VBI VACCINES INC. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - VBI VACCINES INC.	Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - VBI VACCINES INC.	ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - VBI VACCINES INC.	ex32-1.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

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 March 31, 2013

[ ]	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.)


1331 NW Lovejoy Street, Suite 720, Portland, Oregon			97209
(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 May 14, 2013)

PAULSON CAPITAL CORP. AND SUBSIDIARIES

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION		Page

Item 1.	Financial Statements	2

	Consolidated Balance Sheets – March 31, 2013 and December 31, 2012 (unaudited)	2

	Consolidated Statements of Operations - Three Months Ended March 31, 2013 and 2012 (unaudited)	3

	Consolidated Statements of Cash Flows - Three Months Ended March 31, 2013 and 2012 (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		15

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)

	March 31, 2013		December 31, 2012
Assets
Cash	$	486,657	$	337,136
Receivable from clearing organization		2,222,187		2,252,965
Notes and other receivables, net of allowances for doubtful accounts of $836,451 and $847,796		1,030,141		210,536
Income taxes receivable		36,834		43,834
Trading and investment securities owned, at fair value		8,426,488		8,500,488
Underwriter warrants, at fair value		2,149,000		1,548,000
Prepaid and deferred expenses		456,474		437,440
Furniture and equipment, at cost, net of accumulated depreciation and amortization of $156,263 and $155,519		21,746		9,644
Total Assets	$	14,829,527	$	13,340,043

Liabilities and Shareholders' Equity
Accounts payable and accrued liabilities	$	430,755	$	302,252
Payable to clearing organization		431		74,062
Compensation, employee benefits and payroll taxes		241,619		84,885
Trading securities sold, not yet purchased, at fair value		47,295		-
Deferred revenue		14,881		59,523
Advance from related party		1,515,616		-
Total Liabilities		2,250,597		520,722

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 5,766,985		2,163,711		2,163,711
Retained earnings		10,415,219		10,655,610
Total Shareholders' Equity		12,578,930		12,819,321
Total Liabilities and Shareholders' Equity	$	14,829,527	$	13,340,043

See accompanying Notes to Consolidated Financial Statements

Paulson Capital Corp. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	For the Three Months Ended March 31,
	2013			2012
Revenues
Commissions	$	198,071		$	3,206,138
Corporate finance		88,191			22,794
Investment income		724,346			249,511
Trading income		188,742			1,968,921
Interest and dividends		6,449			121,406
Other		44,881			40,890
		1,250,680			5,609,660

Expenses
Commissions and salaries		602,195			3,209,272
Underwriting expenses		22,333			37,189
Rent and utilities		50,956			155,384
Communication and quotation services		25,342			128,694
Professional fees		335,079			256,259
Travel and entertainment		13,088			37,600
Clearing expenses		18,954			79,054
Depreciation and amortization		743			4,113
Licenses, taxes and insurance		183,469			125,297
Interest		15,616			-
Other		223,296			164,504
		1,491,071			4,197,366

Income (loss) before income taxes		(240,391	)		1,412,294

Income tax expense (benefit):
Current		-			-
Deferred		-			-
		-			-

Net income (loss)	$	(240,391	)	$	1,412,294

Basic and diluted net income (loss) per share		(0.04	)		0.24

Shares used in basic and diluted per share calculations:		5,766,985			5,767,897

See accompanying Notes to Consolidated Financial Statements

Paulson Capital Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	For the Three Months Ended March 31,
	2013			2012
Cash flows from operating activities:
Net income (loss)	$	(240,391	)	$	1,412,294
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
Unrealized appreciation of underwriter warrants		(601,000	)		(257,000	)
Depreciation and amortization		743			4,113
Change in assets and liabilities:
Receivables from/payable to clearing organization, net		(42,853	)		419,737
Notes and other receivables		(819,605	)		(51,516	)
Income taxes receivable		7,000			(17,255	)
Trading and investment securities owned		74,000			(1,399,347	)
Prepaid and deferred expenses		(19,034	)		174,337
Deferred revenue		(44,642	)		(38,265	)
Accounts payable, accrued liabilities and compensation payables		300,853			108,616
Trading securities sold, not yet purchased		47,295			(356,695	)
Net cash used in operating activities		(1,337,634	)		(981	)

