VBI VACCINES INC. - FORM 10-Q

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EX-2.1 - EXHIBIT 2.1 - VBI VACCINES INC.	ex2-1.htm
EX-31.2 - EXHIBIT 31.2 - VBI VACCINES INC.	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - VBI VACCINES INC.	ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - VBI VACCINES INC.	ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - VBI VACCINES INC.	ex32-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

[ ]	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: 000-18188

PAULSON CAPITAL CORP.

(Exact name of registrant as specified in its charter)

Oregon		93-0589534
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

811 SW Naito Parkway, Portland, Oregon	97204
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 503-243-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 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 [X] 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 [ ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, no par value		5,766,985
(Class)		(Outstanding at August 14, 2012)

PAULSON CAPITAL CORP. AND SUBSIDIARIES

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION		Page

Item 1.	Financial Statements

	Consolidated Balance Sheets – June 30, 2012 and December 31, 2011 (unaudited)	2

	Consolidated Statements of Operations - Three and Six Month Periods Ended June 30, 2012 and 2011 (unaudited)	3

	Consolidated Statements of Cash Flows - Six Months Ended June 30, 2012 and 2011 (unaudited)	4

	Notes to Consolidated Financial Statements (unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15

Item 4.	Controls and Procedures	15

PART II - OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15

Item 6.	Exhibits	16

Signatures		17

Paulson Capital Corp. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

	June 30, 2012		December 31, 2011
Assets
Cash	$	341,893	$	292,002
Receivable from clearing organization		3,592,300		5,511,538
Notes and other receivables, net of allowances for doubtful accounts of $509,997 and $387,853		1,165,208		607,454
Income taxes receivable		54,090		10,835
Trading and investment securities owned, at fair value		7,693,096		7,708,868
Underwriter warrants, at fair value		1,203,000		1,395,000
Prepaid and deferred expenses		615,208		543,987
Furniture and equipment, at cost, net of accumulated depreciation and amortization of $192,331 and $930,199		10,456		48,755
Total Assets	$	14,675,251	$	16,118,439
Liabilities and Shareholders' Equity
Accounts payable and accrued liabilities	$	283,500	$	136,839
Payable to clearing organization		92,216		366,588
Compensation, employee benefits and payroll taxes		89,106		658,940
Trading securities sold, not yet purchased, at fair value		-		356,705
Deferred revenue		148,808		229,590
Total Liabilities		613,630		1,748,662
Commitments and Contingencies		-		-
Shareholders' Equity
Preferred stock, no par value; 500,000 shares authorized; none issued		-		-
Common stock, no par value; 10,000,000 shares authorized; shares issued and outstanding: 5,766,985 and 5,767,985		2,163,711		2,163,941
Retained earnings		11,897,910		12,205,836
Total Shareholders' Equity		14,061,621		14,369,777
Total Liabilities and Shareholders' Equity	$	14,675,251	$	16,118,439

See accompanying Notes to Consolidated Financial Statements

Paulson Capital Corp. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months ended June 30,
	2012			2011			2012			2011
Revenues
Commissions	$	450,887		$	3,915,986		$	3,657,025		$	8,310,016
Corporate Finance		24,670			108,551			47,464			177,688
Investment loss		(829,132	)		(109,828	)		(579,621	)		(212,510	)
Trading income (loss)		(1,026,076	)		(1,521,936	)		942,845			(1,136,527	)
Interest and dividends		39,309			135,897			160,715			267,272
Loss on asset disposition		(702	)		-			(702	)		-
Gain on sale of assets		1,619,656			-			1,619,656			-
Other		54,096			46,764			94,985			91,462
		332,708			2,575,434			5,942,367			7,497,401

Expenses
Commissions and salaries		879,777			4,019,006			4,089,049			8,378,630
Underwriting expenses		525			436			37,714			10,650
Rent and utilities		59,623			144,371			215,007			285,709
Communication and quotation services		88,546			134,068			217,240			264,676
Professional fees		173,671			177,786			429,930			387,109
Travel and entertainment		8,227			31,491			45,827			61,413
Advertising and promotion		651			5,217			9,123			16,139
Settlement expense		-			25,000			-			25,000
Clearing expenses		85,142			112,944			164,196			217,596
Bad debt expense		232,129			-			232,129			-
Depreciation and amortization		444			5,160			4,557			9,642
Licenses, taxes and insurance		141,047			109,778			266,344			239,189
Other		93,777			170,198			249,808			341,879
		1,763,559			4,935,455			5,960,924			10,237,632

