UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 1) 

 

(Mark One)

 

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2011

 

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

COMMISSION FILE NUMBER: 001-14753

 

NETWORK 1 FINANCIAL GROUP, INC.

(Exact Name of Registrant as specified in its charter)

 

Delaware		11-3423157
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

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 ☑ 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   ☐		Accelerated filer ☐
Non-accelerated filer   ☐		Smaller reporting company  ☑

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES ☐ NO ☑

 

As of November 10, 2011, the Registrant had 48,635,057 shares of its Common Stock, $.001 par value, outstanding.

 

Explanatory Note

 

The purpose of this Amendment No. 1 to Network 1 Financial Group, Inc’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed with the Securities and Exchange Commission on November 22, 2011 (the “Form 10-Q”), is to include the XBRL report.

 

 

 

NETWORK 1 FINANCIAL GROUP, INC.

FORM 10-Q

SEPTEMBER 30, 2011

 

TABLE OF CONTENTS

 

				Page
PART I – FINANCIAL INFORMATION				1
ITEM 1.		CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		1
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		2
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		4
ITEM 4T.		CONTROLS AND PROCEDURES		4
PART II – OTHER INFORMATION				5
ITEM 1.		LEGAL PROCEEDINGS		5
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		5
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES		5
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		5
ITEM 5.		OTHER INFORMATION		5
ITEM 6.		EXHIBITS		5
SIGNATURES				6

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

Index to Consolidated Financial Statements

 

Condensed Consolidated Statement of Financial Condition			F–1
Condensed Consolidated Statements of Operations			F–2
Condensed Consolidated Statement of Equity			F–3
Condensed Consolidated Statement of Cash Flows			F–4
Notes to Condensed Consolidated Financial Statements			F–5

 

 

1

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

September 30, 2011 (unaudited) and June 30, 2011

 

		SEPTEMBER 30,				JUNE 30,
		2011				2011
		(unaudited)
ASSETS
Cash		$	6,947			$	58,856
Commission Receivable from Clearing Firm			8,391			$	78,021
Notes Receivable - Related Party			55,631				59,002
Deposit with clearing organization			322,050				345,137
Due from Affiliates			9,180				45,482
Advances to Registered Representatives: net of reserve
for uncollectible accounts of $ $90,000 respectively.			76,058				70,231
Securities held for resale, at market			85,493				83,415
Property and Equipment, net.			16,185				17,935
Other Assets			27,000				27,000
TOTAL ASSETS:		$	606,935			$	785,079
LIABILITIES AND EQUITY
LIABILITIES
Line of Credit		$	30,000			$	30,000
Notes Payable			11,183				4,088
Commissions Payable			29,520				78,943
Capital Leases payable			16,542				18,588
Accounts Payable, accrued expenses and other liabilities			140,075				173,923
TOTAL LIABILITIES			227,320				305,542
Commitments and Contingencies
EQUITY
Common Stock, $.001 par value;							-
100,000,000  shares authorized; 56,560,057 and 55,560,057 issued and 48,635,057 and 47,635,057 outstanding, respectively			56,560				55,560
Additional Paid In Capital			2,059,888				2,022,888
Treasury Stock at cost; 7,925,000 shares			(5,129	)			(5,129	)
Accumulated deficit			(1,946,704	)			(1,808,782	)
Total stockholders equity			164,615				264,537
Non-controlling interest			215,000				215,000
TOTAL EQUITY			379,615				479,537
TOTAL LIABILITIES AND EQUITY		$	606,935			$	785,079

 

(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 MONTHS ENDED SEPTEMBER 30, 2011 and 2010

(unaudited)

 

		SEPTEMBER				SEPTEMBER
		2011				2010
Revenues:
Commissions		$	349,167			$	169,788
Net dealer inventory gains			9,122				146,288
Investment banking			3,000				99,063
Interest and Dividends			6,145				6,890
Transfer fees and clearing services			-				6,633
Investment advisory			74,949				107,777
Other			335				11,000
Total Revenue			442,718				547,439
Operating Expenses:
Commissions			169,045				87,386
Compensation and Related Expenses			176,323				253,486
Clearing Fees			48,331				47,229
Communications and data processing			28,716				33,285
Interest			587				3,398
Occupancy and related expenses			22,044				41,753
Office Expenses			37,693				49,022
Professional Fees			95,343				115,381
Depreciation			2,558				2,160
Total Operating Expenses			580,640				633,100
Loss from Operations			(137,922	)			(85,663	)
Other Income
Gain on change in derivative liability			-				10,084
Total Other Income			-				10,084
Net loss		$	(137,922	)		$	(75,579	)
Loss per common share (basic and diluted)		$	(0.003	)		$	(0.003	)
Weighted average common shares outstanding			48,580,709				23,393,529

