc. and
Shark Rivers Investors, LLC. The Network 1 Financial Securities, Inc.
Shareholders acquired control of ISSI.
Upon
completion of the reverse merger transaction, ISSI changed its name to Network 1
Financial Group, Inc.
All
references to Common Stock, share and per share amounts have been retroactively
restated to reflect the exchange ratio of 17.16 shares of ISSI’s Common Stock
for 1 share of all of the classes of the acquirer's Common Stock outstanding
immediately prior to the merger as if the exchange had taken place as of the
beginning of the earliest period presented.
The
accompanying consolidated financial statements present the historical financial
condition, results of operations and cash flows of the Company prior to the
merger with ISSI.
The
accompanying consolidated financial statements present on a consolidated basis
the accounts of Network 1 Financial Group, Inc. and its wholly owned
subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Upon the closing date of the Reverse
Merger, through its wholly owned subsidiary, NETW, the Company commenced the
business of providing broker-dealer services. NETW is registered as a
broker-dealer with the SEC, 40 states and Puerto Rico. NETW is an introducing broker-dealer
that clears all transactions with and for customers on a fully disclosed basis
with its clearing broker, Southwest Securities, a NYSE member firm. NETW is a
member of the Financial Industry Regulatory Authority (“FINRA”), the Securities
Investor Protection Corporation (“SIPC”) and NASDAQ.
The Company’s customer base is made up
primarily of individual investors. The Company generates income from
transactional business, mutual fund sales, business consulting fees, finder’s
fees, annuity sales, register representative investment advisor fees, fees for
providing investment banking services, placement agent fees for capital raises,
bond transactions, and underwriting fees and concessions.
The Company competes with other
broker-dealers by offering services to small and microcap public companies which
we believe are significantly underserved by the investment community. These
companies may have little or no analysts following their growth and may be shut
out of the capital markets due to their size and current market cap. Many of our
competitors are larger and have substantially more capital resources than us,
and could potentially enter our market space.
F-6
NETWORK 1
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009
NOTE
2 - Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Consolidation
of Variable Interest Entities
FASB ASC
810-10 Consolidations – Variable Interest Entities requires a variable interest
entity, as defined, to be consolidated by a company, if that company is subject
to a majority of the risk of loss from the variable interest entity’s
activities, entitled to receive a majority of the entity’s residual returns, the
purpose of the entity is for the benefit of the reporting entity, or if the
entity is substantially financed by the reporting entity. For these purposes,
variable interests held by related parties should be consolidated with the
reporting entity.
The
accompanying consolidated financial statements for 2009 (through the date of the
reverse merger) include the following variable interest entities in accordance
with the provisions of FASB ASC 810-10 Consolidations – Variable Interest
Entities: Network 1 Financial Advisors, Inc., Network 1 Financial Assurance,
Inc, National Financial Services Group, Inc. and Shark Rivers Investors.,
LLC.
Network 1
Financial Advisors, Inc. provides advisory services and the in-house management
of client accounts. Network 1 Financial Assurance, Inc. acts as an
agent providing life and health insurance products for certain clients on behalf
of the Company.
National
Financial Services Group, Inc. enters into leases and to function as the
guarantor for any leases or investments on behalf of the Company.
Shark
Rivers Investors, LLC is a real estate investment company that owns and operates
two building facilities in New Jersey.
The
following is a summary of certain financial data for Network 1 Financial
Advisors, Inc, Network 1 Financial Assurance, Inc. National Financial Services
Group, Inc. and Shark Rivers Investors, LLC as of June 30, 2009:
2009(*) | ||||
Revenues
|
$ | 345,545 | ||
Net
income
|
$ | 19,305 | ||
Total
assets
|
$ | 1,529,085 | ||
Total
liabilities
|
$ | 1,108,021 |
*Through
the merger date of June 9, 2009
F-7
NETWORK 1
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009
Revenue
Recognition
Customer
security transactions and the related commission income and expense are recorded
as of the trade date. Investment banking revenues include gains, losses, and
fees, net of syndicate expenses, arising from securities offerings in which the
Company acts as an underwriter or agent. Investment banking revenues also
include fees earned from providing financial advisory services. Investment
banking management fees are recorded on the offering date, sales concessions on
the settlement date, and underwriting fees at the time the underwriting is
completed and the income is reasonably determinable. Customers who are financing
their transaction on margin are charged interest. The Company’s margin
requirements are in accordance with the terms and conditions mandated by its
clearing firm. The interest is billed on the average daily balance of the margin
account.
Net
dealer inventory gains result from securities transactions entered into for the
account and risk of the Company. Net dealer inventory gains are recorded on a
trade date basis. Investment advisory fees are account management fees for high
net worth clients based on the amount of the assets under management. These fees
are billed quarterly and recognized at such time that the service is performed
and collection is probable.
The
Company generally acts as an agent in executing customer orders to buy or sell
listed and over-the-counter securities in which it does not make a market, and
charges commissions based on the services the Company provides to its customers.
In executing customer orders to buy or sell a security in which the Company
makes a market, the Company may sell to, or purchase from, customers at a price
that is substantially equal to the current inter-dealer market price plus or
minus a mark-up or mark-down. The Company may also act as agent and execute a
customer's purchase or sale order with another broker-dealer market-maker at the
best inter-dealer market price available and charge a commission. Mark-ups,
mark-downs and commissions are generally priced competitively based on the
services it provides to its customers. In each instance the commission charges,
mark-ups or mark-downs, are in compliance with guidelines established by the
FINRA.
Marketable
securities are carried at fair value, with changes in value included in the
statement of income in the period of change. Fair value is generally determined
by quoted market prices. Non-marketable securities are valued at fair value as
determined by management.
Cash
and Cash Equivalents
The
Company considers all highly liquid temporary cash investments with an original
maturity of three months or less when purchased, to be cash
equivalents.
Property
and Equipment
Property
and equipment is recorded at cost. Depreciation is calculated using the
straight-line method based on the estimated useful lives of the related assets,
which range from five to twenty years. Leasehold improvements are amortized
using the straight-line method over the shorter of the estimated useful lives of
the assets or the terms of the leases. Maintenance and repairs are charged to
expense as incurred; costs of major additions and betterments that extend the
useful life of the asset are capitalized. When assets are retired or otherwise
disposed of, the costs and related accumulated depreciation or amortization are
removed from the accounts and any gain or loss on disposal is
recognized.
F-8
NETWORK 1
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009
Fair
Value of Financial Instruments
FASB
requires that the Company disclose estimated fair values of financial
instruments. The carrying amounts reported in the statement of financial
position for current assets and current liabilities qualifying as financial
instruments approximate fair value because of their short
maturities.
In April
2009, the FASB issued provisions that require that companies also disclose the
fair value of financial instruments during interim reporting periods similar to
those that are currently provided annually. These pronouncements are effective
for interim reporting periods ending after June 15, 2009.
On July
1, 2008, the Company adopted the provisions of Accounting Standard Codification
(“ASC”) Topic 820, which defines fair value for accounting purposes, establishes
a framework for measuring fair value and expands disclosure requirements
regarding fair value measurements. The Company’s adoption of ASC 820
did not have a material impact on its condensed consolidated financial
statements. Fair value is defined as an exit price, which is the
price that would be received upon sale of an asset or paid upon transfer of a
liability in an orderly transaction between market participants at the
measurement date. The degree of judgment utilized in measuring the
fair value of assets and liabilities generally correlates to the level of
pricing observability. Financial assets and liabilities with readily
available, actively quoted prices or for which fair value can be measured from
actively quoted prices in active markets generally have more pricing
observability and require less judgment in measuring fair
value. Conversely, financial assets and liabilities that are rarely
traded or not quoted have less price observability and are generally measured at
fair value using valuation methods that require more judgment. These
valuation techniques involve some level of management estimation and judgment,
the degree of which is dependent on the price transparency of the asset,
liability or market and the nature of the asset or liability. The
Company has categorized its financial assets and liabilities measured at fair
value into a three level hierarchy in accordance with ASC 820.
Impairment
of Long-Lived Assets
The
Company assesses the recoverability of its long lived assets, including property
and equipment when there are indications that the assets might be impaired. When
evaluating assets for potential impairment, the Company first compares the
carrying amount of the asset to the asset’s estimated future cash flows
(undiscounted and without interest charges). If the estimated future cash flows
used in this analysis are less than the carrying amount of the asset, an
impairment loss calculation is prepared. The impairment loss calculation
compares the carrying amount of the asset to the asset’s estimated future cash
flows (discounted and with interest charges). If the carrying amount exceeds the
asset’s estimated futures cash flows (discounted and with interest charges), the
loss is allocated to the long-lived assets of the group on a pro rata basis
using the relative carrying amounts of those assets. Based on its assessments,
the Company did not incur any impairment charges for the years ended June 30,
2010 and 2009.