Loss before income taxes		(1,430,851	)		(2,360,021	)		(18,557	)		(2,740,231	)

Income tax expense:
Current		-			2,000			-			3,000
Deferred		-			-			-			-
		-			2,000			-			3,000

Net loss	$	(1,430,851	)	$	(2,362,021	)	$	(18,557	)	$	(2,743,231	)

Basic and diluted net loss per share		(0.25	)		(0.41	)		(0.00	)		(0.48	)

Shares used in basic and diluted per share calculations:		5,766,985			5,767,985			5,767,441			5,768,416

See accompanying Notes to Consolidated Financial Statements

Paulson Capital Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	For the Six Months Ended June 30,
	2012			2011
Cash flows from operating activities:
Net loss	$	(18,557	)	$	(2,743,231	)
Adjustments to reconcile net loss to net cash flows from operating activities
Receipt of underwriter warrants		-			(79,000	)
Unrealized depreciation/expiration of underwriter warrants		192,000			220,000
Depreciation and amortization		4,557			9,642
Bad debt expense		232,129			-
Loss on asset disposition		702			-
Gain on sale of assets		(1,619,656	)		-
Change in assets and liabilities:
Receivables from/payable to clearing organization, net		1,644,866			1,163,187
Notes and other receivables		(221,577	)		(170,798	)
Income taxes receivable		(43,255	)		126,451
Trading and investment securities owned		15,772			1,524,227
Prepaid and deferred expenses		(71,221	)		244,169
Deferred revenue		(80,782	)		(76,530	)
Accounts payable, accrued liabilities and compensation payables		(423,173	)		(203,773	)
Trading securities sold, not yet purchased		(356,705	)		10,562
Income taxes payable - current		-			7,159
Income taxes payable - uncertain tax positions		-			3,000
Net cash provided by (used in) operating activities		(744,900	)		35,065

Cash flows from investing activities:
Additions to furniture and equipment		(800	)		(32,746	)
Proceeds from sale of fixed assets		250			-
Proceeds from sale of assets		1,084,940			-
Net cash provided by (used in) investing activities		1,084,390			(32,746	)

Cash flows from financing activities:
Dividends paid to common shareholders		(288,349	)		-
Payments to retire common stock		(1,250	)		(2,400	)
Net cash used in financing activities		(289,599	)		(2,400	)

Increase (decrease) in cash		49,891			(81	)

Cash:
Beginning of period		292,002			375,649

End of period	$	341,893		$	375,568

Supplemental cash flow information:
Cash (paid) received during the period for income taxes, net	$	(43,255	)	$	126,451
Receivable from sale of assets	$	568,306		$	-

See accompanying Notes to Consolidated Financial Statements

PAULSON CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The financial information for Paulson Capital Corp. and its wholly-owned subsidiaries, Paulson Investment Company and Paulson Capital Properties, LLC, included herein as of June 30, 2012 and December 31, 2011 and for the three- and six-month periods ended June 30, 2012 and 2011 is unaudited; however, such information reflects all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2011 is derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Note 2. Earnings Per Share

The number of shares used for our basic net income (loss) per share and diluted net income (loss) per share was the same for both periods presented. For the three- and six-month periods ended June 30, 2012, we had 241,000 anti-dilutive stock options outstanding. For the three- and six-month periods ended June 30, 2011, we had 411,000 anti-dilutive stock options outstanding.

Note 3. Fair Value Measurements

Various inputs are used in determining the fair value of our assets and liabilities carried at fair value and are summarized into three broad categories:

Level 1 – unadjusted quoted prices in active markets for identical securities;

Level 2 – other significant observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.; and

Level 3 – significant unobservable inputs, including our own assumptions in determining fair value.

The inputs or methodology used for valuing securities is not necessarily an indication of the risk associated with investing in those securities.

