Attached files
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EX-31.2 - JESUP & LAMONT, INC. | v185534_ex31-2.htm |
EX-32.2 - JESUP & LAMONT, INC. | v185534_ex32-2.htm |
EX-32.1 - JESUP & LAMONT, INC. | v185534_ex32-1.htm |
EX-31.1 - JESUP & LAMONT, INC. | v185534_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
100 F
Street, NE
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, 2010
or
o 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: 1-31292
JESUP
& LAMONT, INC.
(Exact
name of registrant as specified in its charter)
FLORIDA
|
59-3627212
|
|
(State
or Other Jurisdiction
|
(I.R.S.
Employer
|
|
of
Incorporation or Organization)
|
|
Identification
No.)
|
623 Fifth
Avenue, 17th Floor New York, New York 10022
(Address
of Principal Executive Offices)
800-356-2092
(Registrant's
Telephone Number, Including Area Code)
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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
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 o
|
Accelerated
filer o
|
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). Yes o No x
As of May
11, 2010 there were 42,633,010 shares of common stock, par value $0.01 per
share, outstanding.
JESUP
& LAMONT, INC. AND SUBSIDIARIES
QUARTERLY
REPORT ON FORM 10-Q
FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2010
TABLE OF
CONTENTS
PART
I
|
|||
FINANCIAL
INFORMATION
|
|||
Item
1.
|
Financial
Statements
|
3
|
|
Condensed
Consolidated Statements of Financial Condition at March 31, 2010
(unaudited) and December 31, 2009
|
3
|
||
Condensed
Consolidated Statements of Operations for the Three Months ended March 31,
2010 and 2009 (unaudited)
|
4
|
||
Condensed
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2010 and 2009 (unaudited)
|
5
|
||
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
6-24
|
||
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
25-32
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
32
|
|
Item
4.
|
Controls
and Procedures
|
33
|
|
PART
II
|
|||
OTHER
INFORMATION
|
|||
Item
1.
|
Legal
Proceedings
|
34
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
34
|
|
Item
3.
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Defaults
Upon Senior Securities
|
34
|
|
Item
4.
|
[Removed
and Reserved]
|
34
|
|
Item
5.
|
Other
Information
|
34
|
|
Item
6.
|
Exhibits
|
34
|
|
Signatures
|
|
35
|
2
PART I -
FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
JESUP
& LAMONT, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
|
||||||||
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 340,392 | 345,170 | |||||
Bank
certificate of deposit
|
2,022,174 | 2,014,102 | ||||||
Marketable
securities owned, at market value
|
16,959 | 23,288 | ||||||
Securities
not readily marketable, at estimated fair value
|
697,165 | 946,080 | ||||||
Commissions
and other receivables from clearing organizations
|
1,621,804 | 1,559,391 | ||||||
Other
receivables
|
2,176,081 | 2,437,989 | ||||||
Securities
borrowed under a secured demand note
|
225,000 | 225,000 | ||||||
Deposits
at clearing organizations
|
771,578 | 1,312,294 | ||||||
Prepaid
expenses and other assets
|
1,388,954 | 959,710 | ||||||
Notes
receivable, net of allowance of $561,000
|
1,301,273 | 1,370,984 | ||||||
Deferred
tax asset
|
2,117,000 | 2,117,000 | ||||||
Furniture
and equipment, net
|
645,236 | 669,974 | ||||||
Goodwill
|
13,272,165 | 13,272,165 | ||||||