 

(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 three months ended September 30, 2011

(Unaudited)

 

										Additional				Treasury				Accumulated				Non-Controlling
		Common Stock								paid-in-capital				Stock				Defecit				interest				Total
		Shares				Amount
Balance - June 30, 2011			55,560,057			$	55,560			$	2,022,888			$	(5,129	)		$	(1,808,782	)		$	215,000			$	479,537
Shares issued for services			1,000,000			$	1,000			$	37,000															$	38,000
Net loss																		$	(137,922	)						$	(137,922	)
Balance - September 30, 2011			56,560,057			$	56,560			$	2,059,888			$	(5,129	)		$	(1,946,704	)		$	215,000			$	379,615

 

 

(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 three months ended September 30, 2011 and 2010

(unaudited)

 

		September				September
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss attributable to common shareholders		$	(137,922	)		$	(75,579	)
Adjustments to reconcile net loss to net cash used in operating activities:							-
Depreciation			2,558				2,160
Gain on change in derivative liability			-				(10,084	)
Stock based compensation			2,000				-
Changes in operating assets and liabilities
Due from clearing organization			23,087				332,468
Securities held for resale, at market			(2,078	)			11,550
Advances to/from registered representatives			(55,250	)			6,405
Other assets			-				16,913
Securities sold, but not yet purchased, at market			-				11,933
Accounts Payable, accrued expenses & other Liabilities			2,153				(31,950	)
Commission Receivable from Clearing Organization			69,630				(76,113	)
TOTAL ADJUSTMENTS			42,100				263,282
NET CASH (USED IN) PROVIDED BY  OPERATING ACTIVITIES			(95,822	)			187,703
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment			(808	)			-
NET CASH USED IN INVESTING ACTIVITIES			(808	)			-
CASH  FLOWS FROM FINANCING ACTIVITIES
Advances to affiliated companies			36,302				1,970
Advances from affiliated companies			3,370				(270	)
Repayment of Notes Payable			7,095				(295	)
Repayment of capital lease			(2,046	)			(533	)
							-
NET CASH PROVIDED BY FINANCING ACTIVITIES			44,721				872
NET (DECREASE) INCREASE IN CASH			(51,909	)			188,575
CASH - Beginning of Period			58,856				2,635
CASH - End of Period		$	6,947			$	191,210
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during Quarter
Interest		$	571			$	3,398
Income Taxes		$	-			$	2,162

 

(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 THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(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 (the “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.   NETW’s shareholders acquired control of 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 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 three month periods ended September 30, 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, 2011 as disclosed in the Company's 10-K for that year as filed with the SEC, as it may be amended.

 

The results of the three months ended September 30, 2011 are not necessarily indicative of the results to be expected for the pending full year ending June 30, 2012.

 

 

F-5

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(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 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.

 

 

F-6

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011AND 2010

(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.

 

Reclassifications

 

Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year.

 

 

F-7

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(unaudited)

 

NOTE 3 - Recent Accounting Pronouncements

 

Management does not believe there are any issued, but not yet effective, accounting standards if currently adopted which would have a material effect on the accompanying consolidated financial statements.

 

NOTE 4 – Securities held for resale, At Market

 

 The following table shows the market values of the Company's investment securities owned as of September 30, 2011 and June 30, 2011, respectively:

 

	September 30, 2011					June 30, 2011
	$	85,493			$	83,415

 

 

F-8

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(unaudited)

 

NOTE 5 - Due from Clearing Organization

 

The following represents amounts on deposit in the Company’s clearing broker inventory account with Southwest Securities, Inc. (“Southwest”)and Legent Clearing LLC (“Legent”) for the fiscal year ended June 30, 2011, and  for the three months ended September 30, 2011:

 

		September 30, 2011												June 30, 2011
		Southwest				Legent				Total				Southwest			Legent			Total
Cash		$	14,495			$	254,960			$	275,380		$	14,495		$	260,885		$	275,380
Marketable securities, net of fair value adjustments			0				52,595				52,595			-			69,757			69,757
		$	14,495			$	307,555			$	322,050		$	14,495		$	330,642		$	345,137

 

The marketable securities are primarily comprised of corporate stocks. Marketable securities on deposit with Legent are reflected at fair value.  As of September 30, 2011, the Company is required to maintain a clearing deficit of $100,000 with Legent.