Following are the disclosures related to our financial assets and liabilities (in thousands):

	June 30, 2012			December 31, 2011
	Fair Value		Input Level	Fair Value		Input Level
Trading and investment securities owned:
Corporate equities, marketable	$	3,991	Level 1	$	3,763	Level 1
Corporate equities, not readily marketable		3,477	Level 3		3,857	Level 3
Corporate options/warrants, marketable		225	Level 1		89	Level 1
Underwriter warrants		1,203	Level 3		1,395	Level 3
Trading securities sold, not yet purchased:
Corporate equities, marketable		-	Level 1		357	Level 1

Following is a summary of activity related to our Level 3 financial assets and liabilities (in thousands):

	Underwriter Warrants			Not Readily Marketable Investment Securities
Balance, December 31, 2011	$	1,395		$	3,857
Fair value of underwriter warrants received included as a component of corporate finance income		-			-
Investment in privately-held company		-			-
Net unrealized loss, included as a component of investment loss related to securities held		(192	)		(380	)
Balance, June 30, 2012	$	1,203		$	3,477

	Underwriter Warrants			Not Readily Marketable Investment Securities
Balance, December 31, 2010	$	1,122		$	2,945
Fair value of underwriter warrants received included as a component of corporate finance income		79			-
Investment in privately-held company		-			100
Net unrealized gain (loss), included as a component of investment income (loss) related to securities held		(220	)		20
Balance, June 30, 2011	$	981		$	3,065

Valuation of Marketable Trading and Investment Securities Owned

The fair value of marketable trading and investment securities owned is determined based on quoted market prices. Securities traded on a national exchange are stated at the last reported sales price on the day of valuation; other securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are stated at the last quoted bid price.

Valuation of Not Readily Marketable Investment Securities

Securities not readily marketable include investment securities (a) for which there is no market on a securities exchange or no independent publicly quoted market, (b) that cannot be publicly offered or sold unless registration has been effected under the Securities Act of 1933, or (c) that cannot be offered or sold because of other arrangements, restrictions or conditions applicable to the securities or to us. The fair value of not readily marketable securities is estimated by management using available information including the following: quoted market prices of similar securities (i.e., unrestricted shares of the same company); price of recent known trades of the same or similar securities; the cost of the security, if recently purchased, adjusted for changes in the financial condition of the issuer; all other information available from review of available documents related to the issuer or discussions with management of the issuer.

Valuation of Underwriter Warrants

We estimate the fair value of our underwriter warrants using the Black-Scholes Option Pricing Model. The warrants generally have a five-year expiration date and vest immediately. The warrants are generally subject to a restriction period of six months to one-year in which we cannot exercise the warrants. The Black-Scholes model requires us to use five inputs including: stock price, risk free rate, exercise price, time remaining on the warrant and price volatility. After stock price, the most influential factor in this model is price volatility, which we calculate for each company’s warrants based on each company’s own historical closing stock prices as well as an index of historical prices for comparable companies. When we initially receive a new underwriter warrant from an initial public offering, its calculated volatility factor is entirely based on the volatility of an index of comparable companies, since there is no price history for a new publicly traded company. As each underwriter warrant approaches its expiration date, its volatility factor is derived primarily from the historical prices of its underlying common stock. There is no assurance that we will ultimately be able to exercise any of our warrants in a way that will realize the value that we attribute to them in our financial statements based on this model.

Valuation of Trading Securities Sold, Not Yet Purchased

As a securities broker-dealer, we are engaged in various securities trading and brokerage activities as principal. In the normal course of business, we sometimes sell securities that we do not currently own and will therefore be obligated to purchase such securities at a future date. This obligation is recorded on our balance sheet at the fair value based on quoted market prices of the related securities and will result in a trading loss on the securities if the fair value increases and a trading gain if the fair value decreases between the balance sheet date and the purchase date.

There were no changes to our valuation methods or techniques during the first six-month periods of 2012 or 2011.

Note 4. Divestiture of Brokerage Operations

In the first quarter of 2012, the Company announced that it had reached an agreement with JHS Capital Advisors, LLC (JHS) to sell substantially all of its retail brokerage operations, including many of its branch and non-branch offices as well as registered personnel (employees and independent contractors), to JHS. The sale closed on April 16, 2012. In consideration of the sale, the Company is to be paid approximately $1,653,247 net of certain deductions for compensation expenses. $1,107,741 was received at closing on April 16, 2012, with the balance to be paid over three installments on July 16, 2012, October 15, 2012 and January 11, 2013. These installment payments to the Company are supported by a standby letter of credit issued in favor of the Company, and the total installment amounts of $568,306 have been included within notes and other receivables. Subsequent to June 30, 2012, the Company received $165,183 as the first installment payment. The final purchase price is subject to recalculation after six months based upon the aggregate gross dealer commissions for the twelve month period ended at that time.