Intangible
assets - customer lists and trademarks
|
4,043,943 | 4,072,875 | ||||||
Total
assets
|
$ | 30,639,724 | 31,326,022 | |||||
Liabilities
and Stockholders' Equity
|
||||||||
Accounts
payable, accrued expenses and other liabilities
|
$ | 9,997,283 | 8,360,666 | |||||
Due
to clearing organizations
|
1,338,528 | 1,314,213 | ||||||
Accrued
preferred stock dividends
|
712,126 | 753,394 | ||||||
Securities
sold, but not yet purchased, at market value
|
179,712 | 170,892 | ||||||
Secured
demand note payable
|
225,000 | 225,000 | ||||||
Notes
payable
|
16,044,285 | 16,332,091 | ||||||
Total
liabilities
|
28,496,934 | 27,156,256 | ||||||
Stockholders'
equity
|
||||||||
Convertible
preferred stock, series F, and G
|
||||||||
$.01
par value, 1,000,000 shares authorized
|
||||||||
698,437
issued and outstanding and
|
||||||||
728,575
issued and outstanding
|
6,984 | 7,285 | ||||||
Common
stock, $.01 par value, 100,000,000 shares authorized
|
||||||||
33,163,330
shares issued and outstanding
|
||||||||
and
32,548,715 issued and outstanding
|
331,633 | 325,487 | ||||||
Less:
Treasury Stock
|
(733,765 | ) | (733,765 | ) | ||||
Capital
stock subscribed
|
3,251,000 | 1,585,000 | ||||||
Additional
paid-in capital
|
43,399,399 | 43,275,707 | ||||||
Accumulated
deficit
|
(44,112,461 | ) | (40,289,948 | ) | ||||
Total
stockholders' equity
|
2,142,790 | 4,169,766 | ||||||
Total
liabilities and stockholders' equity
|
$ | 30,639,724 | 31,326,022 |
See
accompanying notes to the unaudited condensed consolidated
financial
statements
for the three months ended March 31, 2010 and 2009.
3
JESUP
& LAMONT, INC. AND SUBSIDIARIES (UNAUDITED)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Three
Months ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Revenues
|
||||||||
Commissions
and fees
|
$ | 8,594,237 | 5,541,397 | |||||
Equity
market making trading revenues, net
|
826,565 | 383,381 | ||||||
Investment
banking income
|
1,156,371 | 413,910 | ||||||
Net
gain (loss) on securities received for banking services
|
(295,087 | ) | 168,431 | |||||
10,282,086 | 6,507,119 | |||||||
Expenses
|
||||||||
Employee
compensation and benefits
|
7,123,415 | 4,959,831 | ||||||
Commissions,
clearing and execution costs
|
3,328,787 | 2,304,581 | ||||||
General
and administrative
|
2,934,437 | 1,789,402 | ||||||
Communications
and data processing
|
197,540 | 144,541 | ||||||
13,584,179 | 9,198,355 | |||||||
Loss
from operations
|
(3,302,093 | ) | (2,691,236 | ) | ||||
Other
income (expenses)
|
||||||||
Interest
income
|
8,427 | 360 | ||||||
Abandonment
of premises
|
(106,289 | ) | - | |||||
Interest
expense
|
(349,158 | ) | (236,789 | ) | ||||
(447,020 | ) | (236,429 | ) | |||||
Net
loss
|
(3,749,113 | ) | (2,927,665 | ) | ||||
Accrued
preferred stock dividends
|
(73,400 | ) | (91,483 | ) | ||||
Net
loss applicable to common shareholders
|
$ | (3,822,513 | ) | (3,019,148 | ) | |||
Basic
and diluted net loss per share applicable to common
|
||||||||
shareholders:
|
||||||||
Net
loss per share-basic
|
$ | (0.10 | ) | (0.10 | ) | |||
Net
loss per share diluted
|
$ | (0.10 | ) | (0.10 | ) | |||
Weighted
average shares outstanding:
|
||||||||
Basic
|
39,158,433 | 28,933,076 | ||||||
Diluted
|
39,158,433 | 28,933,076 |
See
accompanying notes to the unaudited condensed consolidated
financial
statements
for the three months ended March 31, 2010 and 2009.