F-9
NETWORK 1
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR THE
YEARS ENDED JUNE 30, 2010AND 2009
Concentrations
of Credit Risk
The
Company is engaged in trading and providing a broad range of securities
brokerage and investment services to a diverse group of retail and institutional
clientele, as well as corporate finance and investment banking services to
corporations and businesses. Counterparties to the Company’s business activities
include broker-dealers and clearing organizations, banks and other financial
institutions. The Company uses clearing brokers to process transactions and
maintain customer accounts on a fee basis for the Company. The Company uses one
clearing broker for substantially all of its business. The Company permits the
clearing firms to extend credit to its clientele secured by cash and securities
in the client’s account. The Company’s exposure to credit risk associated with
the non-performance by its customers and counterparties in fulfilling their
contractual obligations can be directly impacted by volatile or illiquid trading
markets, which may impair the ability of customers and counterparties to satisfy
their obligations to the Company. The Company has agreed to indemnify the
clearing brokers for losses they incur while extending credit to the Company’s
clients. It is the Company’s policy to review, as necessary, the credit standing
of its customers and each counterparty. Amounts due from customers that are
considered uncollectible by the clearing broker are charged back to the Company
by the clearing broker when such amounts become determinable.
Upon
notification of a charge back, such amounts, in total or in part, are then
either (i) collected from the customers, (ii) charged to the broker initiating
the transaction and included in other receivables in the accompanying
consolidated balance sheet, and/or (iii) charged as an expense in the
accompanying consolidated statements of operations, based on the particular
facts and circumstances.
The
maximum potential amount for future payments that the Company could be required
to pay under this indemnification cannot be estimated. However, the Company
believes that it is unlikely it will have to make any material payments under
these arrangements and has not recorded any contingent liability in the
financial statements for this indemnification.
The
Company maintains cash with major financial institutions. The Federal Deposit
Insurance Corporation (“FDIC”) insures up to $250,000 at each institution. At
times such amounts may exceed the FDIC limits. At June 30, 2010 and 2009, the
uninsured cash bank balance was approximately $0 and $0, respectively. The
Company believes it is not exposed to any significant credit risks for
cash.
Advances
to Registered Representatives
The
Company extends unsecured credit in the normal course of business to its
registered representatives. The determination of the amount of uncollectible
accounts is based on the amount of credit extended and the length of time each
receivable has been outstanding, as it relates to each individual registered
representative. The allowance for uncollectible amounts reflects the amount of
loss that can be reasonably estimated by management and is included as part of
operating expenses in the accompanying consolidated statements of operations. As
of June 30, 2010 and 2009, the Company has reserved approximately $90,000,
respectively for any potential non-collection.
F-10
NETWORK 1
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising costs, which are included in
selling, general and administrative expenses, were deemed to be nominal during
each of the reporting periods.
Non-controlling
Interest
As a
result of adopting FASB ASC 810-10 Consolidations – Variable Interest
Entities, on July 1, 2009, we present non-controlling interests (previously
shown as minority interest) as a component of equity on our Consolidated
Statement of Financial Condition and Consolidated Statement of Equity. The
adoption of this guidance did not have any other material impact on our
financial position, results of operations or cash flow.
Income
Taxes
In
accordance with ASC 740, “Income Taxes,” The Company accounts for income taxes
under the liability method. Deferred income tax assets and liabilities are
determined based on the estimated future tax effects of temporary differences
between the financial statement and tax bases of assets and liabilities, as
measured by current enacted tax rates. The Company periodically assess whether
it is more likely than not that they will generate sufficient taxable income to
realize the deferred tax assets. The Company records a valuation allowance, as
necessary, to reduce the deferred tax assets to the amount of future tax benefit
that The Company estimates is more likely than not to be realized. The Company
believes that their estimates are reasonable; however, the final outcome of tax
matters may be different from than the estimates reflected in their consolidated
financial statements.
The
Company’s income tax provisions are based on assumptions and calculations which
will be subject to examination by various tax authorities. The Company records
tax benefits for positions that they believe are probable of being sustained
under such examinations. Regularly, the Company assesses the potential outcome
of such examinations to determine the adequacy of their income tax accruals. The
Company adjusts their income tax provision during the period in which they
determine that the actual results of the examinations may differ from their
estimates. Changes in tax laws and rates are reflected in their income tax
provision in the period in which they occur.
In June
2006, the FASB issued ASC 740 “Income Taxes” which prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. It
also provides guidance on derecognition, classification, treatment of interest
and penalties, and disclosure of such positions. Effective January 1, 2007,
the Company adopted the provisions of ASC 740 as required. As a result of
implementing ASC 740 there has been no adjustment to the Company’s financial
statements and the adoption of ASC 740 did not have a material effect on the
Company’s financial statements for the year ending June 30, 2010.
Net
Loss per Common Share
The
Company computes earnings per share under Accounting Standards Codification
subtopic 260-10, Earnings Per Share (“ASC 260-10”). Basic net income
(loss) per common share is computed by dividing net loss by the weighted average
number of shares of common stock. Diluted earnings per share is computed
using the weighted average number of common and common stock equivalent shares
outstanding during the period. Dilutive common stock equivalents
consist of shares issuable upon conversion of convertible notes and the exercise
of the Company's stock options and warrants.
For the
years ended June 30, 2010 and 2009, common stock equivalents are not considered
in the calculation of the weighted average number of common shares outstanding
because they would be anti-dilutive, thereby decreasing the net loss per common
share.
Reclassifications
Certain
reclassifications have been made in prior year's financial statements to conform
to classifications used in the current year.
F-11
NETWORK 1
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009
NOTE
3 - Recent Accounting Pronouncements
In
February 2010, the FASB issued FASB ASU 2010-09, Subsequent Events, Amendments to
Certain Recognition and Disclosure Requirements, which clarifies certain
existing evaluation and disclosure requirements in ASC 855 related to subsequent
events. FASB ASU 2010-09 requires SEC filers to evaluate subsequent events
through the date in which the financial statements are issued and is effective
immediately. The new guidance does not have an effect on the Company’s
consolidated results of operations and financial condition.
In
January 2010, the FASB issued FASB ASU 2010-06, “Improving Disclosures about Fair
Value Measurements”, which clarifies certain existing disclosure
requirements in ASC 820 as well as requires disclosures related to significant
transfers between each level and additional information about Level 3 activity.
FASB ASU 2010-06 begins phasing in the first fiscal period after December 15,
2009. The Company is currently assessing the impact on its consolidated results
of operations and financial condition.
In June
2009, the FASB issued new accounting guidance which will change how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. Under this
guidance, determining whether a company is required to consolidate an entity
will be based on, among other things, an entity's purpose and design and a
company's ability to direct the activities of the entity that most significantly
impact the entity's economic performance. This guidance is effective at the
start of a company’s first fiscal year beginning after November 15, 2009, or
January 1, 2010 for companies reporting earnings on a calendar-year basis. The
adoption of this guidance did not have a material impact on the Company’s
financial position or results of operations.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company's present or future
financial statements.
NOTE
4 - Securities Owned and Securities Sold, But Not Yet Purchased, At
Market
The
following table shows the market values of the Company's investment securities
owned and securities sold, but not yet purchased as of June 30, 2010 and 2009,
respectively:
June 30, 2010
|
June 30, 2009
|
|||||||||||||||
Securities Sold
|
Securities Sold
|
|||||||||||||||
Securities
|
but not yet
|
Securities
|
but not yet
|
|||||||||||||
Owned
|
Purchased
|
Owned
|
Purchased
|
|||||||||||||
Securities
|
$
|
152,025
|
$
|
-
|
$
|
84,184
|
$
|
1,215
|
Securities
sold, but not yet purchased commit the Company to deliver specified securities
at predetermined prices. The transactions may result in market risk since, to
satisfy the obligation, the Company must acquire the securities at market
prices, which may exceed the values reflected in the consolidated statements of
financial condition.
F-12
NETWORK 1
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR THE
YEARS ENDED JUNE 30, 2009 AND 2008
NOTE
5 - Due from Clearing Organization
The
following represents amounts on deposit with Southwest Securities, Inc.
(“Southwest”) and Legent Clearing LLC (“Legent”) with the Company’s clearing
broker inventory account:
Southwest
|
Legent
|
Total
|
||||||||||
Cash
|
$ | 392,033 | $ | 50,000 | $ | 442,033 | ||||||
Marketable
securities, net of fair value adjustments
|
243,579 | - | 243,579 | |||||||||
$ | 635,612 | $ | 50,000 | $ | 685,612 |
The
marketable securities are primarily comprised of corporate stocks. Marketable
securities on deposit with Southwest Securities are reflected at fair
value. The Company was required to maintain a balance of $750,000 with
Southwest of cash and securities but as of April 27, 2010 the balance
requirement was reduced to $700,000 pursuant to the Clearing Agreement with
Legent.
