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EXCEL - IDEA: XBRL DOCUMENT - NETWORK 1 FINANCIAL GROUP, INC.Financial_Report.xls
EX-32 - EXHIBIT 32.1 - NETWORK 1 FINANCIAL GROUP, INC.ntfl10qa0705exhib321.htm
EX-32 - EXHIBIT 32.2 - NETWORK 1 FINANCIAL GROUP, INC.ntfl10qa0705exhib322.htm
EX-31 - EXHIBIT 31.1 - NETWORK 1 FINANCIAL GROUP, INC.ntfl10qa0705exhib311.htm
EX-31 - EXHIBIT 31.2 - NETWORK 1 FINANCIAL GROUP, INC.ntfl10qa0705exhib312.htm

 

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 December 31, 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 December 31, 2011, filed with the Securities and Exchange Commission on February 21, 2012 (the “Form 10-Q”), is to include the XBRL report.

 

 

 
 

 

NETWORK 1 FINANCIAL GROUP, INC.

FORM 10-Q

DECEMBER 31, 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 5
ITEM 4T. CONTROLS AND PROCEDURES 5
     
PART II – OTHER INFORMATION 6
ITEM 1. LEGAL PROCEEDINGS 6
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 6
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 6
ITEM 5. OTHER INFORMATION 6
ITEM 6. EXHIBITS 6
     
SIGNATURES 7

 

 
 

 

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

December 31, 2011 (unaudited) and June 30, 2011

 

    DECEMBER     JUNE  
    2011     2011  
    (unaudited)        
ASSETS                
Cash   $ 7,759     $ 58,856  
Commission Receivable from Clearing Firm     63,036       78,021  
Note Receivable Network 1 Financial Advisors Inc.     44,600       59,002  
Deposit with clearing organization     325,382       345,137  
Due from Affiliates     12,183       45,482  
Advances to Registered Representatives: net of reserve                
for uncollectible accounts of $90,000.     79,982       70,231  
Securities held for resale, at market     83,574       83,415  
Property and Equipment, net.     26,532       17,935  
Other Assets     27,000       27,000  
                 
TOTAL ASSETS:   $ 670,048     $ 785,079  
                 
LIABILITIES AND EQUITY                
LIABILITIES                
Line of Credit   $ 30,000     $ 30,000  
Notes Payable     9,245       4,088  
Commissions Payable     95,395       78,943  
Capital Leases payable     14,048       18,588  
Accounts Payable, accrued expenses and other liabilities     166,315       173,923  
      -          
                 
TOTAL LIABILITIES     315,003       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 48,635,054 and 47,635,057 outstanding, respectively.     56,560       55,560  
Additional Paid In Capital     2,055,538       2,022,888  
Treasury Stock at cost; 7,925,000 shares     (5,129 )     (5,129 )
Accumulated deficit     (2,058,274 )     (1,808,782 )
Common stock subscribed     87,000       -  
Total stockholders equity     140,045       264,537  
Non-controlling interest     215,000       215,000  
TOTAL EQUITY     355,045       479,537  
                 
TOTAL LIABILITIES AND EQUITY   $ 670,048     $ 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 AND SIX MONTHS ENDED DECEMBER 31, 2011 and 2010

(unaudited)

 

    For The Three Months Ended     For The Six Months Ended  
    December 31,     December 31,  
    2011     2010     2011     2010  
Revenues:                                
Commissions   $ 388,023     $ 226,950     $ 737,190     $ 396,738  
Net dealer inventory gains     162,550       178,412       171,672       324,700  
Investment banking     101,600       29,100       104,600       128,163  
Interest and Dividends     1,769       6,208       7,914       13,098  
Transfer fees and clearing services     -       -       -       6,633  
Investment advisory     66,629       277,341       141,578       385,116  
Other     -       25,500       335       36,500  
Total Revenue     720,571       743,511       1,163,289       1,290,948  
                                 
Operating Expenses:                                
Commissions     351,103       78,084       520,148       165,470  
Compensation and Related Expenses     206,693       283,975       383,016       537,461  
Clearing Fees     39,682       52,919       88,013       100,148  
Communications and data processing     26,493       39,868       55,209       73,153  
Interest     578       676       1,165       4,074  
Occupancy and related expenses     46,928       54,315       68,972       96,068  
Office Expenses     77,264       59,608       114,957       108,630  
Professional Fees     80,954       82,215       176,297       197,596  
Depreciation     2,446       1,719       5,004       3,879  
Total Operating Expenses     832,141       653,379       1,412,781       1,286,479  
                                 
(Loss) Income from Operations     (111,570 )     90,132       (249,492 )     4,469  
                                 