4
JESUP
& LAMONT, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three
Months ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$ | (3,749,113 | ) | (2,927,665 | ) | |||
Adjustments
to reconcile net loss to net cash used
|
||||||||
in
operating activities:
|
||||||||
Depreciation
and amortization
|
118,645 | 124,413 | ||||||
Unrealized
(gain) loss on securities
|
307,491 | (165,231 | ) | |||||
Stock
compensation expense
|
73,605 | 107,475 | ||||||
Abandonment
of premises
|
106,289 | - | ||||||
Allowance
for notes receivable
|
- | 100,000 | ||||||
Notes
receivable amortization
|
98,203 | 55,556 | ||||||
Deferred
rent
|
66,149 | 3,528 | ||||||
Accrued
interest income on certificate of deposit
|
(8,072 | ) | - | |||||
(Increase)
decrease in operating assets:
|
||||||||
Commissions
receivable from clearing organizations
|
(62,413 | ) | 16,351 | |||||
Deposits
at clearing organizations
|
540,716 | (1,945,173 | ) | |||||
Other
receivables
|
206,660 | 149,777 | ||||||
Marketable
trading account securities, net
|
3,001 | (1,028,277 | ) | |||||
Prepaid
expenses and other assets
|
(429,244 | ) | (130,662 | ) | ||||
Increase
(decrease) in operating liabilities:
|
||||||||
Accounts
payable, accrued expenses and other liabilities
|
1,455,442 | 1,371,817 | ||||||
Payable
to clearing organizations
|
24,315 | 785,223 | ||||||
Securities
sold, not yet purchased
|
8,820 | 57,411 | ||||||
Total
adjustments
|
2,509,607 | (497,792 | ) | |||||
Cash
used in operating activities
|
(1,239,506 | ) | (3,425,457 | ) | ||||
Cash
flows from investing activities
|
||||||||
Purchases
of furniture and equipment
|
(49,264 | ) | (87,211 | ) | ||||
Payments
on notes receivable
|
34,508 | - | ||||||
Issuance
of notes receivable
|
(63,000 | ) | (582,932 | ) | ||||
Total
cash used in investing activities
|
(77,756 | ) | (670,143 | ) | ||||
Cash
flows from financing activities
|
||||||||
Payments
of notes payable
|
(703,516 | ) | (250,000 | ) | ||||
Proceeds
from notes payable
|
400,000 | - | ||||||
Proceeds
from 9% convertible debenture
|
- | 2,000,000 | ||||||
Proceeds
from common stock subscribed
|
1,616,000 | 1,989,980 | ||||||
Total
cash provided in financing activities
|
1,312,484 | 3,739,980 | ||||||
Net
decrease in cash and cash equivalents
|
(4,778 | ) | (355,620 | ) | ||||
|
||||||||
Cash
and cash equivalents at beginning of period
|
345,170 | 410,840 | ||||||
Cash
and cash equivalents at end of period
|
$ | 340,392 | 55,220 | |||||
Supplemental
cash flow information:
|
||||||||
Interest
paid
|
$ | 260,992 | 161,130 | |||||
Supplemental
disclosures of non-cash investing
|
||||||||
and
financing activities:
|
||||||||
Accrued
preferred stock dividends, net of payments
|
$ | 73,400 | 91,483 | |||||
Conversion
of Series C preferred stock to common
|
$ | 6,000 | - | |||||
Issuance
of stock to pay preferred dividends
|
$ | 105,931 | - |
See
accompanying notes to the unaudited condensed consolidated financial statements
for the three months ended March 31, 2010 and 2009.
5
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
1.
Description of Business and Basis of Presentation
ORGANIZATION
AND OPERATIONS - The accompanying financial statements include the accounts of
Jesup & Lamont, Inc. ("JLI" or the "Company"), a Florida Corporation, and
its wholly-owned subsidiaries, Empire Financial Group, Inc. ("EFG"), Empire
Investment Advisors, Inc. ("EIA"), and Jesup & Lamont Securities Corporation
("JLSC"). All intercompany transactions and accounts have been
eliminated in consolidation.
JLSC is
an introducing securities broker-dealer which provides brokerage and advisory
services to retail and institutional customers and a trading platform, order
execution services and market making services for domestic and international
securities to its customers and network of independent registered
representatives. EIA and JLSC provide fee-based investment advisory
services to their customers.
The
Company's executive offices are located at 623 Fifth Ave., New York, NY with
independent registered representatives throughout the United
States. JLSC's main offices are in New York City.