Note 5. Stockholders' Equity

Repurchase of Common Stock

In the first quarter of 2012, we repurchased 1,000 shares of our common stock for $1,250, or $1.25 per share, pursuant to our stock repurchase program previously approved by our Board of Directors. Following this repurchase, 68,011 shares remain available for repurchase. This repurchase plan does not have an expiration date.

In the first quarter of 2011, we repurchased 2,000 shares of our common stock for $2,400, or $1.20 per share.

Common Share Dividends

In March 2012, the Board of Directors approved a special cash dividend of $0.05 per common share payable April 16, 2012 to shareholders of record April 4, 2012. Dividends in the amount of $288,349 were paid to common shareholders in the second quarter.

Note 6. New Accounting Guidance

Management has reviewed the new accounting guidance and determined that there is not a material impact on our financial statements.

Note 7. Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.

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

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This report, including, without limitation, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains or incorporates both historical and “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify forward-looking statements. Any such forward-looking statements in this report reflect our current views with respect to future events and financial performance and are subject to a variety of factors that could cause our actual results to differ materially from historical results or from anticipated results expressed or implied by such forward-looking statements. Because of such factors, we cannot assure you that the results anticipated in this report will be realized. As noted elsewhere in this report, various aspects of our business are subject to extreme volatility, often as a result of factors beyond our ability to anticipate or control. In particular, factors, such as the condition of the securities markets, which are in turn based on popular perceptions of the health of the economy generally, can be expected to affect the volume of our business as well as the value of the securities maintained in our trading and investment accounts. Other factors that may affect our future financial condition or results of operations include the following:

Aspects of our business are volatile and affected by factors beyond our control.

Our ability to attract and retain customers may be affected by our reputation.

We are subject to extensive regulation that could result in investigations, fines or other penalties.

We face intense competition in our industry.

Our future success depends on retaining existing management and hiring and assimilating new key employees, and our inability to attract or retain key personnel would materially harm our business and results of operations.

We are subject to the risk of legal proceedings, which may result in significant losses to us that we cannot recover. Claimants in these proceedings may be customers, employees, investors or regulatory agencies, among others, seeking damages for mistakes, errors, negligence or acts of fraud by our employees.

As a public company, we are subject to complex legal and accounting requirements that require us to incur substantial expense and expose us to risk of non-compliance.

Our directors and executive officers control approximately 47% of our common stock and may have interests differing from those of other stockholders.

OVERVIEW

Substantially all of our business has historically consisted of the securities brokerage and corporate finance activities of our wholly-owned subsidiary, Paulson Investment Company, Inc. ("PIC"), which has operations in four principal categories, all of them in the financial services industry. These categories are:

securities brokerage activities for which we earn commission revenues;

corporate finance revenues consisting principally of underwriting discounts and underwriter warrants;

securities trading from which we record profit or loss, depending on trading results; and

investment income resulting from earnings on, and increases or decreases in the value of, our investment portfolio.

During the six-month period ended June 30, 2012, the Company sold substantially all of PIC's retail brokerage business to JHS Capital Advisors, LLC and intends to focus its operations on boutique investment banking.

In addition, Paulson Capital Properties, LLC, a 100% owned subsidiary, was established for the purpose of purchasing, improving and remarketing underappreciated real estate. Through June 30, 2012, we had not purchased any real estate.

Because we operate in the financial services industry, our revenues and earnings are substantially affected by general conditions in financial markets. Further, past performance is not necessarily indicative of results to be expected in future periods. In our securities brokerage business, the amount of our revenues depends on levels of market activity requiring the services we provide. Our corporate finance activity, which consists of acting as the managing underwriter of initial and follow-on public offerings, private investments in public equity (“PIPEs”) and private placements for smaller companies, is similarly affected by the strength of the market for new equity offerings, which has historically experienced substantial cyclical fluctuation. During the first six months of 2012, the number and total proceeds of global IPO's fell by approximately 50% to 107, generating $49.9 billion, compared to the first six months of 2011 when 222 IPO's were completed for total proceeds of $95.5 billion. In the United States, the number of IPO's was down slightly to 73 during the current six-month period compared to 79 in the first six months of 2011. However, total proceeds increased to $28.6 billion from $25.5 billion raised in the first six months of 2011. The outlook for the remainder of 2012 is encouraging globally, where many companies delayed their initial public offerings due to weak international market conditions in the first half of 2012, which conditions have recently showed signs of improvement. Although we attempt to match operating costs with activity levels, many of our expenses are either fixed or difficult to change on short notice. Accordingly, fluctuations in corporate finance revenues tend to result in sharper fluctuations, on a percentage basis, in net income or loss.