On
December 4, 2009, the Company received a letter from Southwest dated November
25, 2009 (the “Termination Letter”) stating that the Fully Disclosed
Correspondent Agreement, dated as of September 27, 1990, as amended, between the
Company and Southwest (the “Southwest Clearing Agreement”) was being terminated
effective 180 days from the date of the Termination Letter (the “Termination
Date”). Southwest subsequently extended the termination date by an
additional ninety days to May 24, 2010.
On April
21, 2010, the Company entered into a fully executed Clearing Agreement with
Legent, effective as of April 15, 2010 (the “Legent Clearing Agreement”).
Pursuant to the Legent Clearing Agreement, Legent will provide certain services
to the Company with respect to customer accounts (the “Accounts”) introduced by
the Company to Legent. Among other things, the Services shall include
the following: (i) executing, clearing and settling securities transactions on
behalf of the Company; (ii) preparing and delivering confirmations and Account
statements; (iii) extending credit to Accounts; (iv) performing various
cashiering functions; (v) safeguarding Account funds and securities; and (vi)
maintaining books and records with respect to the Accounts. The
Legent Clearing Agreement requires NETW to put down a $100,000 deposit, which
will be paid in two installments of $50,000 each, and will be taken from a
portion of the deposit amount currently being held by Southwest. Southwest has
released $50,000 to date.
The
Company along with Southwest and Legent entered into an agreement to begin the
transfer from Southwest to Legent of all customer accounts introduced by the
Company on August 13, 2010. As of October 8, 2010, the Company had
$25,000 on deposit with Southwest and $350,000 with Legent.
For the
year ended June 30, 2010 and 2009, the Company used the services of Southwest to
clear its brokerage business.
F-13
NETWORK 1
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009
NOTE
6 - Related Party Transactions
As of
June 30, 2010, due to (from) affiliated companies consisted of the
following:
June 30,
|
||||||||
2010
|
2009
|
|||||||
Legends
property development (a)
|
$
|
1,330
|
$
|
1,330
|
||||
Network
1 Financial Advisors Inc.(c)
|
$
|
91,362
|
$
|
104,867
|
||||
Network 1
Financial Assurance, Inc. (b)
|
$
|
400
|
$
|
803
|
||||
National
Financial Services Group (b)
|
$
|
39,884
|
$
|
39,881
|
(a)
|
Represents expenses paid on behalf of an affiliated company whose
directors’ are officers and shareholders’ of the
Company.
|
(b)
|
Represents amounts due from an affiliated company whose officers and
shareholders are officers and shareholders’ of the
Company.
|
(c)
|
Represents amounts due in the form of a promissory note from an affiliated
company whose officers and shareholders are officers and shareholders’ of
the Company.
|
NOTE
7 - Property and Equipment
Property
and equipment, net, consists of the following:
June 30,
|
||||||||
2010
|
2009
|
|||||||
Computer
equipment
|
$
|
115,363
|
$
|
115,363
|
||||
Furniture
and fixtures
|
31,251
|
31,251
|
||||||
Total
|
146,614
|
146,614
|
||||||
Less:
accumulated depreciation
|
(142,736)
|
(133,817)
|
||||||
Property
and Equipment - Net
|
$
|
3,878
|
$
|
12,797
|
Depreciation
expense for the years ended June 30, 2010 and 2009 was approximately $8,920 and
$12,054, respectively.
NOTE
8 - Capital Lease Obligation
As of
June 30, 2010, the Company has equipment under a capital lease expiring in
August 2012. The asset and liability under the capital lease are recorded at the
lower of the present value of the minimum lease payments or the fair value of
the asset. The asset is included in property and equipment and is amortized over
the estimated life of the asset. The interest rate under the lease is
6.60% and is imputed based on the lessor’s implicit rate of
return.
F-14
NETWORK 1
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR THE
YEARS ENDED JUNE 30, 2009 AND 2008
Capital
lease is payable in monthly installments of $532, including interest through
August 2012 secured by office equipment with a cost of $22,570.
At June
30, 2010, annual minimum future lease payments under the capital lease are as
follows:
June 30,
|
Amount
|
|||||
2011
|
$ | 6,387 | ||||
2012
|
1,239 | |||||
Total
minimum lease payments
|
$ | 7,626 |
NOTE
9 - Line of Credit
The
Company’s bank line of credit is payable on demand. The maximum amount the
Company could borrow is $100,000, indebtedness under the line of credit provides
for interest at the bank’s prime rate, plus 1.0%. As of June 30, 2010 and 2009,
the amount outstanding under this credit facility was $55,000 and $93,000,
respectively. Indebtedness under the credit agreement is
collateralized by substantially all of the assets of the Company and an
officers’ personal guarantee.
NOTE
10 - Notes Payable
Notes
payable include settlement agreements entered into with the NASD in July 2007
and May 2010, for monetary sanctions imposed against certain employees who are
officers and shareholders of the Company and the Company, respectively (See Note
18). As of June 30, 2010, notes payable consists of as follows:
June 30,
|
||||||||
2010
|
2009
|
|||||||
Note
payable to FINRA in monthly installments of $900 per month including
interest at a rate of 11.25% through August 2009.
|
$ | - | $ |
280
|
||||
Note
payable to FINRA in monthly installments of $2,500 per month including
interest at a rate of 11.25% through August 2010.
|
5,966. |
32,189
|
||||||
Note
payable to FINRA in monthly installments of $500. per month including
interest at a rate of 6.25% through August
2011
|
7,000 | - | ||||||
Total
notes payable
|
$ | 12,966 | $ | 32,469 |
F-15
NETWORK 1
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009
Maturities
of long-term debt at June 30, 2010 for the next two years and in the aggregate
are follows:
Fiscal
Year Ending
|
||||||
June
30,
|
Amount
|
|||||
2011
|
$
|
11,966
|
||||
2012
|
1,000
|
|||||
$
|
12,966
|
NOTE
11 - Income Taxes
As of
June 30, 2010, the Company had net operating loss carryforwards available to
offset future taxable income of approximately $ 1.8 million. As a result of the
Reverse Merger, the amount of prior years’ net operating
loss carryforwards available to be utilized was significantly reduced due to the
change in control provisions of Section 382 of the Internal Revenue Code. These
net operating losses which, if not utilized, expire in 2030. At June 30,
2010 the Company has a deferred tax asset, which consists primarily of temporary
differences relating to net operating losses. Deferred income taxes reflect the
net tax effects of operating loss and tax credit carryforwards and temporary
differences between carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In assessing
the realization of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. ASC
740 requires that a valuation allowance be established when it is “more likely
than not” that all, or a portion of, deferred tax assets will not be
realized.
A review
of all available positive and negative evidence needs to be considered,
including a company’s performance, the market environment in which the company
operates the length of carryback and carryforward periods, and expectations of
future profits, etc.
The
Company believes that uncertainty exists with respect to future realization of
the deferred tax assets and has established a valuation allowance for the full
amount as of June 30, 2010.
NOTE
12 - Benefit Contribution Plan
The
Company sponsors a 401(k) profit sharing plan that covers substantially all of
its employees. The plan provides for a discretionary annual contribution, and is
allocated in proportion to compensation. In addition, each participant may elect
to contribute to the Plan by way of a salary deduction. An employee becomes
fully vested in the Company’s contribution after 6 years. A participant is fully
vested in their own contributions. For the years ended June 30, 2010 and 2009,
the Company made no discretionary contributions to the Plan.
NOTE
13 - Net Capital Requirements
NETW, a
subsidiary of the Company, is a registered broker-dealer and is subject to
the SEC’s Uniform Net Capital Rule 15c3-1. This requires that NETW maintain
minimum net capital of $100,000 and also requires that the ratio of aggregate
indebtedness, as defined, to net capital, shall not exceed 15 to 1.
As of
June 30, 2010 and 2009, NETW’s net capital exceeded the requirement by
approximately $94,237 and $111,834 respectively.
Advances,
dividend payments and other equity withdrawals are restricted by the regulations
of the SEC, and other regulatory agencies are subject to certain notification
and other provisions of the net capital rules of the SEC. NETW qualifies under
the exemptive provisions of Rule 15c3-3 as NETW does not carry security accounts
for customers or perform custodial functions related to customer
securities.
F-16
NETWORK 1
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009
NOTE
14 - Deconsolidation of Variable Interest Entity
Upon the
date of the reverse merger and as a result of agreements executed, the Company
determined that it was no longer the sole source of financial support and the
primary beneficiary for the variable interest entities (Network 1 Financial
Advisors, Inc., Network 1 Financial Assurance, Inc, National Financial Services
Group, Inc. and Shark Rivers Investors., LLC). Accordingly, we
deconsolidated the variable interest entities effective June 9, 2009 from our
financial position and results of operations.