BASIS OF
PRESENTATION - The condensed consolidated financial statements are unaudited and
have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
In the opinion of management, the interim data includes all adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
the results for the periods presented. Because of the nature of the Company’s
business, interim period results may not be indicative of full year or future
results.
The
unaudited condensed consolidated financial statements do not include all
information and notes required in annual financial statements in conformity with
GAAP. The Statement of Financial Condition at December 31, 2009 has been
derived from the audited financial statements at that date, but does not include
all of the information and notes required by GAAP for complete financial
statement presentation. Please refer to the notes to the consolidated financial
statements included in the Company’s annual report on Form 10-K for the year
ended December 31, 2009 (“Form 10-K”), filed with the SEC, for
additional disclosures and a description of the Company’s accounting
policies.
Certain
prior year items have been reclassified to conform to the current period’s
presentation. All intercompany balances and transactions have been
eliminated.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES
OF CONSOLIDATION – The Consolidated Financial Statements include the accounts of
JLI and its operating and non-operating subsidiaries, all of which are wholly
owned. All intercompany balances and transactions have been
eliminated.
SECURITIES
TRANSACTIONS - Securities transactions and the related revenues and expenses are
recorded on a trade date basis.
6
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
TRADING
INCOME - Consists of net realized and net unrealized gains and losses on
securities traded for the Company's own account. Trading revenues are
generated from the difference between the price paid to buy securities and the
amount received from the sale of securities. Significant security
price fluctuations (volatility) in short periods of time, may result in trading
gains or losses. Gains or losses are recorded on a trade date
basis.
MARKET-MAKING
ACTIVITIES - Securities owned and securities sold, not yet purchased, which
primarily consist of listed, over-the-counter, American Depository Receipts and
foreign ordinary stocks, are carried at market value and are recorded on a trade
date basis. Market value is estimated daily using market quotations
available from major securities exchanges and dealers.
CLEARING
ARRANGEMENTS. – The Company does not carry accounts for customers or perform
custodial functions related to customers' securities. We introduce
all of our customer transactions, to our clearing brokers, who maintain our
customers' accounts and clear such transactions. Additionally, the
clearing brokers provide the clearing and depository operations for our
proprietary securities transactions. These activities may expose us
to off-balance-sheet risk in the event that customers do not fulfill their
obligations with the primary clearing brokers, as we have agreed to indemnify
our clearing brokers for any resulting losses. We continually assess
risk associated with each customer who is on margin credit and record an
estimated loss when we believe collection from the customer is
unlikely.
SHARE-BASED
COMPENSATION is accounted for under the fair value
method. Share-based payments to employees, including grants of stock
options, are charged to expense over the requisite service period based on the
grant date fair value of the awards. The Company uses the
Black-Scholes option valuation model to determine the fair value of the options
granted. The model includes subjective input assumptions that can materially
affect the fair value estimates. The model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and that are
fully transferable. Options issued under the Company's option plan have
characteristics that differ from traded options. Principal
assumptions used in applying the Black-Scholes model are outlined below. In
selecting these assumptions, we considered the guidance for estimating expected
volatility as set forth in ASC 718 “Compensation – Stock Compensation” formerly
SFAS No. 123(R). Volatility is a measure of the amount by which the Company's
common stock price has fluctuated (historical volatility) or is expected to
fluctuate (expected volatility).
CASH AND
CASH EQUIVALENTS consist of highly liquid investments that are readily
convertible into cash. We consider securities with original
maturities of three months or less, when purchased, to be cash
equivalents. The carrying amount of these securities approximates
fair value because of the short-term maturity of these instruments.
MARKETABLE
SECURITIES AND SECURITIES SOLD, BUT NOT YET PURCHASED are carried at market
value, with related unrealized gains and losses reported in our results of
operations.
