Attached files
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EX-31.1 - EXHIBIT 31.1 - NETWORK 1 FINANCIAL GROUP, INC. | v222397_ex31-1.htm |
EX-32.1 - EXHIBIT 32.1 - NETWORK 1 FINANCIAL GROUP, INC. | v222397_ex32-1.htm |
EX-31.2 - EXHIBIT 31.2 - NETWORK 1 FINANCIAL GROUP, INC. | v222397_ex31-2.htm |
EX-32.2 - EXHIBIT 32.2 - NETWORK 1 FINANCIAL GROUP, INC. | v222397_ex32-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2011
OR
¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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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
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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
(Registrant’s telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 ¨ NO ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
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Accelerated filer ¨
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Non-accelerated filer ¨
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Smaller reporting company þ
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ
As of May 12, 2011, the Registrant had 55,560,057 shares of its Common Stock, $.001 par value, outstanding.
NETWORK 1 FINANCIAL GROUP, INC.
FORM 10-Q
March 31, 2011
TABLE OF CONTENTS
Page
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|||||
PART I – FINANCIAL INFORMATION
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1 | ||||
ITEM 1.
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CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
1 | |||
ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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2 | |||
ITEM 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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5 | |||
ITEM 4.
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CONTROLS AND PROCEDURES
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5 | |||
PART II – OTHER INFORMATION
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6 | ||||
ITEM 1.
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LEGAL PROCEEDINGS
|
6 | |||
ITEM 2.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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6 | |||
ITEM 3.
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DEFAULTS UPON SENIOR SECURITIES
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6 | |||
ITEM 5.
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OTHER INFORMATION
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6 | |||
ITEM 6.
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EXHIBITS
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6 | |||
SIGNATURES
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7 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Index to Consolidated Financial Statements
Condensed Consolidated Statement of Financial Condition
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F–1 | |||
Condensed Consolidated Statements of Operations
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F–2 | |||
Condensed Consolidated Statement of Equity
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F–3 | |||
Condensed Consolidated Statement of Cash Flows
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F–4 | |||
Notes to Condensed Consolidated Financial Statements
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F–5 |
1
NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
March 31, 2011 (unaudited) and June 30, 2010
MARCH
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JUNE
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|||||||
2011
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2010
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Cash
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$ | 191,594 | $ | 2,635 | ||||
Commission Receivable from Clearing Firm
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80,178 | - | ||||||
Notes Receivable from affiliates
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59,002 | 90,212 | ||||||
Deposit with clearing organization
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360,311 | 685,612 | ||||||
Due from Affiliates
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52,227 | 42,764 | ||||||
Advances to Registered Representatives: net of reserve
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||||||||
for uncollectible accounts of $90,000
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90,731 | 76,286 | ||||||
Securities held for resale, at market
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141,363 | 152,025 | ||||||
Property and Equipment, net.
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2,180 | 3,878 | ||||||
Other Assets
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27,000 | 28,433 | ||||||
TOTAL ASSETS:
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$ | 1,004,586 | $ | 1,081,845 | ||||
LIABILITIES AND EQUITY
|
||||||||
LIABILITIES
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||||||||
Line of Credit
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$ | 30,000 | $ | 55,000 | ||||
Notes Payable
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6,994 | 12,966 | ||||||
Due to Affiliates
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1,061 | 2,413 | ||||||
Commissions Payable
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77,529 | 51,128 | ||||||
Capital Leases payable