Other Income                                
Gain on change in derivative liability     -       3,098       -       13,182  
Total Other Income     -       3,098       -       13,182  
                                 
Net (loss) Income     (111,570 )     93,230       (249,492 )     17,651  
                                 
Loss/Income attributable to non-controlling interest     -       -               -  
                                 
Net (loss) Income attributable to common shareholders   $ (111,570 )   $ 93,230     $ (249,492 )   $ 17,651  
                                 
(Loss) Income per common share (basic and diluted)   $ (0.002 )   $ 0.002     $ (0.005 )   $ 0.002  
                                 
Weighted average common shares outstanding     56,058,427       40,360,057       50,144,568       40,360,057  

 

(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 six months ended December 31, 2011

(Unaudited)

 

    Common Stock     Additional
paid-in-capital
    Treasury
Stock
    Accumulated
Deficit
    Common Stock
Subscribed
  Non-Controlling
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  
                                                               
Sale of Common Stock                                             87,000             87,000  
                                                               
Shares issued for services     1,000,000       1,000       37,000                       -             38,000  
                                                               
Net Loss                                     (249,492 )     -             (249,492 )
                                                               
Balance - December 31, 2011     57,560,057     $ 56,560     $ 2,055,538     $ (5,129 )   $ (2,058,274 )   $ 87,000   $ 215,000     $ 355,045  

 

(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 six months ended December 31, 2011 and 2010

(unaudited)

 

    2011   2010
         
CASH FLOWS FROM OPERATING ACTIVITIES                
Net (Loss) Income attributable to common shareholders     (249,492 )   $ 17,651  
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation     5,004       3,879  
(Gain) Loss on change in derivative liability     -       (13,182 )
Stock based compensation     2,000       -  
                 
Changes in operating assets and liabilities                
Commission Receivable from Clearing Firm     14,985       (25,957 )
Due from clearing organization     19,755       325,352  
Securities held for resale, at market     (159 )     (282,204 )
Advances to/from registered representatives     6,701       4,852  
Other assets     -       28,059  
Due to clearing organization     -       12,822  
Accounts Payable, accrued expenses & other Liabilities     28,393       (21,136 )
TOTAL ADJUSTMENTS     76,679       32,485  
                 
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES     (172,813 )     50,136  
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchase of Equipment     (13,602 )     -  
NET CASH (USED IN) INVESTING ACTIVITIES     (13,602 )     -  
                 
CASH  FLOWS FROM FINANCING ACTIVITIES                
Advances to affiliated companies     33,299       2,880  
Advances from affiliated companies     -       (1,182 )
Proceeds from sale of common stock     87,000       -  
Repayment of notes receivable     14,401       -  
Repayment of Notes Payable     5,158       (2,168 )
Repayment of line of credit     -       (25,000 )
Repayment of capital lease     (4,540 )     (3,614 )
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES     135,318       (29,084 )
                 
NET (DECREASE) INCREASE IN CASH     (51,097 )     21,052  
                 
CASH - Beginning of Year     58,856       2,635  
                 
CASH - End of Year   $ 7,759     $ 23,687  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                
Cash paid during year                
Interest   $ 1,165     $ 4,074  
Income Taxes   $ 2,645     $ 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 SIX MONTHS ENDED DECEMBER 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. The accompanying unaudited condensed consolidated statement of operations for the  six months ended December, 31 2011 consolidate the following variable interest entities (“VIEs”): Network 1 Financial Advisors, Inc, Network 1 Financial Assurance, Inc., National Financial Services Group, Inc. and Shark Rivers Investors, LLC through the companies merger date of June 9, 2009.  As of December 31, 2011, none of the assets, liabilities and results of operations of the VIEs are included as part of the consolidation.

 

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 six month periods ended December 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, 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 six months ended December 31, 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 SIX MONTHS ENDED DECEMBER 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 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 SIX MONTHS ENDED DECEMBER 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.

 

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 SIX MONTHS ENDED DECEMBER 31, 2011

(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 unaudited condensed consolidated 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 December 31, 2011 and June 30, 2011, respectively:

 

 

    December 31, 2011     June 30, 2011  
    Owned     Owned  
                 
    $ 83,574     $ 83,415  

 

 

F-8
 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2011

(unaudited)

 

NOTE 5 - Due from Clearing Organization

 

The following represents amounts on deposit with Southwest Securities, Inc. (“Southwest”) and Legent Clearing LLC (Legent) with the Company’s clearing broker inventory account:

 

    December 31, 2011     June 30, 2011  
             
Cash   $ 268,570     $ 275,380  
Marketable securities     56,812       69,757  
Total   $ 325,382     $ 345,137  
Less: securities sold short     -       -  
Total due from clearing organization   $ 325,382     $ 345,137  

 

The marketable securities are primarily comprised of corporate stocks. Marketable securities on deposit with Legent as of  December 31, 2011 and June 30, 2011 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 $310,000 in deposits for the firm.