7
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
SECURITIES
THAT ARE NOT READILY MARKETABLE are carried at fair value, with related
unrealized gains and losses reported in our results of
operations. The determination of fair value is fundamental to our
financial condition and results of operations and requires management to make
complex judgments. Fair values are based on listed market prices,
where possible. If listed market prices are not available or if the liquidation
of our positions would reasonably be expected to impact market prices, fair
value is determined based on other relevant factors, including dealer price
quotations, and marketability. Warrants received from investment
banking engagements are generally valued using the Black-Scholes option
valuation model and management may reduce the value if there is a restriction as
to when the warrants may be exercised. The Black-Scholes method uses
assumptions such as volatility, interest rates, and dividend yields to determine
the value.
FAIR
VALUE MEASUREMENT – Financial and non-financial assets and liabilities are
measured at their fair value. Assets are valued at fair value
determined based on the assets highest and best use. Non-financial
assets are valued based on the price that would be received in a current
exchange transaction. The fair value of liabilities is generally
determined assuming the liability is transferred to a market
participant. When quoted market prices for liabilities are not
available, the Company measures such liabilities at their present
value. GAAP has established a framework for measuring fair value that
is based on a hierarchy which prioritizes the inputs to valuation techniques
according to the degree of objectivity necessary. The fair value
hierarchy of the inputs to valuation techniques used to measure fair value is
divided into three broad levels of objectivity:
|
·
|
Level
1 input is quoted prices (unadjusted) in active markets for identical
assets or liabilities the Company has the ability to
access.
|
|
·
|
Level
2 inputs are inputs (other than quoted prices included within level 1)
that are observable for the asset or liability, either directly or
indirectly.
|
|
·
|
Level
3 are unobservable inputs for the asset or liability and rely on
management’s own assumptions about the assumptions that market
participants would use in pricing the asset or liability. (The
unobservable inputs should be developed based on the best information
available in the circumstances and may include the Company’s own
data.)
|
The
Company categorizes its assets and liabilities that are measured at fair value
into a three-level fair value hierarchy as set forth below.
The
Company’s Level 1 Assets which include marketable securities owned and our
securities sold, but not yet purchased, are valued at fair value using quoted
market prices in active markets for identical securities. Gains or
losses are recorded on a trade date basis and are included in the Company’s
consolidated statements of operations in “Equity market making trading, revenue,
net”.
The
Company has no Level 2 Assets at March 31, 2010 or December 31,
2009. The Company had no material changes in its valuation techniques
for the quarter ended March 31, 2010.
The
Company’s Level 3 Assets which include securities not readily marketable are
valued at fair value using listed market prices, where possible. If
listed market prices are not available or if the liquidation of the Company’s
positions would reasonably be expected to impact market prices, then fair value
is determined based on other relevant factors, including dealer price quotations
and marketability. Warrants received from investment banking
engagements are generally valued using the Black-Scholes option valuation model
and the Company may reduce the value if there is a restriction as to when the
warrants may be exercised. The Black-Scholes method uses assumptions
such as volatility, interest rates, and dividend yields to determine
value. Realized gains or losses are recorded on a settlement date
basis and unrealized gains or losses are recorded on the valuation
date. Realized and unrealized gains or losses are included in our
consolidated statements of operations in “Net gain (loss) on securities received
for banking services”.
8
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
COMMISSIONS
AND OTHER RECEIVABLES FROM CLEARING ORGANIZATIONS - Receivables from broker
dealers and clearing organizations represent monies due to the Company from its
clearing agents for transactions processed.
FURNITURE
AND EQUIPMENT, NET - Property and equipment are recorded at cost. Depreciation
on property and equipment is provided utilizing the straight-line method over
the estimated useful lives of the related assets, which range from five to seven
years. Upon the sale or retirement of an asset, the related costs and
accumulated depreciation are removed from the accounts and any gain or loss is
recognized in our results of operations.