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2,416 | 7,626 | ||||||
Warrant Liability
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2,108 | 23,831 | ||||||
Accounts Payable, accrued expenses and other liabilities
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219,032 | 223,484 | ||||||
Bank Overdraft
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- | 21,413 | ||||||
TOTAL LIABILITIES
|
339,140 | 397,861 | ||||||
Commitments and Contingencies
|
||||||||
EQUITY
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||||||||
Common Stock, $.001 par value;
|
||||||||
100,000,000 shares authorized; 55,560,057 and 40,360,057 issued and
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||||||||
47,635,057 and 32,435,075 outstanding at March 31, 2011 and June 30, 2010, respectively
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55,560 | 40,360 | ||||||
Additional Paid In Capital
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2,022,888 | 1,430,088 | ||||||
Treasury Stock at cost; 7,925,000 shares
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(5,129 | ) | (5,129 | ) | ||||
Accumulated deficit
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(1,622,873 | ) | (996,335 | ) | ||||
Total stockholders equity
|
450,446 | 468,984 | ||||||
Non-controlling interest
|
215,000 | 215,000 | ||||||
TOTAL EQUITY
|
665,446 | 683,984 | ||||||
TOTAL LIABILITIES AND EQUITY
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$ | 1,004,586 | $ | 1,081,845 |
(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
F - 1
NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(unaudited)
For The Three Months Ended
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For The Nine Months Ended
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|||||||||||||||
March 31,
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March 31,
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|||||||||||||||
2011
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2010
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2011
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2010
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|||||||||||||
Revenues:
|
||||||||||||||||
Commissions
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$ | 266,290 | $ | 203,762 | $ | 663,028 | $ | 605,978 | ||||||||
Net dealer inventory gains (losses)
|
(170,625 | ) | 93,250 | 154,075 | 118,628 | |||||||||||
Investment banking
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99,262 | 198,691 | 227,425 | 666,027 | ||||||||||||
Interest and Dividends
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5,875 | 8,298 | 18,973 | 36,786 | ||||||||||||
Transfer fees and clearing services
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4,827 | 7,345 | 11,460 | 20,372 | ||||||||||||
Investment advisory
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93,377 | 215,538 | 478,493 | 501,706 | ||||||||||||
Other
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26,450 | 25,550 | 62,950 | 39,394 | ||||||||||||
Total Revenue
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325,456 | 752,434 | 1,616,404 | 1,988,890 | ||||||||||||
Operating Expenses:
|
||||||||||||||||
Commissions
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534,247 | 357,739 | 699,717 | 1,114,026 | ||||||||||||
Compensation and Related Expenses
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220,751 | 184,542 | 758,212 | 576,213 | ||||||||||||
Clearing Fees
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41,788 | 60,273 | 141,936 | 174,269 | ||||||||||||
Communications and data processing
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44,031 | 33,224 | 117,184 | 90,317 | ||||||||||||
Interest
|
609 | 3,648 | 4,683 | 13,894 | ||||||||||||
Occupancy and related expenses
|
54,616 | 27,600 | 150,684 | 105,342 | ||||||||||||
Office Expenses
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24,371 | 23,700 | 133,001 | 150,712 | ||||||||||||
Professional Fees
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57,774 | 89,832 | 255,370 | 300,477 | ||||||||||||
Depreciation
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- | 2,160 | 3,879 | 6,760 | ||||||||||||
Total Operating Expenses
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978,187 | 782,718 | 2,264,666 | 2,532,010 | ||||||||||||
Loss from Operations
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(652,731 | ) | (30,284 | ) | (648,262 | ) | (543,120 | ) | ||||||||
Other Income (expenses)
|
||||||||||||||||
Gain (Loss) on change in derivative liability
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8,541 | (13,738 | ) | 21,723 | (22,951 | ) | ||||||||||
Total Other Income (expenses)
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8,541 | (13,738 | ) | 21,723 | (22,951 | ) | ||||||||||
- | ||||||||||||||||
Net loss
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(644,190 | ) | (44,022 | ) | (626,539 | ) | (566,071 | ) | ||||||||
Loss/Income attributable to non-controlling interest
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- | - | - | |||||||||||||
Net loss attributable to common shareholders
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$ | (644,190 | ) | $ | (44,022 | ) | $ | (626,539 | ) | $ | (566,071 | ) | ||||
Loss per common share (basic and diluted)
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$ | (0.018 | ) | $ | (0.001 | ) | (0.017 | ) | $ | (0.017 | ) | |||||