 

For the six months ending December 31, 2011 the Company used the services of Legent to clear its brokerage business.The Company ceased using Southwest Securities on August 13, 2010 and Legent commenced clearing on August 16, 2010. The Company incurred charges of approximately $48,251 and $97,570 for the three and six months ended December 31, 2011 and approximately $23,387 with Southwest and $49,252 with Legent for the six months ended December 31, 2011. 

 

 

F-9
 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2011

(unaudited)

 

NOTE 6 - Related Party Transactions

 

As of December 31, 2011 and June 30, 2011, due to (from) affiliated companies consisted of the following:

 

    December 31,     June 30,  
    2011     2011  
             
Network 1 Financial Advisors Inc.(a) (b)   $ 47,900     $ 67,095  
                 
Network  1 Financial Assurance, Inc. (b)   $ -     $ 200  
                 
National Financial Services Group (b)   $ 8,884     $ 37,189  

 

  (a) Represents amounts due from an affiliated company whose officers and shareholders 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.

 

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 December 31, 2011). As of December 31, 2011 and June 30, 2011, the amount outstanding under this credit facility was $30,000 and $30,000 respectively. The Company is currently not in default of its line of credit with the bank.

 

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

 

NOTE 8 - 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 2011, notes payable consists of the following:

    December 31,
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   $ 824     $ 3,264  
                 
Note payable to FINRA in monthly installments of $500 per month including interest at a rate of 6.25% through May 2013.     8,421       -  
                 
Note payable to FINRA in monthly installments of $500. per month including interest at a rate of 6.25% through August 2011     -       824  
                 
Total notes payable   $ 9,245     $ 4,088  

 

 

F-10
 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2011

(unaudited)

 

NOTE 9 – 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 December 31, 2011, annual minimum future lease payments under the capital lease are as follows:

 

June 30,   Amount  
       
2012   $ 4,897  
2013     2,517  
2014     2,517  
2015     2,517  
2016     1,600  
         
Total minimum lease payments   $ 14,048  

 

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 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 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.

 

On October 28, 2011, the Company authorized the issuance of 4,350,000 share of $0.001 par value common stock valued at $0.02 to an investor for $87,000. As of December 31, 2011 the authorized stock has not been issued and is listed under Common Stock Subscribed.

 

 

F-11
 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2011

(unaudited)

 

NOTE 11 - 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 December 31, 2011 and June 30, 2011, NETW’s net capital exceeded the requirement by approximately $21,514 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 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 December 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:

 

    Level 1     Level 2     Level 3     Total  
Due from clearing organization   $ 254,485       -       -     $ 254,485  
Securities owned, at market values     83,574       -       -       83,574  
    338,059       -           338,059  

 

 

F-12
 

 

NOTE 13 - Subsequent Event

 

The company secured financing from a minority shareholder via a discounted note maturing on February 1, 2015 for a face amount of $100,000 the total proceeds received by the Company was $59,400 in marketable securities. The note will accrue in 36 equal increments. There is no prepayment penalty. The Company also issued 500,000 options/warrants to purchase its common stock for $0.10 per share expiring February 1, 2015.

 

 

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 in our 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 December 31, 2011, we had a increase in our investment banking fees, a decrease in interest and dividends, we experienced an increase in commission income, a decrease in net dealer inventory gains investment and investment advisory fees.  . The increase in investment banking fees was attributable to an increase in private placement activity. The firm’s net dealer inventory gains showed a decrease which offset the increase in commission’s income. The decrease in advisory consulting fees was due to less fees paid in stock of the client companies. The increase in commissions earned in NETW’s daily transaction business was due primarily to a increase in greater commissions received from NETW’s retail clients. The decrease in trading profits was due to market volatility. Overall, we experienced a loss in the quarter ended December 31, 2011 compared to the same period in the prior year.

 

We had a loss from operations of approximately $111,570 for the quarter ended December 31, 2011, which represents an decrease of $204,800 over our profit of $93,230 in the same period in the prior year.  This decrease in profit was primarily due to an decrease in payment of fees in the form of stock of client companies and the decrease in the market value of the client companies stock, an increase in operating expenses, which consisted of higher commissions paid, decrease in professional fees, decrease in interest expense, offset by increases in office 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 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, 2011.  There were no significant changes in critical accounting estimates.