GOODWILL
AND OTHER INTANGIBLE ASSETS. Goodwill represents the excess of acquisition costs
over the fair value of net assets of businesses purchased. The
reported amounts of goodwill are reviewed for impairment on an annual basis and
more frequently when negative conditions such as significant current or
projected operating losses exist. The annual impairment test for
Goodwill and Other Intangible Assets is a two-step process and involves
comparing the estimated fair value of each reporting unit to the reporting
unit's carrying value, including goodwill. If the fair value of the
reporting unit exceeds its carrying amount, goodwill of the reporting unit is
not considered impaired, and the second step of the impairment test is
unnecessary. If the carrying amount of a reporting unit exceeds its
fair value, the second step of the goodwill impairment test would be performed
to measure the amount of impairment loss to be recorded, if any. Our annual
impairment tests resulted in no goodwill impairment
INCOME
TAXES - The Company accounts for income taxes using the liability method in
accordance with GAAP. Tax benefits or expenses are recognized based
on the temporary differences between the tax basis and financial basis of its
assets and liabilities. Therefore deferred income tax assets and
liabilities represent the tax effects differences between the financial and tax
basis of assets and liabilities that will result in taxable or deductible
amounts in the future, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. A valuation allowance is recognized if, based on the weight
of available evidence, it is more likely than not that some portion or all of
the future tax benefits from deferred tax assets will not be
realized.
The
Company evaluates tax positions to determine whether the benefits of tax
positions will more likely than not be sustained upon audit based on the
technical merits of the tax position. For such tax positions, the Company
recognizes the largest amount of the benefit that will likely be realized upon
ultimate settlement. The Company does not recognize any portion of
the benefit in the financial statements related to tax positions that are not
likely of being sustained upon audit.
USE OF
ESTIMATES - The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
9
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
EARNINGS
(LOSS) PER SHARE - Basic earnings (loss) per share is computed by dividing net
income (loss) available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings (loss) per
share considers the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or could otherwise cause the
issuance of common stock. Diluted earnings (loss) per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock, such as options, convertible notes and convertible preferred
stock, were exercised or converted into common stock or could otherwise cause
the issuance of common stock that then shared in earnings
(loss). Such potential additional common shares are included in the
computation of diluted earnings per share. Diluted loss per share is
not computed because any potential additional common shares would reduce the
reported loss per share and therefore have an antidilutive effect.
RECLASSIFICATIONS
- Certain prior year items have been reclassified to conform to the current
period’s presentation.
3.
SECURITIES BORROWED UNDER A SECURED DEMAND NOTE AND SECURED DEMAND NOTE
PAYABLE
In August
2009, the Company entered into a $225,000 secured demand note with an employee
under which the employee has pledged securities to the Company that fully
collateralizes the secured demand note payable. As of March 31, 2010
such securities had an approximate value of $334,575. The secured
demand note matures on October 2, 2012 and accrues interest at 5% per annum to
be paid quarterly.
4.
MARKETABLE SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET
PURCHASED
Marketable
securities owned and securities sold, but not yet purchased, are carried at fair
value, which is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. A fair value measurement
assumes that the transaction to sell the asset or transfer the liability occurs
in the principal market for the asset or liability or, in the absence of a
principal market, the most advantageous market. The Company
categorizes and measures its assets and liabilities in accordance with the
three-level fair value hierarchy as specified by GAAP.
The
following tables present the Company’s assets measured at fair value, according
to the GAAP hierarchy criteria, on a recurring basis as of March 31, 2010 and
December 31, 2009.
10
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
Fair
Value Measurements
As of
March 31, 2010
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Assets
|
||||||||||||||||
Marketable
securities owned
|
$ | 16,959 | $ | - | $ | - | $ | 16,959 | ||||||||
Securities
not readily marketable
|
- | - | 697,165 | 697,165 | ||||||||||||
Totals
|
$ | 16,959 | $ | - | $ | 697,165 | $ | 714,124 | ||||||||
Liabilities
|
||||||||||||||||
Securities
sold, but not yet purchased
|
$ | 179,712 | $ | - | $ | - | $ | 179,712 |
Fair
Value Measurements
as of
December 31, 2009
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Assets
|
||||||||||||||||
Marketable
securities owned
|
$ | 23,288 | $ | - | $ | - | $ | 23,288 | ||||||||
Securities
not readily marketable
|
- | - | 946,080 | 946,080 | ||||||||||||
Totals
|
$ | 23,288 | $ | - | $ | 946,080 | $ | 969,368 | ||||||||
Liabilities
|
||||||||||||||||
Securities
sold, but not yet purchased
|
$ | 170,892 | $ | - | $ | - | $ | 170,892 |
The
following is a reconciliation of the beginning and ending balances for assets
and liabilities measured at fair value on a recurring basis using significant
unobservable (level 3) during the quarter ended March 31, 2010 and December 31,
2009.