Weighted average common shares outstanding
|
41,228,408 | 32,435,075 | 35,846,706 | 32,435,075 |
(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
F - 2
NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
For the nine months ended March 31, 2011
(Unaudited)
Additional
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Treasury
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Accumulated
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Non-Controlling
|
|||||||||||||||||||||||||
Common Stock
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paid-in-capital
|
Stock
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Deficit
|
interest
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Total
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|||||||||||||||||||||||
Shares
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Amount
|
|||||||||||||||||||||||||||
Balance - June 30, 2010
|
40,360,057 | $ | 40,360 | $ | 1,430,088 | $ | (5,129 | ) | $ | (996,335 | ) | $ | 215,000 | $ | 683,984 | |||||||||||||
Sale of common stock
|
9,000,000 | 9,000 | 351,000 | 360,000 | ||||||||||||||||||||||||
Stock issued for services
|
6,200,000 | 6,200 | 241,800 | 248,000 | ||||||||||||||||||||||||
Net loss
|
(626,539 | ) | (626,539 | ) | ||||||||||||||||||||||||
Balance - March 31, 2011
|
55,560,057 | $ | 55,560 | $ | 2,022,888 | $ | (5,129 | ) | $ | (1,622,874 | ) | $ | 215,000 | $ | 665,445 |
(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
F - 3
NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine months ended March 31, 2011 and 2010
(unaudited)
2011
|
2010
|
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net Loss attributable to common shareholders
|
(626,539 | ) | $ | (566,071 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
Depreciation
|
3,879 | 6,758 | ||||||
(Gain) Loss on change in derivative liability
|
(21,723 | ) | 22,951 | |||||
Stock based compensation
|
248,000 | - | ||||||
Changes in operating assets and liabilities
|
||||||||
Due from clearing organization
|
(80,178 | ) | 1,251 | |||||
Securities held for resale, at market
|
10,662 | (19,125 | ) | |||||
Advances to/from registered representatives
|
(14,445 | ) | 38,252 | |||||
Other assets
|
1,433 | (400 | ) | |||||
Securities sold, but not yet purchased, at market
|
- | (1,215 | ) | |||||
Due to clearing organization
|
325,301 | (17,477 | ) | |||||
Accounts Payable, accrued expenses & other Liabilities
|
537 | (45,252 | ) | |||||
TOTAL ADJUSTMENTS
|
473,466 | (14,257 | ) | |||||
NET CASH (USED IN) OPERATING ACTIVITIES
|
(153,073 | ) | (580,328 | ) | ||||
|
||||||||
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchase of Equipment
|
(2,181 | ) | - | |||||
NET CASH (USED IN) INVESTING ACTIVITIES
|
(2,181 | ) | - | |||||
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Advances from affiliated companies
|
20,395 | 3,986 | ||||||
Proceeds from certificate of deposit
|
- | 550,942 | ||||||
Proceeds from sale of common stock
|
360,000 | - | ||||||
Repayment of Notes Payable
|
(5,972 | ) | (19,179 | ) | ||||
Repayment of line of credit
|
(25,000 | ) | (38,000 | ) | ||||
Repayment of capital lease
|
(5,210 | ) | (4,864 | ) | ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
344,213 | 492,885 | ||||||
NET INCREASE (DECREASE) IN CASH
|
188,959 | (87,443 | ) | |||||
CASH - Beginning of Year
|
2,635 | 91,882 | ||||||
CASH - End of Year
|
$ | 191,594 | $ | 4,439 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
Cash paid during year
|
||||||||
Interest
|
$ | 4,682 | $ | 13,805 | ||||
Income Taxes
|
$ | 2,726 | $ | 726 |
(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
F - 4
NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2011
(unaudited)
NOTE 1 – Basis of Presentation (Reverse Merger and Corporate Structure)
Network 1 Financial Securities, Inc. (“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. NETW is an introducing broker-dealer that clears all transactions with and for customers on a fully disclosed basis with a clearing broker.
On June 9, 2009, NETW completed a merger transaction (the “Reverse Merger”) 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 and the current assets of NETW were merged with ISSI.
Upon completion of the Reverse Merger transaction, ISSI changed its name to Network 1 Financial Group, Inc. (the “Company”).
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 one (1) share of the acquirer's Common Stock outstanding immediately prior to the Reverse Merger, as if the exchange had taken place as of the beginning of the earliest period presented.
The accompanying unaudited condensed consolidated financial statements present on a consolidated basis the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements for the nine month periods ended March 31, 2011 and 2010 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. The Company believes that the disclosures provided are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements and explanatory notes for the year ended June 30, 2010 as disclosed in the Company's 10-K for that year, as filed with the SEC.
The results of the nine months ended March 31, 2011 are not necessarily indicative of the results to be expected for the pending full year ending June 30, 2011.
F - 5
NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2011
(Unaudited)
NOTE 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of the unaudited condensed 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.