The
carrying value of variable interest entities’ net assets approximated fair
value. At June 9, 2009, the date of deconsolidation, the net assets
were as follows:
Assets:
|
||||
Cash
and cash equivalents
|
$ | 2,695 | ||
Advances
from officers
|
302,333 | |||
Property
and equipment, net
|
1,002,418 | |||
Other
assets
|
218,363 | |||
Total
assets
|
$ | 1,525,809 | ||
Liabilities:
|
||||
Accounts
payable and accrued expenses
|
$ | (60,450 | ) | |
Notes
payable
|
(1,047,550 | ) | ||
Total
liabilities
|
(1,108,000 | ) | ||
Net
assets
|
$ | 417,809 |
No gain
or loss was recorded upon deconsolidation as the estimated fair values of
variable interest entities’ net assets equaled their carrying
values.
F-17
NETWORK I
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR THE
YEARS ENDED JUNE 30, 2010AND 2009
NOTE
15 - Non-Controlling Interest in Subsidiaries
Through
the merger date of June 9, 2009, non-Controlling interest represents one hundred
percent (100%) of the equity from the four (4) variable interest entities that
are beneficially-owned by the Company’s stockholders.
Network 1
Financial Securities, Inc. (“NETW”) exchanged substantially all it’s Common
Stock in accordance with the reverse merger. However,
NETW’s Series A preferred stock remained
outstanding. As of June 30, 2010 and 2009, NETW had
1,000,000 shares authorized, of 8% Series A preferred stock $1.00 par value, and
215,000 shares are outstanding.
The
Series A preferred stock is redeemable at the option of the Company’s Board of
Directors at 125% of the issuance price plus any dividends earned but unpaid and
after one year outstanding. The Series A preferred stock is non-voting and
non-cumulative. Of the 215,000 shares issued, 130,000 shares are owned by
National Financial Services Group, Inc., an affiliated Company, whose officers
and shareholders’ are officers and shareholders of the Company. Accordingly, the
value of these shares has been eliminated as of June 30, 2008. The
preferred stock shareholders are entitled to a bonus dividend at the discretion
of the board of directors based on the profitability of the firms market making
investment activities minus certain deductions. No bonus dividends were declared
for the years ended June 30, 2010 and 2009.
NOTE
16 –Warrants and Derivative Liability
The
following is additional information with respect to the Company’s warrants as of
June 30, 2010:
WARRANTS OUTSTANDING AND EXERCISABLE
|
|||||||||
Number of
|
Weighted
|
||||||||
Outstanding
|
Average
|
Weighted
|
|||||||
Shares
|
Remaining
|
Average
|
|||||||
Exercise
|
Underlying
|
Contractual
|
Exercise
|
||||||
Price
|
Warrants
|
Life
|
Price
|
||||||
$0.20
|
7,657,733 |
1.31 years
|
$ | 0.20 | |||||
|
7,657,733 |
1.31 years
|
$ | 0.20 |
In June 2008, the FASB
issued new accounting guidance which requires entities to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock by assessing the instrument’s contingent exercise provisions and
settlement provisions. Instruments not indexed to their own stock fail to meet
the scope exception of ASC 815 “Derivative and Hedging” and should be classified
as a liability and marked-to-market. The statement is effective for fiscal years
beginning after December 15, 2008 and is to be applied to outstanding
instruments upon adoption with the cumulative effect of the change in accounting
principle recognized as an adjustment to the opening balance of retained
earnings. The Company’s warrants issued in connection with the IPO do not have
fixed settlement provisions because their exercise prices, may be lowered if the
Company issues securities at lower prices in the future. The Company
was required to include the reset provisions in order to protect warrant holders
from potential dilution associated with future financings. In
accordance with the guidance, the warrants have been recharacterized as a
derivative liability.
F-18
NETWORK I
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009
The
derivative liability was valued using the Black-Scholes option valuation model
and the following assumptions:
June 30, 2010
|
June 9, 2009
|
|||||||
Warrants:
|
||||||||
Risk-free
interest rate
|
0.6 | % | 0.6 | % | ||||
Expected
volatility
|
103 | % | 103 | % | ||||
Expected
life (in years)
|
0.93 | 0.93 | ||||||
Expected
dividend yield
|
0 | % | 0 | % | ||||
Fair
value:
|
||||||||
Warrants
|
$ | 23,831 | $ | 22,896 |
The
risk-free interest rate was based in rates established by the Federal Reserve.
The Company’s expected volatility was based upon the historical volatility for
its common stock. The expected life of the warrants was determined by the
expiration date of the warrants. The expected dividend yield was based upon the
fact that the Company has not historically paid dividends, and does not expect
to pay dividends in the future.
NOTE
17 - Stockholders’ Equity
Common
Stock
On
December 8, 2004, we filed a Certificate of Amendment to our Certificate of
Incorporation increasing the total number of authorized shares to 101,000,000,
consisting of 100,000,000 shares of common stock and 1,000,000 shares of
preferred stock.
On
November 26, 2008, the Company sold 429,031 shares of its Class A common
stock to Network 1 Financial Advisors, Inc. for gross proceeds of
$50,000.
On
February 6, 2009, the Company sold 429,031 shares of its Class A common
stock to an investor for gross proceeds of $50,000.
In
accordance with the reverse merger, all references to Common Stock, share and
per share amounts have been retroactively restated to reflect the exchange ratio
of 17.16 shares of ISSI’s Common Stock for 1 share of all of the classes of the
acquirer's Common Stock outstanding immediately prior to the merger as if the
exchange had taken place as of the beginning of the earliest period
presented.
Preferred
Stock
The Board
of Directors of the Company is authorized, without further action of the
shareholders of the Company, to issue up to 1,000,000 shares of Preferred Stock
in one or more classes or series and to fix the rights, preferences, privileges
and restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, and the number of shares
constituting any series or the designation of such series. As of June 30, 2010,
there were no shares of preferred stock issued and outstanding.
F-19
NETWORK I
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED JUNE 30, 2010AND 2009
NOTE
18 - Commitments and Contingencies
Litigation
The
Company may be involved in legal proceedings in the ordinary course of business.
Such matters are subject to many uncertainties, and outcomes are not predictable
with assurance. The Company currently is not involved in any legal proceedings
which are not in the ordinary course of business.
Enforcement
Actions
In July
2007, the Company entered into a settlement agreement with the NASD for monetary
sanctions imposed against certain employees who are officers and shareholders of
the Company. The monetary sanctions amounted in the aggregate to $129,900. The
term of the settlement agreement allowed the Company to follow an installment
arrangement. Principal terms of the arrangement required a down payment of 25%.
The remaining balance is to be paid over a term ranging from 24 to 36 months.
Interest is to be paid at a rate of approximately 11.25% per annum (See Note
10).
In April
2010, the Company entered into a settlement agreement with the NASD for monetary
sanctions imposed on the Company. The monetary sanctions amounted in the
aggregate to $10,000. The term of the settlement agreement allowed the Company
to follow an installment arrangement. Principal terms of the arrangement
required a down payment of 25%. The remaining balance is to be paid over a term
of 16 months. Interest is to be paid at a rate of approximately 6.25% per
annum (See Note 10).
Regulatory
Approvals Required
NETW was
required to file with the Financial Industry Regulatory Authority (“FINRA”), an
application pursuant to FINRA Rule 1017 (the “1017 Application”) to obtain
approval for the sale of up to one hundred percent (100%) of NETW. NETW filed
the initial 1017 Application on February 6, 2009, subsequently withdrew the 1017
Application and re-filed the 1017 application on April 2, 2009. FINRA approved
the 1017 Application on October 30, 2009.
As a
registered broker-dealer, we are subject to the SEC’s ongoing Uniform Net
Capital Rule 15c3-1. This requires that we maintain minimum net capital of
$100,000 and also requires that the ratio of aggregate indebtedness, as defined,
to net capital, shall not exceed 15 to 1.
Lease
Commitments
The
Company leases its corporate office facility under an operating lease expiring
in June 2012. Additional rent is payable for increases in real estate taxes and
operating expenses over base period amounts. Under the terms of the lease, the
Company has the option to cancel the lease provided a minimum of four months
written notice is given to the landlord.
F-20
NETWORK 1
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009
Minimum
future annual rental payments are approximately as follows:
Year Ending
|
Amount
|
||||
2011
|
$ | 108,000 | |||
2012
|
108,000 | ||||
Total
|
$ | 216,000 |
The total
amount of rent payable under the leases is recognized on a straight line basis
over the term of the leases. Rent expense for the years ended June 30, 2010 and
2009 was approximately $121,200 and $114,000 respectively.