Our investment and trading income or loss is affected by changes in market valuation of securities generally and, in particular, by changes in valuation of the equity securities of microcap companies in which our investments and trading activities tend to be concentrated. Equity markets in general, and microcap equity markets in particular, have always experienced significant volatility and this volatility has, in recent years, been extreme. As a result, the value of our investment portfolio and securities held in connection with our trading and investment activities has experienced large quarterly fluctuations in income or loss, and our net worth has substantially increased or decreased as our securities holdings are marked to market.

A substantial portion of our corporate finance business consists of acting as managing underwriter of initial and follow-on public offerings for microcap and smallcap companies. As a part of our compensation for these activities, we typically receive warrants exercisable to purchase securities similar to those that we offer and sell to the public. The warrants generally have a five-year expiration date and are subject to a restricted period of six months to one-year during which we cannot exercise. The exercise price is typically 120% of the price at which the securities were initially sold to the public. Accordingly, unless there is at least a 20% increase in the price of these securities at some time more than six months and less than five years after the offering, the warrants will remain “under water” and will ultimately expire unexercised. We also receive warrants in connection with PIPEs, which have varying terms and conditions.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

We reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on March 8, 2012.

SALE OF RETAIL BROKERAGE OPERATIONS

In February 2012, the Company announced it had reached an agreement with JHS Capital Advisors, LLC (JHS) of Tampa, Florida to sell substantially all of its retail brokerage operations, including many of its branch and non-branch offices as well as registered personnel (employees and independent contractors), to JHS. Under the transaction, Paulson advisors became registered representatives of JHS and, through JHS, will continue to use RBC Correspondent Services, a division of RBC Capital Markets, LLC, for custody of client assets and securities, trade execution and portfolio reporting.

The sale closed on April 16, 2012. Under the agreement, the Company is to be paid approximately $1,653,247 net of certain deductions for compensation expenses. $1,107,741 was received on closing on April 16, 2012, and the balance is to be paid over three installments on July 16, 2012, October 15, 2012 and January 11, 2013. Subsequent to June 30, 2012, the first installment payment of $165,183 was received. The final purchase price is subject to recalculation after six months based upon the aggregate gross dealer commissions for the twelve month period ended at that time. The agreement also requires twelve directors, officers and employees of the Company to enter into non-solicitation and non-competition agreements pursuant to which they are prohibited from soliciting employees and registered representatives of JHS for two years from the closing date and, subject to a limited exception, engaging in the retail brokerage business for one year from the closing date.

The Company will continue to operate independently as a broker/dealer focused on its core competencies in boutique investment banking activities, and will continue as a public company under the symbol "PLCC" on the NASDAQ Exchange.

RESULTS OF OPERATIONS

Our revenues and operating results are influenced by fluctuations in the equity markets as well as general economic and market conditions, particularly conditions in the NASDAQ and over-the-counter markets, where our investment and trading positions and the underlying stock for the underwriter warrants are heavily concentrated. Significant fluctuations can occur in our revenues and operating results from one period to another. Our results of operations depend upon many factors, such as the number of companies that are seeking financing, the quality and financial condition of those companies, market conditions in general, the performance of our previous underwritings and interest in certain industries by investors. As a result, revenues and income derived from these activities may vary significantly from period to period. Our revenues include the following:

Commissions, which represent amounts earned from our retail securities brokerage activities;

Corporate finance revenues, which are a function of total proceeds from offerings done during the period, compensation per offering and the fair value of underwriter warrants received;

Investment income (loss), which includes (i) the unrealized appreciation and depreciation of securities held based on quoted market prices, (ii) the unrealized appreciation and depreciation of securities held that are not readily marketable, based upon our estimate of their fair value, (iii) realized gains and losses on the sale of securities with quoted market prices and securities that are not readily marketable, (iv) income on the exercise of underwriter warrants, and (v) the unrealized appreciation and depreciation of underwriter warrants held; and

Trading income (loss), which is the gain or loss from trading positions before commissions paid to the representatives in the trading department.