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 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.
F - 6
NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2011
(Unaudited)
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.
F - 7
NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2011
(Unaudited)
Reclassifications
Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year.
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 March 31, 2011 and June 30, 2010, respectively:
March 31, 2011
|
June 30, 2010
|
||||||||||||
Securities:
|
Owned
|
Sold Short
|
Owned
|
Sold Short
|
|||||||||
|
$
|
141,363
|
$
|
-
|
$
|
152,025
|
$
|
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 - 8
NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2011
(Unaudited)
NOTE 5 - Due from Clearing Organization
The following represents amounts on deposit with the Company’s former clearing broker, Southwest Securities, Inc. (“Southwest”)and Legent Clearing LLC (“Legent”) for the 9 months ending March 31, 2011 in the Company’s clearing broker inventory account:
March 31, 2011
|
June 30, 2010
|
|||||||
Cash
|
$
|
284,219
|
$
|
442,033
|
||||
Marketable securities
|
76,092
|
243,579
|
||||||
Total due from clearing organization
|
$
|
360,311
|
$
|
685,612
|
The marketable securities are primarily comprised of corporate stocks. Marketable securities are on deposit with Southwest Securities as of June 30, 2010 which ceased clearing for the firm on August 13, 2010. Marketable securities held by Legent which started to clear the firm on August 16, 2010 are reflected at fair value. The Company is required to maintain a deposit balance of $100,000 with Legent. Currently Southwest retains $14,495 in deposit and Legent currently retains approximately $350,000 in deposits for the firm .
For the nine months ending March 31, 2011 and 2010, the Company used the services of Southwest to clear its brokerage business until August 13, 2010 and Legent commenced on August 16, 2010. The Company incurred charges of approximately $141,936 with Legent for the nine months ended March 31, 2011 and $174,269 with Southwest for the nine months ended March 31, 2010.
F - 9
NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2011
(Unaudited)
NOTE 6 - Related Party Transactions
As of March 31, 2011 and June 30, 2010, due to (from) affiliated companies consisted of the following:
March 31,
|
June 30,
|
|||||||
2011
|
2010
|
|||||||
Network 1 Financial Advisors Inc. (a) (b)
|
$
|
70,945
|
$
|
91362
|
||||
Network 1 Financial Assurance, Inc. (b)
|
$
|
(661)
|
$
|
400
|
||||
National Financial Services Group (b)
|
$
|
39,884
|
$
|
39,884
|
(a)
|
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.
|
(b)
|
Represents amounts due from an affiliated company whose officers and shareholders are officers and shareholders’ of the Company.
|
NOTE 7 - Line of Credit – Bank
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% (approximately 4.25% at March 31, 2011). As of March 31, 2011 and June 30, 2010, the amount outstanding under this credit facility was $30,000 and $55,000 respectively.
NOTE 8 - Net Capital Requirements
Network 1 Financial Securities, Inc. (“NETW”) 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 March 31, 2011 and June 30, 2010, NETW’s net capital exceeded the requirement by approximately $67,010 and $94,237 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 - 10
NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2011
(Unaudited)
NOTE 9 – Notes Payable
Notes payable include settlement agreements entered into with FINRA in September 2010 and May 2010 for monetary sanctions imposed against the Company. As of March 31, 2011 and June 30, 2010, notes payable consists of the following:
March 31,
2011
|
June 30,
2010
|
|||||||
Note payable to FINRA in monthly installments of $500 per month including interest at a rate of 6.25% through January 2012
|
$
|
4,698
|
$
|
-
|
||||
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
|
||||||
Note payable to FINRA in monthly installments of $500. per month including interest at a rate of 6.25% through August 2011
|
2,296
|
7,000
|
||||||
Total notes payable
|
$
|
6,994
|
$
|
12,966
|
NOTE 10 – Capital Stock.
We are authorized to issue 100,000,000 shares of common stock with a par value of $.001 per share.
On January 4, 2011 we issued an aggregate of 6,200,000 shares of common stock to an officer as payment for his appointment as the president of our company. The services were valued at $248,000 based on the value of the stock at the time of issuance.