 

For the three months ended September 30, 2011, the Company used the services of  Legent to clear its brokerage business.  Southwest ceased clearing the Company’s brokerage business on August 13, 2010 and Legent commenced clearing on August 16, 2010.   The Company incurred charges of approximately $49,320 for the three months ended September 30, 2011 and  approximately $23,387 with Southwest and $23,841 with Legent for the three months ending September 30, 2010

 

NOTE 6 - Related Party Transactions

 

As of September 30, 2011 and June 30, 2011, due from (to) affiliated companies consisted of the following:

 

		September 30,				June 30,
		2011				2011
Network 1 Financial Advisors Inc.(b)		$	55,781			$	67,362
Network 1 Financial Assurance, Inc. (a) (b)		$	146			$	200
National Financial Services Group (c)		$	8,884			$	37,189

 

	(a)	Represents expenses paid on behalf of an affiliated company whose directors are officers and shareholders of the Company.
	(b)	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.

 

 

F-9

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(unaudited)

 

NOTE 7 - Capital Lease Obligation

 

The Company has equipment under a capital leases expiring in August 2012 and September 2015. The assets and liabilities under the capital lease are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are included in property and equipment and is amortized over the estimated life of the assets. The interest rate under the lease is 6.60% and 6.89% and is imputed based on the lessor’s implicit rate of return. The Capital lease is payable in monthly installments of $532 and $210, including interest through August 2012 and September 2015.

 

Amortization of assets held under the capital lease is included in depreciation expense.

 

At September 30, 2011, annual minimum future lease payments under the capital lease are as follows:

 

June 30,		Amount
2012		$	7,391
2013			2,517
2014			2,517
2015			2,517
2016			1,600
Total minimum lease payments		$	16,542

 

NOTE 8 - 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 September 30, 2011). As of September 30, 2011 and June 30, 2011, the amount outstanding under this credit facility was $30,000.

 

Indebtedness under the credit agreement is collateralized by substantially all of the assets of the Company and an officers’ personal guarantee.

 

NOTE 9 – Notes Payable

 

Notes payable include settlement agreements entered into with the FINRA in September 2011, September 2010 and May 2010, for monetary sanctions imposed against the Company.  As of September 30, 2011 and June 30, 2011, notes payable consists of the following:

 

		September 30, 2011				June 30, 2011
Note payable to FINRA in monthly installments of $500 per month including interest at a rate of 6.25% through January 2012		$	1,808			$	3,264
Note payable to FINRA in monthly installments of $ 500 per month including interest at a rate of 6.25% through May 2013			9,375				-0-
Note payable to FINRA in monthly installments of $500 per month including interest at a rate of 6.25% through August 2011			-0-				824
Total notes payable		$	11,183			$	4,088

 

NOTE 10 - Net Capital Requirements

 

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 September 30, 2011 and June 30, 2011, NETW’s net capital exceeded the requirement by approximately $37,316 and $65,212 , 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.

 

NOTE 11 – Capital Stock.

 

We are authorized to issue 100,000,000 shares of common stock with a par value of $.001 per share.

 

On July 6, 2011 we issued an aggregate of 900,000 shares of common stock for previously accrued services valued at $36,000 based on the value of the stock at the time of issuance.

 

On July 6, 2011 the Company issued 100,000 shares of $0.001 par value Company common stock to a Company director.  The services were valued at $2,000 based on the value of the stock at the time of issuance.

 

NOTE 12 - Warrants

 

The following is additional information with respect to the Company’s warrants as of September 30, 2011:

 

 

F-10

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(unaudited)

 

WARRANTS OUTSTANDING AND EXERCISABLE

 

				Number of			Weighted
				Outstanding			Average		Weighted
				Shares			Remaining		Average
Exercise				Underlying			Contractual		Exercise
Price				Warrants			Life		Price
$	0.16				7,657,733		0.07 years		$	0.16
					7,657,733		0.07 years		$	0.16

 

Note: The warrants’ expiration date is October 23, 2011.

 

NOTE 13- 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 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 September 30, 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:

 

		Level 1				Level 2				Level 3				Total
Due from clearing organization		$	52,595				-				-			$	52,595
Securities owned, at market values			85,493				-				-				85,493
Total Assets		$	138,088				-				-			$	138,088

 

NOTE 14 – Subsequent Events

 

On October 28, 2011 the firm sold 4.350,000 shares of its common stock to an affiliated person, for gross proceeds of $87,000.