The following tables set forth the changes in our operating results in the three- and six-month periods ended June 30, 2012 compared to the three- and six-month periods ended June 30, 2011 (dollars in thousands):

	Three Months Ended June 30,						Favorable (Unfavorable)			Percentage
	2012			2011			Change			Change
Revenues:
Commissions	$	451		$	3,916		$	(3,465	)		(88.5	)%
Corporate finance		25			108			(83	)		(76.9	)
Investment loss		(829	)		(110	)		(719	)		(653.6	)
Trading loss		(1,026	)		(1,522	)		496			32.6
Interest and dividends		39			136			(97	)		(71.3	)
Loss on asset disposition		(1	)		-			(1	)		(100.0	)
Gain on sale of assets		1,620			-			1,620			100.0
Other		54			47			7			14.9
Total revenues		333			2,575			(2,242	)		(87.1	)
Expenses:
Commissions and salaries		880			4,019			3,139			78.1
Underwriting expenses		1			1			-			*
Rent and utilities		60			144			84			58.3
Communication and quotation services		88			134			46			34.3
Professional fees		174			178			4			2.2
Travel and entertainment		8			31			23			74.2
Advertising and promotion		1			5			4			80.0
Settlement expense		-			25			25			100.0
Clearing expenses		85			105			19			18,1
Bad debt expense		232			-			(232	)		(100.0	)
Depreciation and amortization		1			5			4			80.0
Licenses, taxes and insurance		141			110			(31	)		(28.2	)
Other		93			178			85			47.8
Total expenses		1,764			4,935			3,171			64.3
Loss before income taxes	$	(1,431	)	$	(2,360	)	$	929			39.4	%

*Not meaningful.

	Six Months Ended June 30,						Favorable (Unfavorable)			Percentage
	2012			2011			Change			Change
Revenues:
Commissions	$	3,657		$	8,310		$	(4,653	)		(56.0	)%
Corporate finance		47			178			(131	)		(73.6	)
Investment loss		(580	)		(212	)		(368	)		(173.6	)
Trading income (loss)		943			(1,136	)		2,079			183.0
Interest and dividends		161			267			(106	)		(39.7	)
Loss on asset disposition		(1	)		-			(1	)		(100.0	)
Gain on sale of assets		1,620			-			1,620			100.0
Other		95			91			4			4.4
Total revenues		5,942			7,498			(1,556	)		(20.8	)
Expenses:
Commissions and salaries		4,089			8,379			4,290			51.2
Underwriting expenses		38			11			(27	)		(245.5	)
Rent and utilities		215			286			71			24.8
Communication and quotation services		217			265			48			18.1
Professional fees		430			387			(43	)		(11.1	)
Travel and entertainment		46			61			15			24.6
Advertising and promotion		9			16			7			43.8
Settlement expense		-			25			25			100.0
Clearing expenses		164			217			53			24.4
Bad debt expense		232			-			(232	)		(100.0	)
Depreciation and amortization		5			10			5			50.0
Licenses, taxes and insurance		266			239			(27	)		(11.3	)
Other		250			342			92			26.9
Total expenses		5,961			10,238			4,277			41.8
Loss before income taxes	$	(19	)	$	(2,740	)	$	2,721			99.3	%

Revenues

The strong first quarter of 2012 for the United States markets did not carry over into the second quarter, with the NASDAQ Composite declining 5.1% in the second quarter, although for the six-month period, the NASDAQ Composite was up 12.7%. The Dow Jones Industrial Average was up 5.4% for the six-month period, although it showed a decline of 2.6% in the second quarter. Second quarter performance suffered due to continuing uncertainty over the European debt crisis, a possible slowing of growth in China, and the slower than anticipated economic recovery in the United States.

Commissions declined 89% during the second quarter ended June 30, 2012 compared to the second quarter of 2011 and declined 56% for the first six months of 2012 compared to the first six months of 2011. The declines were largely due to the sale of the Company's retail brokerage business to JHS effective April 16, 2012. As of June 30, 2012, the Company had 3 registered representatives, which were included in the Company's 16 employees, compared to 98 registered representatives as of June 30, 2011.

Corporate finance income in the second quarter of 2012 was down 76.9% from the second quarter of 2011, and was down 73.6% for the six-month period ended June 30, 2012 compared to the six-month period ended June 30, 2011. The Company participated in no private placements in the first six months of 2012, while underwriting discounts from a private placement were earned in the first six months of 2011.