F - 11
NOTE 11 - Warrants and Derivative Liability
The following is additional information with respect to the Company’s warrants as of March 31, 2011
WARRANTS OUTSTANDING AND EXERCISABLE(1)
Number of
|
Weighted
|
|||||||||
Outstanding
|
Average
|
Weighted
|
||||||||
Shares
|
Remaining
|
Average
|
||||||||
Exercise
|
Underlying
|
Contractual
|
Exercise
|
|||||||
Price
|
Warrants
|
Life
|
Price (2)
|
|||||||
$
|
0.20
|
7,357,730
|
0.56 years
|
$
|
0.16
|
|||||
7,357,730
|
0.56 years
|
$
|
0.16
|
Effective April 8, 2010, the Board of Directors of the Company amended the Warrant Agreement to extend the expiration date of the Warrants by eighteen months, from April 23, 2010 until October 23, 2011.
|
|
(2)
|
Effective March 4, 2011 the exercise price of these warrants was adjusted from $0.20 to $0.16 due to the exercise price adjustment provisions in the warrant agreements. This adjustment was due to the issuance of common stock for services and sale of the common stock for a stock price lower than the exercise price attributable to the warrants.
|
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.
The derivative liability was valued using the Black-Scholes option valuation model and the following assumptions:
|
|
March 31, 2011
|
|
|
June 30, 2010
|
|
||
Warrants:
|
||||||||
Risk Free interest rate
|
0.05
|
%
|
0.6
|
%
|
||||
Expected volatility
|
88.00
|
%
|
85.77
|
%
|
||||
Expected life (in years)
|
0.56
|
1.31
|
||||||
Expected dividend yield
|
0
|
%
|
0
|
%
|
||||
Fair value Warrants:
|
$
|
2,108
|
$
|
23,831
|
F - 12
NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2011
(unaudited)
NOTE 12- Fair Value Measurements
The financial assets of the Company measured at fair value on a recurring basis are cash, due from clearing organization, marketable securities, derivatives and debt. The Company’s cash equivalents, due from clearing organization and marketable securities are generally classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The Company’s long-term investments, derivative liabilities and debt are classified within level 3 of the fair value hierarchy because they are valued using unobservable inputs, due to the fact that observable inputs are not available, or situations which there is little, if any, market activity for the asset or liability at the measurement date.
·
|
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities;
|
|
·
|
Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly , for substantially the full term of the asset or liability; or
|
·
|
Level 3: Prices or valuation techniques that require inputs that require inputs that are both significant to the fair value measurement and are unobservable.
|
The following table sets forth the Company’s short and long term investments as of March 31, 2011, which are measured at fair value on a recurring basis by level within the fair value hierarchy. As required, by ASC 820 (formerly SFAS No. 157), these are classified based on the lowest level of input that is significant to the fair value measurement (in thousands):
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||
Due from clearing organization
|
$
|
360,311
|
-
|
-
|
$
|
360,311
|
|||||||
Securities owned, at market values
|
89,218
|
51,845
|
300
|
141,363
|
|||||||||
Total assets
|
551,674
|
501,674
|
|||||||||||
-
|
-
|
2,108
|
|
2,108
|
|
||||||||
Total liabilities
|
$
|
|
$ |
2,108
|
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (warrant derivative liability) for the nine months ended March 31, 2011.
2011
|
||||
Balance at beginning of year
|
$
|
23,831
|
||
Additions to derivative instruments
|
-
|
|||
Change in fair value of warrant liability
|
(21,723)
|
|||
Balance at end of period
|
$
|
2,108
|
NOTE 13 – Subsequent Event
On March 31, 2010, the Company, Richard Hunt, William Hunt, and an unaffiliated third party were sued in the Superior Court of New Jersey, Mercer County (Docket No. L-572-10) (the “Complaint”). The Complaint sought to recover $123,307 of unpaid attorney’s fees allegedly owed to Stark and Stark. The Complaint was reinstated on April 11, 2011. The Company retained counsel to represent the Company and Messrs. Richard and Hunt in this matter. On May 6, 2011 the Company entered into a stipulation of agreement (the “Settlement”) with Stark and Stark whereby the Company has agreed to pay Stark and Stark $68,999.07 in 18 monthly payments of $3,833.29, which Stark and Stark has agreed to accept as full and final payment. The firm made a payment of $11,499.87 (retroactive payment for February, March, April 2011) upon signing the Settlement and continues to make regular payments pursuant to the Settlement.