NOTE
19 – Fair Value Measurements
ASC 820
defines fair value as the amount that would be received for an asset or paid to
transfer a liability (i.e., an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also establishes a fair value
hierarchy that requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. ASC 820
describes the following three levels of inputs that may be used:
Level 1:
Quoted prices (unadjusted) in active markets that are accessible at the
measurement date for identical assets and liabilities. The fair value hierarchy
gives the highest priority to Level 1 inputs.
Level 2:
Observable prices that are based on inputs not quoted on active markets but
corroborated by market data.
Level 3:
Unobservable inputs when there is little or no market data available, thereby
requiring an entity to develop its own assumptions. The fair value hierarchy
gives the lowest priority to Level 3 inputs.
The table
below summarizes the fair values of our financial assets that are measured on a
recurring basis at fair value as of June 30, 2010:
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
Due
from clearing organization
|
$ | 243,579 | - | - | $ | 243,579 | ||||||||||
Securities
owned, at market values
|
152,025 | - | - | 152,025 | ||||||||||||
Total
Assets
|
$ | 395,604 | - | - | $ | 395,604 | ||||||||||
Derivative
liabilities
|
$ | - | - | 23,831 | $ | 23,831 | ||||||||||
Total
Liabilities
|
$ | - | - | 23,831 | $ | 23,831 |
The table
below sets forth a summary of changes in the fair value of the Company’s Level 3
Financial Liabilities (derivative liabilities) for the year ended June 30,
2010.
Balance
at beginning of year
|
$ | 22,896 | ||
Change
in fair value of derivative liabilities
|
935 | |||
Balance
at end of year
|
$ | 23,831 |
NOTE
20 - Subsequent Event
NETW
along with Southwest and Legent entered into an agreement to begin the transfer
from Southwest to Legent of all customer accounts introduced by the Company on
August 13, 2010. The transfer was initiated as of that date and all
future customer account transactions will be cleared through
Legent. As of October 8, 2010, the Company had $25,000 on deposit
with Southwest and $350,000 on deposit with Legent.
On
September 1, 2010, NETW entered into an AWC with FINRA, concerning NETW’s
reporting to OATS and its Written Supervisory Procedures. The fine
was for an aggregate of $10,000. NETW made one $2,500 payment to
FINRA and will pay the balance at a rate of $500 per month until January 24,
2012.
F-21
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
There
were no changes in accounting principles or disagreements with our auditors
regarding applications of any accounting principles during the year ended June
30, 2010.
Item
9A. Controls and Procedures
We
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(f)
under the Exchange Act) (the “Disclosure Controls”) as of the end of the period
covered by this Annual Report. The Disclosure Controls evaluation was done under
the supervision and with the participation of management, including our
Principal Executive Officer (“PEO”) and Principal Accounting Officer (the “PAO,”
and together with the PEO, the “Certifying Officers”).
Attached
as exhibits to this Annual Report are certifications of the Certifying Officers,
which are required in accordance with Rule 13a-14 of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section
includes the information concerning the controls evaluation referred to in the
certifications and it should be read in conjunction with the certifications for
a more complete understanding of the topics presented.
Disclosure
Controls and Procedures
The term
“disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e))
refers to the controls and other procedures that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer’s management, including its Certifying Officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosures.
We have
designed our disclosure controls and procedures to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is recorded, processed, summarized and reported within time periods
specified the SEC’s rules and forms. We also have designed our disclosure
controls and procedures to ensure that information required to be disclosed by
us in the reports that we file under the Exchange Act is accumulated and
communicated to our management to allow timely decisions regarding required
disclosures. Based on management’s evaluation, we have determined that our
disclosure controls and procedures were not effective as a result of the
material weakness described below.
This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal controls over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only Management’s report in this Annual Report.
Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for the preparation of the Company’s financial statements and
related information. Management uses its best judgment to ensure that the
financial statements present fairly, in all material aspects, the Company’s
financial position and results in conformity with Generally Accepted Accounting
Principles (“GAAP”).
Internal
control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Exchange Act as a process designed by, or under the
supervision of, Certifying Officers and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP.
Under the
supervision of management, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in
“Internal Control – Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission published in 1992.
As a
result of this evaluation, we concluded that our internal control over financial
reporting was not effective as of June 30, 2010 due to the identification of a
material weakness. A material weakness is a control deficiency or combination of
control deficiencies such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.
10
To
address the material weakness described below, we performed additional analysis
and performed other procedures to ensure our financial statements were prepared
in accordance with GAAP. Accordingly, management believes that the financial
statements included in this Annual Report on Form 10-K, fairly present, in all
material aspects, our financial condition, results of operations and cash flows
for the periods presented in accordance with GAAP.
The
weakness, identified by management, related to the lack of necessary
accounting resources to ensure consistently complete and accurate reporting of
financial reporting. To mitigate the current limited resources and limited
employees, we rely heavily on direct management oversight of transactions. As we
grow, we expect to increase our number of employees, which will enable us to
implement adequate segregation of duties within the internal control
framework.
We
believe that for the reasons described above, after we hire additional qualified
in-house personnel, we will be able to improve our disclosure controls and
procedures, remedy the material weaknesses identified above and provide
reasonable assurance that assets are safeguarded from loss or unauthorized use,
that transactions are recorded in accordance with GAAP under management’s
directions, and that financial records are reliable to prepare financial
statements. However, because of inherent limitations in all control systems, no
evaluation can provide absolute assurance that all control issues and instances
of fraud, if any, will be or have been detected.
Changes
in Internal Controls over Financial Reporting
Other
than the identification of the material weakness described above, there have not
been any other changes in our internal control over financial reporting that
occurred during the quarter ended June 30, 2010 that have materially affected or
are reasonably likely to affect our internal control over financial
reporting.
Item
9B. Other Information
Not
applicable.
11
PART
III
Item
10. Directors, Executive Officers and Corporate Governance.
The
following individuals serve as the directors, executive officers and key
employees of the Company. All directors of the Company and our
operating subsidiary hold office until his successor shall have been duly
elected and qualified, subject to his earlier death, resignation or removal. The
executive officers of the Company and our operating subsidiary are appointed by
our board of directors and hold office until their death, resignation or removal
from office.
Name
|
Age
|
Position
|
||
Richard
W. Hunt
|
57
|
Chief
Executive Officer, Vice-President and Chairman of the
Board
|
||
Michael
S. Rakusin(1)(2)(3)
|
54
|
Chief
Financial Officer, Treasurer, Vice-President and
Director
|
||
William
R. Hunt, Jr.
|
55
|
President
and Director
|
||
Damon
Testaverde
|
62
|
Secretary
and Director
|
(1)
|
Member
of the Audit Committee.
|
(2)
|
Member
of the Compensation Committee.
|
(3)
|
Member
of the Nominating and Corporate Governance
Committee.
|
Richard W.
Hunt was appointed Chief Executive Officer, Vice-President and Chairman
of the Board of Directors of the Company following the consummation of the
Reverse Merger on June 9, 2009. Since March 1988, Mr. Hunt has served as Chief
Executive Officer, Secretary and Chairman of the Board of Directors of NETW. Mr.
Hunt is currently a FINRA Registered Representative. Since May 1998, Mr. Hunt
has served as a director of Network 1 Financial Assurance, Inc., which acts as
an agent providing life and health insurance products for certain clients on
behalf of the Company, and since September 2000, he has served as director of
Network 1 Financial Advisors, Inc., which provides advisory services and the
in-house management of the Company’s client accounts. Mr. Hunt also served as
President of Network 1 Financial Advisors, Inc. between September 2000 and
November 2008. Mr. Hunt received his BA in Liberal Arts, with emphasis in Human
Resources, from Trenton State College, now known as The College of New
Jersey.
For a
period of 45 days during August and September 2007, Mr. Hunt was suspended from
association with any FINRA (f/k/a NASD) member in a principal capacity and was
fined $25,000, upon consenting to such sanctions and the entry of findings in
connection with charges that Mr. Hunt violated certain NASD Conduct rules for
failure to supervise.
Michael S.
Rakusin has served as our Chief Financial Officer since September 28,
2006. Since 2001, Mr. Rakusin has served as the Managing Director of 54 Pearl
Street Associates, a restaurant management holding company. Mr. Rakusin is also
a certified public accountant and currently maintains an active accounting and
tax practice. He also has extensive experience as a builder of single-family
homes. Mr. Rakusin previously served as Chief Executive Officer of Echo Springs
Water Co., Inc., a distributor of bottled water. Michael Rakusin has been
designated as our Audit Committee Financial Expert.
William Hunt
Jr. was appointed President and a member of the Board of Directors
of the Company following the consummation of the Reverse Merger on June 9, 2009.