 

Results of Operations

 

For the six months ended December 31, 2011 compared to the six months ended December 31, 2010

 

Revenues.  Our consolidated income results for the six months ended December 31, 2011 compared to the six months ended December 31, 2010, showed a decrease in revenue of $127,659 or 10%. Total revenue for the six months ended December 31, 2011 was $1,163,289 versus $1,290,948 for the six months ended December 31, 2010.

 

The decrease in revenue for the six month period ended December 31, 2010 was due primarily to an decrease in investment advisory fees of $243,538 or 63% and a decrease of $153,028 or 47% in net dealer gains. We experienced a decrease in revenues of $23,563 or 18% from our investment banking business compared to our revenues in the corresponding period ended December 31, 2010 due to less private placement activity.

 

Operating Expenses. Our consolidated operating expenses for the six month period ended December 31, 2011 were $1,412,782 or 121%, of revenue versus $1,286,479, or 99%, of revenue. This represents an increase of $126,303 or 10 %, over the corresponding period ended December 31, 2010. The increase was due to an increase in commission expense of $354,678; offset by a reduction of clearing fees of $12,135; a reduction of interest expense of $2,909; a reduction of profession fees of $21,299; decreases of $154,445 in compensation and related expenses ;an decrease of $17,944 for communication and data processing and an decrease in occupancy and related expenses of $27,096 for the six months ended December 31, 2011 compared to the corresponding period in December 31, 2010.

 

The increase in commission expense is due to higher commissions charged for retail customer transactions and commissions paid for capital placements for client companies.  

 

Profit and Loss.  Our consolidated loss was $249,492 for the six month period ended December 31, 2011 compared to a profit of $4,469 for the corresponding period in 2010. This represents a decrease of $253,961 for the six months ended December 31, 2011 compared to the same period in 2010. The loss is attributed to increase in commission expense and office expenses.

 

For the three months ended December 31, 2011compared to the three months ended December 31, 2010

 

Revenues.  Total revenue for the three months ended December 31, 2010 was $720,571 versus $743,511 for the three months ended December 31, 2010. We experienced a decrease in revenue of $22,940 or 3 %, for the three months ended December 31, 2011 compared to the same period in 2010.

 

The decrease in revenue for the three month period ended December 31, 2011 was due primarily to a decrease in investment advisory fees of $210,712 or 76% and a reduction of $15,862 or 9%, in net dealer gains and $4,439 in interest and dividends compared to the same period in 2010.  We experienced an increase of $72,500 or 249% in our investment banking fees, and an increase of $161,073 or 71% in commission income for the three months ended December 31, 2011 compared to the same period in 2010. The increase was attributed to higher commissions receive from client transactions and an increase in private placement activity.

 

 

3
 

 

Operating Expenses.  Our consolidated operating expenses for the three month period ended December 31, 2011 were $832,142 or 115% of revenue compared to $653,379, or 88% of revenue, for the same period in 2010, representing a increase of $178,763, or 27%, The increase was due to an increase in commissions payable of $273,019; an increase in office expenses of $17,656; offset by a reduction of compensation an related expensed of $77,282; a decrease in clearing fees of $13,237; a decrease in professional fees of $1,261;a decrease in communications and data processing of $13,375; a decrease in occupancy and related expenses $7,387 for the three months ended December 31, 2011 compared to the same period in 2010.

 

The increase in commission expense is due to higher commissions received from retail customers and a change in the mix of products, and an increase in office expense due to expenses associated with the hiring of additional sales personnel. This was offset by a decrease in professional fees, communications and data processing, occupancy and related expenses for the three months ended December 31, 2011  

 

Profit and Loss  Our consolidated loss was $111,570, for the three months ended December 31, 2011, compared to a profit of $90,132 for the same period in 2010.  This represents a decrease of $201,702 for the three months ended December 31, 2011, compared to the same period in 2010.

  

 LIQUIDITY AND CAPITAL RESOURCES

 

Our primary source of liquidity is cash generated from operations and from short-term financing arrangements. We had $7,759 in cash and as of December 31, 2011.

We generated negative cash flow from operations of $172,813 for the six months ended December 31, 2011 comprised primarily of cash proceeds from the receivables from Legent Clearing LLC. Cash flows provided by financing activities for the six months ended December 31, 2011 were $135,318

Our business has experienced difficulty in closing sufficient investment banking private placements due to market conditions subsequent to December 31, 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.

4
 

 

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 December 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 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.

 

5
 

 

(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

 

None.

 

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

 

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.
     
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

 

7