F - 13
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Some of the statements contained in this Quarterly Report on Form 10-Q, which are not purely historical, are forward-looking statements, including, but not limited to, statements regarding the Company’s objectives, expectations, hopes, beliefs, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by the use of the words “may,” “will,” “should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of those terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our actual results could differ materially from those disclosed in these statements due to various risk factors and uncertainties affecting our business. We caution you not to place undue reliance on these forward-looking statements. We do not assume responsibility for the accuracy and completeness of the forward-looking statements and we do not intend to update any of the forward-looking statements after the date of this report to conform them to actual results. You should read the following discussion in conjunction with our financial statements and related notes included elsewhere in this report. For a more complete understanding of our industry, the drivers of our business and our current period results, you should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operation in conjunction with the audited financial statements and notes thereto set forth inour Annual Report on Form 10-K for the year ended June 30, 2010 and our other filings with the SEC.
OVERVIEW
On June 9, 2009, the Company (then known as “International Smart Sourcing, Inc.” or “ISSI”) 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 the Company, of approximately 97.55% of the outstanding common shares of NETW.
As of the closing date, the former shareholders of NETW held approximately 66% of the issued and outstanding common shares of the 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,” the “Company,” “we,” “us,” or “our”).
During the quarter ended March 31, 2011, we had a decrease in our investment banking fees, a decrease in investment advisory consulting fees and trading gains. In the same period, we had an increase in commission income. The decrease in investment banking fees was attributable to the reduced fees paid to us by investment banking clients versus the same period in 2010 Our investment advisory fees showed a decrease resulting from fewer investment banking fees earned. The decrease in advisory consulting fees was due to less number of companies seeking our services. The increase in commissions earned in NETW’s daily transaction business was due primarily to an increase in activity from NETW’s retail clients. The decrease in trading profits was due to increased market volatility and mark to market pricing of securities held. Overall, we experienced an increase in losses in the quarter ended March 31, 2011 compared to the same period in the prior year.
We had a loss from operations of approximately $652,731 for the quarter ended March 31, 2011 excluding the gain on change in derivative liability of $ 8,541, which represents an increase of $622,447 over our net loss of $30,284 in the same period in the prior year. This increase in loss was primarily due to decreased revenues, increased operating expenses, which consisted of higher commissions paid, cost of additional personnel including the hiring of inside counsel. 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.
2
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon the unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles as recognized in the United States of America. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For a complete description of accounting policies, see Note 2 to our financial statements included in our Form 10-K for the year ended June 30, 2010. There were no significant changes in critical accounting estimates.
Results of Operations
For the nine months ended March 31, 2011 compared to the nine months ended March 31, 2010
Revenues. Our consolidated income results for the nine months ended March 31, 2011 compared to the nine months ended March 31, 2010 showed a decrease of $372,486. Total revenue for the nine months ended March 31, 2011 was $1,616,404 versus $1,988,890 for the nine months ended March 31, 2010.
We experienced a decrease in revenue of $372,486, or 16% for the nine month period ended March 31, 2011, compared to the nine months ended March 31, 2010.
The decrease in revenue for the nine month period ended March 31, 2011 was due primarily to a decrease of $438,602 or 66 %, in the fees earned in investment banking activities. The decrease in investment banking fees earned was attributed to fees earned from lower amount of closed financings for the nine months ended in March 31, 2011 as compared to the nine months ended March 31, 2010. We experienced an increase in revenues of $57,050 or 9%, from our commissions earned as compared in the corresponding period ended March 31, 2010. The increase was $35,447, or 72% for net dealer inventory gains compared to our net dealer inventory gains in the nine months ended March 31, 2010. The increase in commissions were attributed to increased transactions by our customers and increased net dealer inventory gains were due to increased market volatility.
Operating Expenses. Our consolidated operating expenses for the nine month period ended March 31, 2011 were $2,264,666, or 140% of revenue versus $2,532,010, or 127% of revenue. This represents a decrease of $267,344 or 11%, over the corresponding period ended March 31, 2010. The decrease was due to a reduction of commissions expense of $414,309; a reduction of office expense of $17,711; a reduction in fees paid to professionals of $45,107, and a reduction of clearing expenses in the amount of $32,333. These decreases were offset by an increase of communication and data processing of $26,867, an increase of compensation and related expenses of $181,999 and an increase of $45,342 for occupancy and related expenses for the nine months ended March 31, 2011 compared to the corresponding period in March 31, 2010.