Investment loss included the following (in thousands):

	Three months Ended June 30,						Six months Ended June 30,
	2012			2011			2012			2011
Net unrealized appreciation (depreciation) related to underwriter warrants	$	(449	)	$	(130	)	$	(192	)	$	(220	)
Net unrealized appreciation (depreciation) of securities held based on quoted market prices or, for securities that are not readily marketable, our estimate of their fair value		(380	)		20			(254	)		7
Net realized loss on the sale of securities with quoted market prices and securities that are not readily marketable		-			-			(134	)		-
	$	(829	)	$	(110	)	$	(580	)	$	(213	)

We did not exercise any underwriter warrants in the first two quarters of 2012 or 2011. Generally, when we exercise a warrant to obtain the underlying common stock, the common stock is subsequently sold in the near term and the related gain is reflected as a component of investment income.

Investment income (loss) is volatile from period to period due to the fact that it is driven by the fair value of the securities and underwriter warrants held. In addition, the performance of the securities in which we have a concentration can significantly affect our investment income from period to period.

Trading loss decreased by 32.6% to $1.026 million in the second quarter of 2012 compared to $1.522 million in the second quarter of 2011. For the first six months of 2012, trading income was $943 thousand compared to a trading loss of $1.136 million for the first six months of 2011. The trading income was positively affected by the market value of certain securities in which we make a market. Our focus is on very small capitalization issues, especially those tied to our corporate finance clients.

Expenses

Total expenses decreased by $3.171 million in the second quarter of 2012 compared to the second quarter of 2011, and decreased by $4.277 million for the first six months of 2012 compared to the first six months of 2011. The decline in both periods was primarily due to the sale of the Company's retail brokerage operations in April 2012, which resulted in lower commissions and salaries, as well as related expenses including rent and utilities, and communications and quotation services. Bad debt expense increased by $232,000 for both the quarter and six-month period as the Company reserved the full amount of two notes receivable. Professional fees decreased by $4,000 in the second quarter and increased $43,000 in the first six months of 2012 compared to the same periods in 2011 due to the sale of the Company's retail brokerage operations on April 16, 2012. Underwriting expenses were unchanged for the second quarter of 2012 compared to the second quarter of 2011, but increased by $27,000 in the first six months of 2012 compared to the first six months of 2011. Expenses vary due to the timing and level of investment banking activity.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity include our cash and receivables from our clearing organization, offset by payables to our clearing organization.

In addition, our sources of liquidity include, to a certain extent, our trading positions, borrowings on those positions and profits realized upon the sale of the securities underlying underwriter warrants exercised. The liquidity of the market for many of our securities holdings, however, varies with trends in the stock market. Since many of the securities we hold are thinly traded, and we are, in many cases, a primary market maker in the issues held, any significant sales of our positions could adversely affect the liquidity of the issues held. In general, falling prices in NASDAQ and over-the-counter securities (which make up most of our trading positions) lead to decreased liquidity in the market for these issues, while rising prices in NASDAQ and over-the-counter issues tend to increase the liquidity of the market for these securities.

We believe our cash and receivables from our clearing organization at June 30, 2012 are sufficient to meet our cash and regulatory net capital needs for at least the next twelve-month period from June 30, 2012. Our liquidity could be negatively affected by protracted unfavorable market conditions.

As a securities broker-dealer, we are required by SEC regulations to meet certain liquidity and capital standards. We believe we were in compliance with these standards at June 30, 2012.

Following the lapse of restrictions upon issuance, capital available from the sale of the underlying securities of underwriter warrants exercised can fluctuate significantly from period to period as the value of the underlying securities fluctuates with overall market and individual company financial condition or performance. There is no public market for the underwriter warrants. The securities receivable upon exercise of the underwriter warrants cannot be resold unless the issuer has registered these securities with the SEC and with the states in which the securities will be sold unless exemptions are available. Any delay or other problem in the registration of these securities would have an adverse impact upon our ability to obtain funds from the exercise of the underwriter warrants and the resale of the underlying securities.