Cash flows from investing activities:
Additions to furniture and equipment		(12,845	)		(800	)
Net cash used in investing activities		(12,845	)		(800	)

Cash flows from financing activities:
Proceeds from related party advance		1,500,000			-
Redemption of common stock		-			(1,250	)
Net cash provided by (used in) financing activities		1,500,000			(1,250	)

Increase (decrease) in cash		149,521			(3,031	)

Cash:
Beginning of period		337,136			292,002

End of period	$	486,657		$	288,971

Supplemental cash flow information:
Cash paid (received) during the period for income taxes, net	$	(7,000	)	$	17,255

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 March 31, 2013 and December 31, 2012 and for the three-month periods ended March 31, 2013 and 2012 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, 2012 is derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012. 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, 2012. 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-month period ended March 31, 2013, we had 218,500 anti-dilutive stock options outstanding. For the three-month period ended March 31, 2012, we had 391,000 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):

	March 31, 2013			December 31, 2012
	Fair Value		Input Level	Fair Value		Input Level
Trading and investment securities owned:
Corporate equities, marketable	$	3,537	Level 1	$	3,463	Level 1
Corporate equities, not readily marketable		4,858	Level 3		4,878	Level 3
Corporate options/warrants, marketable		31	Level 1		159	Level 1
Underwriter warrants		2,149	Level 3		1,548	Level 3
Trading securities sold, not yet purchased:
Corporate equities, marketable		47	Level 1		-	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, 2012	$	1,548		$	4,878
Fair value of underwriter warrants received included as a component of corporate finance income		-			-
Investment in privately-held company		-			-
Net unrealized gain (loss), included as a component of investment income related to securities held		693			(20	)
Underwriter warrants exercised or expired included as a component of investment income		(92	)		-
Balance, March 31, 2013	$	2,149		$	4,858

	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 gain (loss), included as a component of investment loss related to securities held		257		-
Balance, March 31, 2012	$	1,652	$	3,857

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. Significant unobservable inputs include the discount rate for lack of liquidity, and the volatility index of comparable companies. Changes to these unobservable inputs would cause the fair value to fluctuate substantially.

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. Private company underwriter warrant valuations use the volatility index of comparable public companies. 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 quarter of 2013 or 2012.

Note 4. Stockholders' Equity

Comprehensive Income

The Company did not have any transactions that generated comprehensive income during the first quarter of 2013 or during the fiscal year ended December 31, 2012.

Repurchase of Common Stock

There were no common shares repurchased during the first quarter of 2013.

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, after which 68,011 shares remain available for repurchase. This repurchase plan does not have an expiration date.

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 payable in the amount of $288,349 was recorded in the first quarter of 2012 and paid during the second quarter of fiscal 2012.

In December 2012, the Board of Directors approved a second special cash dividend of $0.15 per common share payable December 28, 2012 to shareholders of record December 14, 2012. Dividends of $865,048 were paid in the fourth quarter of fiscal 2012.

Note 5. New Accounting Guidance

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

Note 6. Proposed New Investment in Paulson Investment Company, Inc.

In January 2013, the Company announced that it had agreed in principle to a change of ownership transaction involving the broker-dealer license held by our wholly-owned subsidiary, Paulson Investment Company, Inc. ("PIC"). Since then, the transaction has been restructured to facilitate FINRA approval. In January 2013, PIC received a $1,500,000 loan from an outside investor pursuant to a convertible promissory note bearing 5% simple interest. The note is convertible into preferred stock of PIC, representing approximately 35% of PIC on a fully diluted basis. The holders of the preferred stock shares will have no liquidation or other rights in the cash, receivables, inventories (including underwriter warrants), and certain prepaid assets, furniture and equipment that existed when the convertible promissory note was executed, and will not participate in any future gains or losses derived from those assets. On May 8, 2013, PIC submitted an updated Continuing Membership Application to FINRA for approval of this change of ownership transaction, after which the promissory note will convert into the preferred stock of PIC.

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 48% of our common stock and may have interests differing from those of other stockholders.

GENERAL

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:

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

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

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

securities brokerage activities for which we earn commission revenues.

In addition, Paulson Capital Properties, LLC, a 100% owned subsidiary, was established for the purpose of purchasing, improving and remarketing underappreciated real estate. Through March 31, 2013, we had not purchased any real estate.