Since March 1988, Mr. Hunt has served as the President, Chief Operating Officer
and a director of NETW. In 1993, he was also appointed Chief Financial Officer
of NETW. From September 2000 to November 2008, he served as Vice President of
Network 1 Financial Advisors, Inc, and in November 2008 he was appointed
President. Since May 1998, he has served as Vice President and Chief Financial
Officer of Network 1 Financial Assurance, Inc. Mr. Hunt is currently a FINRA
Registered Representative, and has an insurance and real estate license in New
Jersey. He received his BS in Business Administration from Trenton State
College, now known as The College of New Jersey.
Damon D.
Testaverde was appointed Secretary and a member of the Board of Directors
of the Company following the consummation of the Reverse Merger on June 9, 2009.
Since July 1994, Mr. Testaverde has been the managing director of NETW. From May
1991 until June 1995, Mr. Testaverde served as President and Chief Executive
officer of TekInsight. From 1989 to March 1991, Mr. Testaverde served as the
principal stockholder of R.H. Damon & Company, Inc. a full service
securities broker-dealer. From 1980 to 1986, he served in the capacity of
President of S.D. Cohn & Co., Inc., a full service securities broker-dealer.
He is currently a FINRA Registered Representative. He received his B.A. in
Accounting from Pace University.
12
Between
September 2007 and January 2008, Mr. Testaverde was suspended from association
with any FINRA (f/k/a NASD) member in any capacity, and was fined $50,000, upon
neither admitting nor denying such sanctions and the entry of findings, relating
to charges that he solicited one of NETW’s customers, who was a controlling
shareholder of a company to sell shares in amounts that exceeded the limits that
a controlling shareholder could sell in public transactions, in violation of
certain NASD Conduct Rules and Section 5 of the Securities Act of 1933, as
amended.
Family
Relationships
William
R. Hunt, Jr. and Richard W. Hunt are brothers. There are no other family
relationships between any of our directors or executive officers.
Involvement
in Certain Legal Proceedings
Except as
set forth above with respect to Richard W. Hunt and Damon Testaverde, none of
our directors, executive officers, promoters or control persons has been
involved in any of the following events during the past five years:
1.
|
any
bankruptcy petition filed by or against any business of which such person
was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that
time;
|
2.
|
any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor
offences);
|
3.
|
being
subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking activities;
or
|
4.
|
being
found by a court of competent jurisdiction (in a civil action), the
Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended, or
vacated.
|
Meetings
of the Board
Our Board
of Directors met two (2) times in person during the fiscal year ended June 30,
2010. All directors serving at the time attended the meeting.
Board
Committees
Our Board
of Directors has established a compensation committee (the “Compensation
Committee”), an audit committee (the “Audit Committee”), and a nominating and
corporate governance committee (the “Nominating and Corporate Governance
Committee”).
The Compensation
Committee. The Compensation Committee consists of Michael Rakusin.
The Compensation Committee determines the salaries and bonuses of our executive
officers.
The Audit
Committee. Mr. Rakusin serves as a member of the Audit Committee. We have
determined that Mr. Rakusin qualifies as an “audit committee financial expert”
under applicable SEC regulations. The Audit Committee has the responsibilities
set forth in the Audit Committee Charter, which was revised and adopted by our
Board of Directors on March 4, 2004 including appointing auditors, pre-approving
all auditing services, reviewing the audited financial statements and other
financial disclosures, and overseeing our accounting and audit functions. The
Audit Committee reports its findings to the Board of Directors. At the present
time, no members of the audit committee are independent. The Charter of the
Audit Committee is attached as Appendix D of the Company’s definitive proxy
statement filed with the SEC on August 28, 2006.
Nominating and
Corporate Governance Committee. The member of the Nominating Committee is
Michael Rakusin. The Nominating Committee has the responsibilities set forth in
the Nominating and Corporate Governance Committee charter, which was adopted by
our Board of Directors on March 4, 2004, including making recommendations to the
Board of Directors of persons qualified to serve as our directors, chairman and
members of committees of the Board of Directors. The Nominating Committee is
also responsible for certain corporate governance practices, including the
development of ethical conduct standards for our Directors, officers and
employees and an annual evaluation to determine whether the Board of Directors
and its committees are functioning effectively.
13
The
Nominating Committee expects to identify nominees to serve as our directors
primarily by accepting and considering the suggestions and nominee
recommendations made by directors, management and stockholders. The Nominating
Committee has not established specific minimum qualifications for recommended
nominees. However, as a matter of practice, the Nominating Committee does
evaluate recommended nominees for directors based on their integrity, judgment,
independence, financial and business acumen, relevant experience, and their
ability to represent and act on behalf of all stockholders, as well as the needs
of the Board of Directors. In general, the Nominating Committee would expect to
re-nominate incumbent directors who express an interest in continuing to serve
on the Board of Directors.
The
Charter of the Nominating and Corporate Governance Committee can be found as
Appendix E of the definitive proxy statement filed with the SEC on August 28,
2006.
Code
of Business Conduct and Ethics
The Board
of Directors has also adopted a Code of Business Conduct and Ethics, which can
be found in Appendix F of the Definitive Proxy Statement filed by the Company
with the SEC on August 28, 2006. The Code of Business Conduct and Ethics will be
provided without charge, upon written request to us at the following address:
Network 1 Financial Group, Inc., 2 Bridge Avenue, 4th Floor Red Bank, NJ
07701, Attention: Richard W. Hunt.
Section
16(a) Beneficial Ownership Reporting
Section
16(a) of the Exchange Act requires our executive officers and directors, and
persons who own more than 10% of a registered class of our equity securities, to
file reports of ownership and changes in ownership with the SEC and NASDAQ.
Officers, directors and greater than 10% stockholders are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file. To
the best of our knowledge, based solely on a review of such reports provided to
us and written representations that no other reports were required during, or
with respect to, the year ended June 30, 2010, all Section 16(a) filing
requirements applicable to our executive officers, directors and greater than
10% beneficial owners have been satisfied.
Item
11. Executive Compensation.
Executive
Compensation
The
following table sets forth information concerning the compensation paid and
awarded to those individuals serving as our officers following the consummation
of the Reverse Merger. It includes compensation paid at the end of the fiscal
years ended June 30, 2010 and 2009 to (i) our Chief Executive Officer and former
Chief Executive Officer and (ii) the two most highly compensated executive
officers (other than our Chief Executive Officer) of us and our subsidiaries
whose total compensation exceeded $100,000 for these periods. These individuals
may be collectively referred to in this report as our “Named Executive
Officers.”
14
Non-
|
Non-
|
||||||||||||||||||
Equity
|
qualified
|
||||||||||||||||||
Fiscal
|
Incentive
|
Deferred
|
|||||||||||||||||
Name and Principal
|
Year
|
Stock
|
Option
|
Plan
|
Compensation
|
All Other
|
|||||||||||||
Position
|
Ended
|
Salary
|
Bonus
|
Awards
|
Awards
|
Compensation
|
Earnings
|
Compensation
|
Total
|
||||||||||
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
||||||||||||
David
R. E. Hale
|
2009
|
— | — | — | — | — | — | — | — | ||||||||||
President and
CEO(1)
|
|||||||||||||||||||
Richard
W. Hunt
|
2010
|
119,600 | 50,935 | (6) | — | — | — | — | — | 170,535 | |||||||||
Chief
Executive
|
2009
|
100,230 | — | 33,516 | — | — | — | — | 133,746 | ||||||||||
Officer
and Vice-
|
|||||||||||||||||||
President (2)(3)
|
|||||||||||||||||||
William
R. Hunt
|
2010
|
119,600 | 50,935 | (6) | — | — | — | — | — | 170,535 | |||||||||
President (3)(4)
|
2009
|
92,560 | — | 38,516 | — | — | — | — | 131,076 | ||||||||||
Damon
Testaverde
|
2010
|
— | 1,008,815 | (6) | 435,987 | — | — | — | — | 1,444,802 | |||||||||
Secretary (5)
|
2009
|
319,810 | — | 134,190 | — | — | — | — | 454,000 |
(1)
|
Mr.
Hale resigned his positions with the Company on June 9, 2009 in
conjunction with the consummation of the Reverse Merger. Mr. Hale did not
receive any compensation during the fiscal year ended June 30, 2009 for
his services as an executive officer or director of the
Company.
|
(2)
|
Richard
W. Hunt was appointed Chief Executive Officer and Vice-President of the
Company on June 9, 2009 in conjunction with the consummation of the
Reverse Merger.
|
(3)
|
Represents
fees paid to Richard W. Hunt and William R. Hunt, Jr. for their services
to NETW during the fiscal years ended June 30, 2010 and
2009. NETW does not have employment agreements with any of its
employees. The salary for Messrs. William and Richard Hunt consists of a
base salary plus commissions, which commissions have been waived by each
of Messrs. William and Richard Hunt beginning in 2008. The base salary for
Messrs. William and Richard Hunt was determined by looking at comparable
salaries for individuals holding similar titles at other brokerage firms
of similar size. The commission portion allows them to increase their
salary based on actual production, which NETW’s management believes is
standard in the industry.
|
(4)
|
William
R. Hunt, Jr. was appointed President of the Company on June 9, 2009 in
conjunction with the consummation of the Reverse
Merger.
|
(5)
|
Mr.