The decrease in commission expense is due to reduced commissions paid due to fewer financial placements closed in the nine months ended March 31, 2011. The decrease in office expenses is due to tighter control of purchasing. The decrease in professional fees is due to the hiring of in-house counsel.
Profit and Loss. Our consolidated loss was $626,549 for the nine month period ended March 31, 2011 compared to a loss of $566,071, for the corresponding period in 2010. This represents an increase in loss of $60,549 for the nine months ended March 31, 2011 compared to the same period in 2010.
The losses incurred were attributed to increased compensation and related expenses, occupancy and related expenses and communication and data processing and losses incurred to market to market security held in account.
For the three months ended March 31, 2011 compared to the three months ended March 31, 2010
Revenues. Total revenue for the three months ended March 31, 2011 was $335,455 versus $752,434 for the three months ended March 31, 2010. We experienced a decrease in revenue of $426,979, or 57%, for the three months ended March 31, 2011 compared to the same period in 2010.
3
The decrease in revenue for the three month period ended March 31, 2011 was due primarily to an decrease in net dealer inventory gains of $263,875; decrease in investment banking fees of $99,429; and decrease of $122,161 in investment advisory fees. These were offset by increases in commissions earned on transactions of $62,528, compared to the same period in 2010. The increase was attributed to more transactions and the hiring of additional registered representatives. The decrease in investment banking fees earned was attributed to fewer fees earned from closed financial placements. The decrease in net dealer inventory gains is due to mark to market of securities held in account; the decrease in investment advisory fees is due to a decrease in fees earned from consulting.
Operating Expenses. Our consolidated operating expenses for the three month period ended March 31, 2011 were $978,186 or 300% of revenue compared to $782,718, or 104% of revenue, for the same period in 2010, representing an increase of $195,468, or 25%. The increase was due to an increase in commission expense of $176,508; an increase in compensation and related expenses of $36,209; and an increase in communication and data processing expenses of $10,807; and an increase in occupancy and related expenses of $27,016. Such increased expenses were offset by a decrease of $32,058 in professional fees; a decrease in clearing fees of $18,485; a decrease in interest expense of $3,039 and a decrease in depreciation expense of $2,160 for the three month ended March 31, 2011 compared to the same period in 2010.
The increases were due to increased activity of our retail customers due to the increase of registered representatives hired by the firm resulting in more commissions paid and reflecting in part the award of securities in the amount of $248,000 to the new CEO of the firm; and an increase in compensation and related expenses due to hiring of additional staff and in house counsel to assist in the compliance and regulatory workload.
The decreases in expenses were due to reduction of clearing fees, lower interest rates as well as lower balances owed to the bank in the three month ended March 31, 2011 compared to the same period in 2010.
Profit and Loss. Our consolidated loss was $652,731 before adjustment for the gain of $8,541 from the change in derivative liability, for the three months ended March 31, 2011 compared to a loss of $30,284 for the same period in 2010. This represents an increased loss of $622,447 for the three months ended March 31, 2011, compared to the same period in 2010. The losses incurred were attributed to an increase in commission expense, an increase in compensation and related expenses and an increase in occupancy and related expenses and an increase in communications and data processing expenses.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is cash generated from operations and from short-term financing arrangements. We had $191,594 in cash as of March 31, 2011.
We generated a deficit in cash flow from operations of $153,073 for the nine months ended March 31, 2011. Cash flows used by investing activities for the nine months ended March 31, 2011 were $2,181, and cash flows provided by financing activities for the nine months ended March 31, 2011 was $344,213, comprised primarily of cash flows from sale of common stock.
On December 4, 2009, Network 1 Financial Securities, Inc. (“NETW”), a wholly owned subsidiary of the Company received a letter via regular mail dated November 25, 2009 (the “Termination Letter”) from NETW’s clearing firm, Southwest Securities, Inc. (“Southwest”), stating that the Fully Disclosed Correspondent Agreement, dated as of September 27, 1990, as amended, between NETW and Southwest (the “Clearing Agreement”) was being terminated pursuant to Paragraph 12 of the Clearing Agreement. Such termination is effective 90 days from the date of the Termination Letter (the “Termination Date”). NETW entered into a new clearing agreement with Legent Clearing LLC. Legent Clearing LLC commenced clearing the firm’s business on August 16, 2010 and Southwest ceased clearing the firm’s business on August 13, 2010.