During the second quarter of fiscal 2012 ended June 30, 2012, the Company sold substantially all PIC's retail brokerage business to JHS Capital Advisors, LLC and is focusing its operations on boutique investment banking.

OVERVIEW

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 quarter of 2013, the number of global IPO's fell, primarily due to fewer offerings in Asia. Total global IPO's declined by 11%, although proceeds increased by 48% compared to the first quarter of 2012. In the United States, the number of IPO's fell by 26%, but proceeds were higher, primarily due to a single offering of over $2 billion dollars. There were 31 IPO's in the first quarter of 2013 for proceeds of $7.6 billion compared to 42 IPO's for proceeds of $5.9 billion in the first quarter of 2012.

The outlook for IPO’s during the remainder of 2013 is encouraging due to the continued strength in the market indexes and positive performance of many recent IPO's. Past public pipeline figures are not an effective predictor of future IPO activity, especially since recent regulatory changes under the JOBS Act allow a company with annual gross revenue of under $1 billion to file a draft registration statement confidentially. 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 brokerage and 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 PIPEs and private placements 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 have varying terms and conditions, and 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.

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, 2012, which was filed with the Securities and Exchange Commission on March 21, 2013.

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 will become 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 was 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 was paid over three installments on July 16, 2012, October 15, 2012 and January 11, 2013. The final purchase price was subject to recalculation after six months based upon the aggregate gross dealer commissions for the twelve month period ended at that time. After the recalculation, the final purchase price was $1,522,841. As of March 31, 2013, all amounts due under the agreement have been received.

The agreement also required 12 directors, officers and employees of the Company to enter into non-solicitation agreements pursuant to which they are prohibited from soliciting employees and registered representatives of JHS for two years from the closing date. These 12 people also entered into non-competition agreements which have since expired.

PROPOSED NEW INVESTMENT IN PAULSON INVESTMENT COMPANY, INC.

This loan has allowed the Company to expand its investment banking activities on behalf of smaller and emerging companies to include early- and late-stage private financings. With the implementation of the Jumpstart Our Business Startups Act (“JOBS Act”) in the United States, the market for private placements for start-up and early-stage companies is anticipated to increase significantly over the next several years. The Company’s historical focus on investment banking services and public offerings for smaller capitalization companies is well suited to providing services in the expanding market for the financing of emerging growth companies under the JOBS Act. The management team being formed in the broker-dealer has the experience to expand PIC’s presence in this area while leveraging its existing broker-dealer platform. During the first quarter of 2013, we leased temporary office space in New York City, and hired 13 new employees, including 10 institutional brokers focused on managing private financings.

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:

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

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

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

securities brokerage activities for which we earn commission revenues.

The following tables set forth the changes in our operating results in the three-month period ended March 31, 2013 compared to the three-month period ended March 31, 2012 (dollars in thousands):

	Three Months Ended March 31,					Favorable (Unfavorable)			Percentage
	2013			2012		Change			Change
Revenues:
Commissions	$	198		$	3,206	$	(3,008	)		(93.8	)%
Corporate finance		88			23		65			282.6
Investment income		724			250		474			189.6
Trading income		189			1,969		(1,780	)		(90.4	)
Interest and dividends		7			121		(114	)		(94.2	)
Other		45			41		4			9.8
Total revenues		1,251			5,610		(4,359	)		(77.7	)
Expenses:
Commissions and salaries		602			3,209		2,607			81.2
Underwriting expenses		22			37		15			40.5
Rent and utilities		51			156		105			67.3
Communication and quotation services		25			129		104			80.6
Professional fees		335			256		(79	)		(30.9	)
Travel and entertainment		13			38		25			65.8
Clearing expenses		19			79		60			75.9
Depreciation and amortization		1			4		3			75.0
Licenses, taxes and insurance		184			125		(59	)		(47.2	)
Interest		16			-		(16	)		*
Other		223			165		(58	)		(35.2	)
Total expenses		1,491			4,198		2,707			64.5
Income (loss) before income taxes	$	(240	)	$	1,412	$	(1,652	)		(117.0	)%

* Not meaningful

Revenues

The markets in the United States had a very strong first quarter of 2013, with the Dow Jones Industrial Average rising 11.3% and the NASDAQ composite index rising 8.2%. Investor confidence was supported by improving economic numbers in the United States, particularly a rebound in housing activity and prices, as well as in retail sales. Some investors expect that the stronger economic indicators will be reflected in improved corporate earnings later in 2013.