Testaverde was appointed Secretary of the Company on June 9, 2009 in
conjunction with the consummation of the Reverse Merger. Represents fees
paid for Mr. Testaverde’s services to NETW during the fiscal years ended
June 30, 2010 and 2009.
|
(6)
|
Represents commissions paid. |
Employment
Contracts
We do not
have employment agreements with any of our employees.
Compensation
of Directors
All of
our directors, regardless of whether they are also employees of our Company,
receive $500 a month for serving on the Board of Directors as well as
reimbursement of reasonable expenses incurred in attending
meetings.
DIRECTOR
COMPENSATION
No fees
were paid to any of our directors for the fiscal year ended June 30,
2010.
15
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
The
following table sets forth as of October 5, 2010 certain information regarding
the beneficial ownership of Common Stock by (i) each person or “group” (as that
term is defined in Section 13(d)(3) of the Exchange Act) known by the Company to
be the beneficial owner of more than 5% of the common stock, (ii) each of our
executive officers, (iii) each director and nominee and (iv) all directors and
executive officers as a group. Except as otherwise indicated, we believe, based
on information furnished by such persons, that each person listed below has sole
voting and investment power over the shares of common stock shown as
beneficially owned, subject to community property laws, where applicable.
Beneficial ownership is determined under the rules of the SEC and includes any
shares which the person has the right to acquire within 60 days after October 5,
2010 through the exercise of any stock option or other right.
Name and address of beneficial owner
|
Amount and nature of
Beneficial ownership
|
Percent of class of
Common Stock(1)
|
||||||
Horace
T. Ardinger, Jr.
9040
Governors Row
Dallas,
TX 75356
|
11,077,351 | (2) | 29.61 | % | ||||
Directors
and Officers(3)
:
|
||||||||
Michael
Rakusin
Chief
Financial Officer, Treasurer, Vice-President and Director
|
100,000 | (4) | * | |||||
Damon
Testaverde
Secretary
and Director
|
3,323,653 | (5) | 9.98 | % | ||||
William
R. Hunt, Jr.
President
and Director
|
9,363,213 | (6) | 28.19 | % | ||||
Richard
W. Hunt
Chief
Executive Officer, Vice-President and Chairman
|
9,284,933 | (7) | 28.02 | % | ||||
Directors
and Officers as a group (4 persons)
|
21,092,212 | (8) | 63.10 | % |
*Less
than one percent.
(1)
|
Based
on 32,435,057 shares of common stock outstanding as of October 5,
2010.
|
(2)
|
Includes
965,000 warrants with an exercise price of approximately $1.00 to purchase
a total of 4,979,400 shares of common stock which expire on October
23, 2011. Also includes 5,668,920 shares of common stock held by H.T.
Ardinger & Sons, Inc., a Texas corporation, of which Mr. Ardinger has
sole voting and dispositive control. Also includes 429,031 shares which
Mr. Ardinger received in conjunction with the Reverse Merger as a result
of his ownership of NETW shares. Does not include 317,500 shares owned by
Mr. Ardinger’s wife, to which he disclaims beneficial
ownership.
|
(3)
|
The
address of each officer and director is c/o Network 1 Financial Group,
Inc., 2 Bridge Avenue, 4th floor, Red Bank, NJ
07701.
|
(4)
|
Consists
of 100,000 warrants to purchase a total of 100,000 shares of common stock
at $0.20 per share which expire on March 28,
2012.
|
(5)
|
Includes
53,452 warrants with an exercise price of approximately $1.00 to purchase
of total of 275,278 shares of common stock which expire October 23,
2011. Such warrants are owned by Network 1 Financial Securities, Inc.,
over which Mr. Testaverde shares control with Mr. William Hunt and Mr.
Richard Hunt. Also includes 12,500 shares of common stock owned by Mr.
Testaverde’s wife, Patricia. Also includes 5,000 shares of common stock
owned by R. H. Damon, Inc., a corporation over which Mr. Testaverde
exercises voting and investment control. Also includes 104,000 warrants
with an exercise price of approximately $1.00 to purchase 535,600 shares
of common stock which expire on October 23,
2011.
|
16
(6)
|
Includes
53,452 warrants with an exercise price of approximately $1.00 to purchase
of total of 275,278 shares of common stock which expire October 23, 2011.
Such warrants are owned by Network 1 Financial Securities, Inc., over
which Mr. Hunt shares control with Mr. Testaverde and Mr. Richard Hunt.
Also includes 429,031 shares of common stock received in conjunction with
the Reverse Merger by Network 1 Financial Advisors, Inc., a corporation
over which William Hunt shares voting and investment control with Richard
Hunt. Also includes 15,200 warrants with an exercise price of
approximately $1.00 to purchase a total of 78,280 shares of common stock
which expire October 23, 2011.
|
(7)
|
Includes
53,452 warrants with an exercise price of approximately $1.00 to purchase
of total of 275,278 shares of common stock which expire October 23, 2011.
Such warrants are owned by Network 1 Financial Securities, Inc., over
which Mr. Hunt shares control with Mr. Testaverde and Mr. William Hunt.
Also includes 429,031 shares of common stock received in conjunction with
the Reverse Merger by Network 1 Financial Advisors, Inc., a corporation
over which Richard Hunt shares voting and investment control with William
Hunt.
|
(8)
|
Includes
100,000 warrants to purchase a total of 100,000 shares of common stock at
$0.20 per share which expire on March 28, 2012. Also includes 53,452
warrants owned by Network 1 Financial Securities, Inc. with an exercise
price of approximately $1.00 to purchase a total of 275,278 shares of
common stock and which expire on October 23, 2011. Also includes 104,000
warrants with an exercise price of approximately $1.00 to purchase 535,600
shares of common stock and which expire October 23, 2011. Also includes
15,200 warrants with an exercise price of approximately $1.00 to purchase
a total of 78,280 shares of common stock which expire October 23,
2011.
|
Changes
in Control
There are
no arrangements known to us that may, at a subsequent date, result in a change
of control of the Company.
Item
13. Certain Relationships and Related Transactions, and Director
Independence.
The
Company has entered into the following separate agreements with affiliated
companies that define the relationship with the Company post-Reverse
Merger:
1.
|
The agreement with Network 1
Financial Assurance, Inc. provides for the reimbursement of certain
overhead expenses and the sharing of commissions generated by variable
annuity sales referred or placed by NETW. This agreement is not exclusive
and NETW is in a position to obtain more favorable terms from third
parties should they become
available.
|
2.
|
The agreement with Network 1
Financial Advisors, Inc. provides for the reimbursement of certain
overhead expenses and the payment of investment advisory fees to NETW
stemming from accounts referred by registered representatives of NETW to
Network 1 Financial Advisors, Inc. This agreement is not exclusive and
NETW is in a position to obtain more favorable terms from third parties
should they become available.
|
3.
|
The agreement with Network 1
Financial Advisors, Inc. (“Advisors”), Network 1 Financial Assurance, Inc.
(“Assurance”) and NETW is an agreement to abstain from
certain voting rights to prohibit the current principals of NETW (as
continuing post-Reverse Merger) from voting on certain matters. This will
prohibit the current principals of NETW (should they elect to continue as
executives post-Reverse Merger) from voting on matters related to fee
arrangements for any ongoing activities with Advisors and
Assurance.
|
On
November 18, 2008, the Company loaned to and received a promissory note in the
amount of $100,000 from Network 1 Financial Advisors Inc. The effective interest
rate for the note is 6% per annum. The note matured on November 18, 2009 which
was extended to November 18, 2010.
There
were no other related party transactions for the fiscal year ended June 30,
2010.
Director
Independence
Our
determination of independence of directors is made by using the definition of
“independent director” contained under Rule 4200(a)(15) of the Rules of the
Financial Industry Regulatory Authority. Our Board of Directors has determined
that Richard Hunt, Michael Rakusin, William R. Hunt, Jr. and Damon Testaverde
are not “independent” under this rule by virtue of their positions as corporate
and executive officers of our Company.
17
Item
14. Principal Accountant Fees and Services.
Fees
|
|||||||
Fee Category
|
2010
|
2009
|
|||||
Audit
Fees
|
$ |
42,500
|
$ |
—
|
|||
Audit-Related
Fees
|
–
|
—
|
|||||
Tax
Fees
|
5,000
|
—
|
|||||
All
Other Fees
|
2,700
|
—
|
|||||
Total
Fees
|
$ |
50,200
|
$ |
—
|
Audit
Fees
On August
4, 2009, RBSM LLP (“RBSM”) was engaged as the Registrant’s new independent
registered public accountants. Accordingly, RBSM did not bill us for any of the
above services during the fiscal year ended June 30, 2009. RBSM was
engaged to audit our financial statements for the fiscal years ended June 30,
2010 and 2009. RBSM billed us an aggregate of approximately $50,200
in fees for professional services during the fiscal year ended June 30,
2010.