11
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
Level 3
Financial Assets and Liabilities
Principle
Transaction
Periods Covered
|
Beginning
Balance
|
Unrealized Gains
and (Losses)
Related to Assets
Held at Year End
|
Purchases,
Issuances,
and
Settlements
|
Ending
Balance
|
||||||||||||
March
31,2010
|
||||||||||||||||
Assets
|
||||||||||||||||
Marketable
securities owned
|
$ | 946,080 | $ | (308,794 | ) | $ | 59,879 | $ | 697,165 | |||||||
December
31,2009
|
||||||||||||||||
Assets
|
||||||||||||||||
Marketable
securities owned
|
$ | 531,265 | $ | (152,906 | ) | $ | 567,721 | $ | 946,080 |
5. SHARE
BASED COMPENSATION
The
Black-Scholes option valuation model is used to estimate the fair value of the
options granted. The model includes subjective input assumptions that
can materially affect the fair value estimates. The model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and that are fully transferable. Options issued
under the Company's option plan have characteristics that differ from traded
options. There were no stock options granted for the three months
ended March 31, 2010. The principal assumptions used in applying the
Black-Scholes model for options granted are as follows:
2010
|
2009
|
|||||
Expected
dividend yield:
|
None
|
None
|
||||
Risk
free interest rate:
|
3.5%
|
3.5%
|
||||
Expected
life:
|
4 –
8 years
|
4 –
8 years
|
||||
Expected
volatility:
|
58%
- 112%
|
58%
- 112%
|
Volatility
is a measure of the amount by which the Company's common stock price has
fluctuated (historical volatility) or is expected to fluctuate (expected
volatility).
6. NOTES
RECEIVABLE
The
Company has made advances to certain registered representatives in various
offices. The resulting notes receivable balance at March 31, 2010 and
December 31, 2009 was $1,301,273 and $1,370,984, respectively. Some
of these notes receivable are forgivable based on the employees attaining
certain defined revenue production levels and/or being employed by the Company
on a future date. The Company has provided an allowance of $561,000
on notes receivable as of March 31, 2010 for notes due from terminated
employees.
12
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
7.
INTANGIBLE ASSETS
At March
31, 2010 and December 31, 2009, intangible assets consisted of the
following:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Goodwill
(indefinite useful life)
|
$ | 13,272,165 | $ | 13,272,165 | ||||
Trademarks
(indefinite useful life)
|
$ | 3,282,077 | $ | 3,282,077 | ||||
Customer
List (10 year life)
|
$ | 1,157,266 | $ | 1,157,266 | ||||
Less:
accumulated amortization
|
(395,400 | ) | (366,468 | ) | ||||
Net
Customer list
|
$ | 761,866 | $ | 790,798 |
Amortization
expense for intangible assets totaled $28,932 and $28,931 for the three months
ended March 31, 2010 and 2009, respectively.
The
estimated annual aggregate amortization expense related to amortizable
intangible assets for the five succeeding fiscal years is as
follows:
Year ending
December 31,
|
Amortization
|
|||
2010
|
$ | 115,727 | ||
2011
|
115,727 | |||
2012
|
115,727 | |||
2013
|
115,727 | |||
2014
|
115,727 |
We
performed an impairment test of our intangible assets as of December 31, 2009,
and determined we had no impairment of intangible assets at that
date.