At June 30, 2012, we owned 11 underwriter warrants from 8 issuers, all but 1 of which were exercisable. None of the warrants had an exercise price below the June 30, 2012 market price of the securities receivable upon exercise. There is little or no direct relationship between the intrinsic value of our underwriter warrants at the end of any given period and the fair value calculated using the Black-Scholes option pricing model. The prices of the securities underlying the underwriter warrants are very volatile, and substantial fluctuations in their fair value can be expected in the future.

Cash used by operating activities totaled $745,000 in the six months ended June 30, 2012, which included our net loss of $19,000 as well as changes in our operating assets and liabilities as discussed in more detail below.

Our net receivable from our clearing organization totaled $3.5 million at June 30, 2012 and $5.1 million at December 31, 2011. The period-to-period reduction is primarily due to the sale of our retail brokerage business to JHS Capital Advisors. Our net receivable from our clearing organization is also affected by the results of the activity in our trading and investment accounts, as well as the timing of general corporate expenditures and cash flow requirements.

During the second quarter of 2012, we sold our retail brokerage business to JHS Capital Advisors, LLC and recorded a one-time gain on sale of assets of $1.620 million. Notes and other receivables net of allowances for doubtful accounts increased $558,000 to $1.165 million at June 30, 2012 from $607,000 at December 31, 2011, primarily due to the note receivable from JHS for $568,000 for the installment payments due under the sale of the Company's retail brokerage operations.

Changes in our trading and investment securities owned are dependent on the purchase and sale of securities during the period, as well as changes in their fair values during the period.

A summary of activity related to the fair value of our underwriter warrants was as follows (in thousands):

Balance, December 31, 2011	$	1,395
Receipt of underwriter warrants		-
Net unrealized loss on value of warrants		192
Warrants exercised or expired		-
Balance, June 30, 2012	$	1,203

Deferred revenue of $149,000 at June 30, 2012 was related to amounts received from our clearing firm pursuant to a five-year agreement with three, one-year extensions, and is being amortized at the rate of $14,881 per month through April 2013.

In September 2001, our Board of Directors approved a stock repurchase program pursuant to which we are authorized to repurchase up to 600,000 shares of our common stock. In June 2008, our Board of Directors approved the repurchase of up to a total of an additional 200,000 shares of our common stock. We repurchased a total of 1,000 shares of our common stock during the first quarter of 2012 at an average price of $1.25 per share for a total of $1,250. Through June 30, 2012, a total of 731,989 shares had been repurchased and 68,011 shares remained available for repurchase under the program. This repurchase program does not have an expiration date.

In March 2012, the Board of Directors approved a special cash dividend of $0.05 per common share payable April 16, 2012 to shareholders of record April 4, 2012. The ex-dividend date was April 2, 2012. Dividends paid to common shareholders totaled $288,349.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

NEW ACCOUNTING GUIDANCE

See Note 5 of Notes to Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for Smaller Reporting Companies.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

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

We repurchased the following shares of our common stock during the first six months of 2012:

	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plan		Maximum number of shares that may yet be purchased under the plan
January 1 to January 31		-		-		-		69,011
February 1 to February 29		-		-		-		69,011
March 1 to March 31		1,000	$	1.25		1,000		68,011
April 1 to June 30		-		-		-		68,011
Total		1,000	$	1.25		1,000		68,011

A plan to repurchase up to a total of 600,000 shares of our common stock was approved by our Board of Directors in September 2001 and does not have an expiration date. In June 2008, our Board of Directors approved the repurchase of up to a total of an additional 200,000 shares of our common stock. This authorization does not have an expiration date.

Item 6. Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

2.1*	Asset Purchase Agreement dated April 10, 2012 by and between JHS Capital Advisors, LLC, Paulson Investment Company, Inc. and the Company.
31.1*	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1**	Certification of Principal Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2**	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

101.INS***	XBRL Instance
101.SCH***	XBRL Taxonomy Extension Schema
101.CAL***	XBRL Taxonomy Extension Calculation
101.DEF***	XBRL Taxonomy Extension Definition
101.LAB***	XBRL Taxonomy Extension Labels
101.PRE***	XBRL Taxonomy Extension Presentation

*	Filed herewith
**	Furnished herewith
***	XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

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

Date:

August 14, 2012

PAULSON CAPITAL CORP.

			By:	/s/ Chester L. F. Paulson
				Chester L. F. Paulson
				President and Chief Executive Officer
				Principal Executive Officer

			By:	/s/ Murray G. Smith
				Murray G. Smith
				Chief Financial Officer
				Principal Financial Officer

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