 

 

F-11

 

 

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 in our Annual Report on Form 10-K for the year ended June 30, 2011 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 September 30, 2011, we had a decrease in our investment banking fees and  a decrease  in our investment advisory consulting fees. In the same period, we had an increase in commission income but a decrease  in trading profits. The decrease in investment banking fees was attributable to a reduction in the number of completed private placements and a decrease in  our investment advisory consulting fees, which   was due to a  lesser number of companies seeking our services. The increase in commissions earned in NETW's daily transaction business was due primarily to a increase in activity from NETW's retail clients. The decrease in trading profits was due to increased market volatility. Overall, we experienced a increase in losses in the quarter ended September 30, 2011 compared to the same period in the prior year.

 

We had a loss from operations of approximately $137,922 for the quarter ended September 30, 2011, which represents an increase of $52,259 over our net loss of $85,663 in the same period in the prior year. This increase was primarily due to decreased revenues which consisted of lower investment banking commissions, a decrease in net dealer inventory gains, investment advisory fees offset by a reduction in operating expenses in occupancy, office expenses, professional fees and compensation and related expenses. 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.

 

 

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Critical Accounting Policies and Estimates

 

Our discussion and analysis of financial condition and results of operations are based upon the 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, 2011. There were no significant changes in critical accounting estimates.

 

Results of Operations

 

For the three months ended September 30, 2011 and 2010, we generated $442,718 and $547,439 of consolidated revenue, respectively. The decrease in revenue of $104,721 in the quarter ended September 30, 2011 represents a 19% decrease in revenue over the corresponding period in 2010 and is due to a decrease in dealer inventory gains or trading profits and a decrease in investment advisory fees. The decrease in inventory gains or trading profits was due primarily to increased market volatility. The decrease in investment advisory fees is primarily due to a decrease in fees earned in our advisory business to companies and individuals.

 

We reported an operating loss of $137,922 in the three months ended September 30, 2011 compared to a loss of $85,663 for the corresponding period in the prior year, which represents an increase of $52,259. The increase in operating loss was due to an increase in commissions payable and an increase in clearing fees, as well as a reduction in compensation and related expenses, occupancy and relates expenses, office expense, and professional fees..

 

Our consolidated operating expenses were $580,640 and $633,100 for the quarters ended September 30, 2011 and 2010, respectively, representing a decrease of $52,460 or 8% from the prior period, and represents 131% and 116% of revenue, respectively. The decrease in our expenses in 2011 was primarily due to a reduction of compensation and related expenses, occupancy and related expenses, office expenses, and professional fees offset by an increase in commission paid to register representatives...

 

Interest expense was $587 and $3,398 for the quarters ended September 30, 2011 and 2010, respectively, a decrease of $2,811 or 83%. The decrease was due to a reduction in interest rates and a reduction in debt financing.

 

Our consolidated loss was $137,922 and $85,663 for the three months ended September 30, 2011 and 2010, respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary source of liquidity is cash generated from operations and from short-term financing arrangements. We had $6,947 in cash and as of September 30, 2011.

 

We generated negative cash flow from operations of $95,822 for the three months ended September 30, 2011 comprised primarily of cash proceeds from the receivables from Legent Clearing LLC. Cash flows provided by financing activities for the three months ended September 30, 2011 were $44,721

 

 

 

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Our business has experienced difficulty in closing investment banking private placements due to volatile market conditions subsequent to September 30, 2011. Accordingly, we are experiencing liquidity and cash flow problems.

 

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.

 

Additional financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and the downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations. The firm is currently reviewing its options due to its liquidity problems.

 

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 2 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 September 30, 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 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 weakness 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.

 

 

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(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 first 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.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are not party to any material legal proceedings, nor to our knowledge, are there any proceedings threatened against us.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On October 28, 2011 the firm sold 4.350,000 shares of its common stock to an affiliated person, for gross proceeds of $87,000

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

We have not submitted any matters to a vote of security holders during the three-month period covered by this quarterly report.

 

ITEM 5. OTHER INFORMATION

 

On October 23, 2011 the company did not extent the outstanding warrants and were allowed to expire

 

ITEM 6. EXHIBITS

 

Exhibits:
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. § 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. § 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

 

 

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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.
July 5, 2012		/s/ Damon D Testaverde
Date		Damon D Testaverde
		Chief Executive Officer, President
July 5, 2012		/s/ William R. Hunt, Jr.
Date		William R. Hunt, Jr.
		Interim Chief Financial Officer
		Interim Principal Financial Officer

 

 

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