Commissions declined 94% during the first quarter ended March 31, 2013 compared to the first quarter of 2012. The decline was largely due to the sale of the Company's retail brokerage business to JHS effective April 16, 2012. As of March 31, 2013, the Company had 14 registered representatives, which were included in the Company's 28 employees, compared to 67 registered representatives as of March 31, 2012.

Corporate finance income in the first quarter of 2013 was up 283% from the first quarter of 2012. The Company participated in two private placements in the quarter. We acted as managing underwriter in a $1.7 million PIPE offering for Methes Energies, International, and acted as lead placement agent and partially closed an ongoing private placement for a company in the life science industry. The Company participated in no private placements in the first quarter of 2012.

Investment gain included the following (in thousands):

	Three Months Ended March 31,
	2013			2012
Net unrealized appreciation related to underwriter warrants	$	601		$	257
Net unrealized depreciation of securities held based on quoted market prices or, for securities that are not readily marketable, our estimate of their fair value		(14	)		(7	)
Net realized gain on the sale of securities with quoted market prices and securities that are not readily marketable and gains from the sale of underwriter warrants		137			-
	$	724		$	250

We exercised and sold approximately 10% of one of our underwriter warrant positions in the first quarter of 2013, and did not exercise any underwriter warrants in the first quarter of 2012. 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 income decreased by 90% to $189,000 in the first quarter of 2013 compared to $1.969 million in the first quarter of 2012. The trading income was negatively 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 $2.707 million in the first quarter of 2013 compared to the first quarter of 2012. The decline 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.

Commissions and salaries decreased $2.607 million in the first quarter of 2013 compared to the first quarter of 2012. The decrease is due to a fewer registered representatives with the Company after the sale of the retail brokerage operations.

Underwriting expenses decreased by $15,000 in the first quarter of 2013 compared to the first quarter of 2012. Expenses vary due to the timing and level of investment banking activity.

Professional fees increased by $79,000 in the first quarter of 2013 compared to the same quarter in 2012. The increase was due to fees incurred in connection with the restructuring of the Company’s business.

The Company leased temporary office space in New York City for 9 new employees that have been hired to extend our investment banking activities to private placements. The Company is likely to enter into a long-term lease for office space in the current building during the second quarter of 2013. Subsequent to the end of the quarter, our Portland office was relocated to a smaller space. The former larger location was no longer required since the sale of the retail brokerage operations and transfer of the brokerage personnel in 2012.

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 March 31, 2013 are sufficient to meet our cash and regulatory net capital needs for at least the next twelve-month period from March 31, 2013. 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 March 31, 2013.

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 March 31, 2013, we owned 11 underwriter warrants from 8 issuers, all but 1 of which were exercisable. Only one of the warrants had an exercise price below the March 31, 2013 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 $1.338 million in the first quarter ended March 31, 2013, including our net loss of $240,000 and changes in our operating assets and liabilities as discussed in more detail below.

Our net receivable from our clearing organization totaled $2.2 million at March 31, 2013 and $2.3 million at December 31, 2012. Our net receivable from our clearing organization is 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.

Notes and other receivables increased $820,000 to $1,030,000 at March 31, 2013 from $211,000 at December 31, 2012. The increase was primarily due to $775,000 in loans issued to the Company’s newest employees in New York City.

Advance from related party totaled $1,515,616 at March 31, 2013, and included $15,616 accrued interest. During the first quarter, the Company received the cash advance from an outside investor upon executing a convertible promissory note.

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, 2012	$	1,548
Receipt of underwriter warrants		-
Net unrealized gain on value of warrants		693
Warrants exercised or expired		(92	)
Balance, March 31, 2013	$	2,149

Deferred revenue of $14,881 at March 31, 2013 was related to amounts received from our clearing firm pursuant to a five-year agreement with two, 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. No common shares were repurchased during the first quarter of 2013. Through March 31, 2013, 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. In December 2012, the Board approved a second special cash dividend of $0.15 per share payable December 28, 2012 to shareholders of record December 14, 2012.

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 no shares of our common stock during the first three months of 2013.

During the first three months of 2012, we repurchased 1,000 common shares at an average price of $1.25 per common share.

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:

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: May 14, 2013	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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