We believe that we will have available resources to meet our liquidity requirements, including debt service, for the next quarter. If our cash flow from operations is insufficient to fund our debt service and other obligations, we may be required to increase our borrowings, reduce or delay capital expenditures, and seek additional capital or refinance our indebtedness. There can be no assurance, however, that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under revolving credit facilities.
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.
4
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.
Recent Accounting Pronouncements
See Note 3 of the Unaudited Condensed Consolidated Financial Statements for a full description of new accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2011 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.
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 Quarterly Report on Form 10-Q, 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 number of 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.
(b) Changes in internal control over financial reporting
There were no changes in the Company’s internal control over financial reporting in the Company’s third fiscal quarter of the fiscal year ending June 30, 2011 covered by this Quarterly Report on Form 10-Q, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
5
PART II – OTHER INFORMATION
On March 31, 2010, the Company, Richard Hunt, William Hunt, and an unaffiliated third party were sued in the Superior Court of New Jersey, Mercer County (Docket No. L-572-10) (the “Complaint”). The Complaint sought to recover $123,307 of unpaid attorney’s fees allegedly owed to Stark and Stark. The Complaint was reinstated on April 11, 2011. The Company retained counsel to represent the Company and Messrs. Richard and Hunt in this matter. On May 6, 2011 the Company entered into a stipulation of agreement (the “Settlement”) with Stark and Stark whereby the Company has agreed to pay Stark and Stark $68,999.07 in 18 monthly payments of $3,833.29, which Stark and Stark has agreed to accept as full and final payment. The firm made a payment of $11,499.87 (retroactive payment for February, March, April 2011) upon signing the Settlement and continues to make regular payments pursuant to the Settlement.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We have not sold any unregistered equity securities during the three-month period covered by this quarterly report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 5. OTHER INFORMATION
Effective at 9:00 AM on May 18, 2011, Michael Rakusin resigned his positions as the Company’s Chief Financial Officer, Director, and member of the Board of Directors’ Compensation Committee due to poor health.
On May 18, 2011, at a special meeting of the Board of Directors, William R. Hunt, Jr. was designated as the Company’s interim principal financial officer. Mr. Hunt is currently the Company’s Secretary, and the new position is in addition to his existing duties.
From June of 2009 and the consummation of the reverse merger with International Smart Sourcing, Inc., until January of 2011, Mr. Hunt served as President and Chief Operating Officer of the Company. In January 2011 Mr. Hunt was appointed COO and Secretary of Network 1 Financial Group Inc. Since March 1988, Mr. William Hunt has served as President and Chief Operating Officer of the Company’s subsidiary, Network 1 Financial Securities, Inc. (the “Subsidiary Company”). In 1993, he was also appointed Chief Financial Officer of the Subsidiary Company. From September 2000 to November 2008, he served as Vice President of Network 1 Financial Advisors, Inc, (“Network Advisors”) and in November 2008 he was appointed President of Network 1 Financial Advisors, Inc. 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.
On May 18, 2011, at a special meeting of the Board of Directors, the Board unanimously agreed to issue 100,000 shares of Company stock to Vincent LaBarbara as compensation for his service as a Director and Member of the Company’s compensation committee.
ITEM 6. EXHIBITS
No.
|
Description
|
|
31.1
|
|
Rule 13a–14(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 the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
|
|
32.2
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
|
6
SIGNATURES
Pursuant to the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NETWORK 1 FINANCIAL GROUP, INC.
|
|||
May 19, 2011
|
/s/ Damon Testaverde
|
||
Date
|
Damon Testaverde
|
||
Chief Executive Officer
|
|||
May 19, 2011
|
/s/ William R. Hunt, Jr.
|
||
Date
|
William R. Hunt, Jr.
|
||
interim principal financial officer
|
7
EXHIBIT INDEX
Exhibit No.
|
Description
|
|
31.1
|
Rule 13a–14(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 the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
|
|
32.2
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
|