Audit
Related Fees
We did
not incur any audit-related fees for the fiscal years ended June 30, 2010 and
2009.
Tax
Fees
We
engaged RBSM to prepare our tax returns for fiscal years ending June 30, 2010
and 2009.
All
Other Fees
We
engaged RBSM for other services, primarily related to AML audit services, for
the fiscal years ending June 30, 2010 and 2009.
18
Item
15. Exhibits and Financial Statement Schedules.
Financial
Statement Schedules
Not
applicable.
Exhibits
Exhibit
|
||
No.
|
Description
of Exhibit
|
|
3.1
|
Certificate
of Incorporation of International Plastic Technologies, Inc. dated March
4, 1998 (Incorporated by reference to Exhibit 3.1 to the Company’s
Registration Statement on Form SB-2 (Registration Statement No. 333-48701,
filed with the SEC on March 26, 1998)).
|
|
3.2
|
Amendment
to the Certificate of Incorporation of International Plastic Technologies,
Inc., dated December 7, 1998, changing the Company’s name to
“International Smart Sourcing, Inc.” (Incorporated by reference to Exhibit
3.1 to the Company’s Registration Statement on Form SB-2/A (Registration
Statement No. 333-48701, filed with the SEC on January 6,
1999)).
|
|
3.3
|
Amendment
to the Certificate of Incorporation of International Smart Sourcing, Inc.,
dated June 26, 2000, changing the Company’s name to “CHINAB2BSOURCING.COM,
INC.” (Incorporated by reference to Exhibit 3.3 to the Quarterly Report on
Form 10-QSB filed with the SEC on August 15, 2000).
|
|
3.4
|
Amendment
to the Certificate of Incorporation of International Smart Sourcing, Inc.,
dated June 9, 2009, changing the Company’s name to “Network 1 Financial
Group, Inc. (Incorporated by reference to Exhibit 3.4 to the Annual Report
on Form 10-K filed with the SEC on October 13, 2010).
|
|
3.5
|
By-Laws
of International Plastic Technologies, Inc. (Incorporated by reference to
Exhibit 3.2 to the Company’s Registration Statement on Form SB-2
(Registration Statement 333-48701, filed with the SEC on March 26,
1998)).
|
|
3.6
|
Amendment
of the By-Laws of International Smart Sourcing, Inc. dated as of October
14, 2004 (Incorporated by reference to Exhibit B to the Definitive
Information Statement on Schedule 14C filed with the SEC on November 15,
2004).
|
|
4.1
|
Form
of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to
the Company’s Registration Statement on Form SB-2/A (Registration
Statement No. 333-48701, filed with the SEC on June 4,
1998)).
|
19
4.2
|
Form
of Warrant Certificate (Incorporated by reference to Exhibit 4.2 to the
Company’s Registration Statement on Form SB-2/A (Registration Statement
No. 333-48701, filed with the SEC on June 4, 1998)).
|
|
4.3
|
Form
of Warrant Agreement between the Company and Continental Stock Transfer
and Trust Company (Incorporated by reference to Exhibit 4.3 to the
Company’s Registration Statement on Form SB-2/A (Registration Statement
No. 333-48701, filed with the SEC on June 4, 1998)).
|
|
4.4
|
Amendment
No. 1 to the Warrant Agreement between the Company and Continental Stock
and Trust Company effective as of April 12, 2005 (Incorporated by
reference to Exhibit 99.1 to the Current Report on Form 8-K filed with the
SEC on April 20, 2005).
|
|
4.5
|
Amendment
No. 2 to the Warrant Agreement between the Company and Continental Stock
and Trust Company effective as of December 4, 2006 (Incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the
SEC on December 5, 2006).
|
|
21
|
List
of Subsidiaries (Incorporated by reference to Exhibit 21 to the Current
Report on Form 8-K, filed with the SEC on June 15,
2009).
|
|
31.1
|
Rule
13a– 4(a)/15d–14(a) certification, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002*
|
|
31.2
|
Rule
13a–14(a)/15d–14(a) certification, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002*
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*
|
* Filed
herewith.
20
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
NETWORK 1 FINANCIAL GROUP,
INC.
|
|
Date:
October 13, 2010
|
/s/ Richard W. Hunt
|
Richard
W. Hunt
|
|
Chief
Executive Officer, Vice President and Chairman
(Principal
Executive Officer)
|
In
accordance with the Securities Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/ Richard W. Hunt
|
Chief
Executive Officer, Vice President and Chairman
|
October
13, 2010
|
||
Richard
W. Hunt
|
(Principal
Executive Officer)
|
|||
/s/ Michael Rakusin
|
Chief
Financial Officer, Director
|
October
13, 2010
|
||
Michael
Rakusin
|
(Principal
Financial Officer)
|
|||
/s/ William R. Hunt, Jr.
|
President
and Director
|
October
13, 2010
|
||
William
R. Hunt, Jr.
|
||||
/s/ Damon Testaverde
|
Secretary
and Director
|
October
13, 2010
|
||
Damon
Testaverde
|
||||
21
Exhibit
|
||
No.
|
Description
of Exhibit
|
|
3.1
|
Certificate
of Incorporation of International Plastic Technologies, Inc. dated March
4, 1998 (Incorporated by reference to Exhibit 3.1 to the Company’s
Registration Statement on Form SB-2 (Registration Statement No. 333-48701,
filed with the SEC on March 26, 1998)).
|
|
3.2
|
Amendment
to the Certificate of Incorporation of International Plastic Technologies,
Inc., dated December 7, 1998, changing the Company’s name to
“International Smart Sourcing, Inc.” (Incorporated by reference to Exhibit
3.1 to the Company’s Registration Statement on Form SB-2/A (Registration
Statement No. 333-48701, filed with the SEC on January 6,
1999)).
|
|
3.3
|
Amendment
to the Certificate of Incorporation of International Smart Sourcing, Inc.,
dated June 26, 2000, changing the Company’s name to “CHINAB2BSOURCING.COM,
INC.” (Incorporated by reference to Exhibit 3.3 to the Quarterly Report on
Form 10-QSB filed with the SEC on August 15, 2000).
|
|
3.4
|
Amendment
to the Certificate of Incorporation of International Smart Sourcing, Inc.,
dated June 9, 2009, changing the Company’s name to “Network 1 Financial
Group, Inc. (Incorporated by reference to Exhibit 3.4 to the Annual Report
on Form 10-K filed with the SEC on October 13, 2010).
|
|
3.5
|
By-Laws
of International Plastic Technologies, Inc. (Incorporated by reference to
Exhibit 3.2 to the Company’s Registration Statement on Form SB-2
(Registration Statement 333-48701, filed with the SEC on March 26,
1998)).
|
|
3.6
|
Amendment
of the By-Laws of International Smart Sourcing, Inc. dated as of October
14, 2004 (Incorporated by reference to Exhibit B to the Definitive
Information Statement on Schedule 14C filed with the SEC on November 15,
2004).
|
|
4.1
|
Form
of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to
the Company’s Registration Statement on Form SB-2/A (Registration
Statement No. 333-48701, filed with the SEC on June 4,
1998)).
|
|
4.2
|
Form
of Warrant Certificate (Incorporated by reference to Exhibit 4.2 to the
Company’s Registration Statement on Form SB-2/A (Registration Statement
No. 333-48701, filed with the SEC on June 4, 1998)).
|
|
4.3
|
Form
of Warrant Agreement between the Company and Continental Stock Transfer
and Trust Company (Incorporated by reference to Exhibit 4.3 to the
Company’s Registration Statement on Form SB-2/A (Registration Statement
No. 333-48701, filed with the SEC on June 4, 1998)).
|
|
4.4
|
Amendment
No. 1 to the Warrant Agreement between the Company and Continental Stock
and Trust Company effective as of April 12, 2005 (Incorporated by
reference to Exhibit 99.1 to the Current Report on Form 8-K filed with the
SEC on April 20, 2005).
|
|
4.5
|
Amendment
No. 2 to the Warrant Agreement between the Company and Continental Stock
and Trust Company effective as of December 4, 2006 (Incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the
SEC on December 5, 2006).
|
|
21
|
List
of Subsidiaries (Incorporated by reference to Exhibit 21 to the Current
Report on Form 8-K, filed with the SEC on June 15,
2009).
|
|
31.1
|
Rule
13a– 4(a)/15d–14(a) certification, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002*
|
|
31.2
|
Rule
13a–14(a)/15d–14(a) certification, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002*
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*
|
22