13
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
8. NOTES
PAYABLE
Notes
payable at March 31, 2010 and December 31, 2009, consisted of the
following:
2010
|
2009
|
||||||||
●
|
Convertible
notes payable to investors, interest payable quarterly at an annual rate
of 6.5%. The notes mature March 28, 2012 and are convertible
into common stock at $2.39 per share.
|
$ | 5,757,158 | $ | 5,757,158 | ||||
●
|
Unsecured
note payable to a bank, interest payable monthly at an annual rate of
3.8%, maturing on May 28, 2010. (a)
|
2,100,000 | 2,100,000 | ||||||
●
|
Unsecured
note payable to Legent Clearing LLC, interest at a base annual rate of
prime plus 4.25%, with a maturity of November 3,
2018. Principal and interest repaid at $55,000 per month
(increased to $75,000 per month in January 2010)
|
1,613,385 | 1,697,997 | ||||||
●
|
Convertible
debenture payable to a shareholder, interest at an annual rate of
9%. The note matures February 26, 2014, and is convertible into
common stock at $0.50 per share.
|
2,000,000 | 2,000,000 | ||||||
●
|
Unsecured
notes payable to the stockholders of Jesup & Lamont Holding
Corporation (former parent of JLSC). The notes accrue interest
at an annual rate of 4.0%. Interest is payable annually, and the principal
is payable at maturity on October 1, 2011.
|
1,327,675 | 1,327,675 | ||||||
●
|
Note
payable to bank at an annual rate of LIBOR plus 10% (currently 10.29%) due
on demand with monthly principal payments of $30,000. Converted
from a line of credit as explained in Note 9 below.
|
689,449 | 779,449 | ||||||
●
|
Unsecured
note payable to an investor payable on demand.
|
400,000 | - | ||||||
●
|
Unsecured
note payable to a shareholder with no interest currently charged, due in
April 2011
|
500,000 | 900,000 | ||||||
●
|
Short
term note payable to a shareholder, with interest at an annual rate of 8%,
originally due on April 2, 2009 but extended to December 31, 2009; has
since become payable on demand
|
850,000 | 850,000 | ||||||
●
|
Unsecured
note payable, interest is payable quarterly at an annual rate of 10%, with
a maturity of June 7, 2010. (a)
|
265,000 | 265,000 | ||||||
●
|
Unsecured
note payable to a shareholder, principal and interest at an annual rate of
15%, due at maturity date of January 16, 2009; has since become payable on
demand.
|
275,000 | 400,000 | ||||||
●
|
Subordinated
note payable to EFH Partners, a shareholder, with interest at an annual
rate of 20%, originally payable at maturity on February 17,
2007. The note was extended to April 1, 2009 at a 4% annual
interest rate and then modified to become due on demand and is
subordinated to notes payable to banks.
|
222,500 | 222,500 | ||||||
●
|
Unsecured
note payable which accrues interest at an annual rate of
5%. Principal and interest payable on demand.
|
66,534 | 66,534 | ||||||
●
|
Unsecured
operating notes payable to various vendors at prevailing market
rates. Due dates range from 2010 to
2013
|
77,112 | 81,017 | ||||||
Total principal payable | 16,143,813 | 16,447,330 | |||||||
Less:
unamortized discount on note to stockholders of Jesup & Lamont Holding
Corporation
|
(99,528 | ) | (115,239 | ) | |||||
Total notes payable net of discount | $ | 16,044,285 | $ | 16,332,091 |
14
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(a) the
Company is in discussion with holders of these notes to extend the maturity date
of them.
The
annual maturities of principal on the notes payable are as follows:
Year ending December 31
|
Principal
|
Interest
|
||||||
2010
(remainder)
|
$ | 3,527,315 | $ | 812,668 | ||||
2011
|
3,408,268 | 681,382 | ||||||
2012
|
7,195,792 | 274,717 | ||||||
2013
|
12,437 | 180,000 | ||||||
2014
|
2,000,000
|
210,000 | ||||||
Thereafter
|
- | - | ||||||
Total
|
$ | 16,143,812 | $ | 2,158,767 |
Interest
on these notes totaled $333,430 and $221,018 for the three months ended March
31, 2010 and 2009, respectively.
9. NOTE
PAYABLE TO BANK
On
January 31, 2007, the Company obtained a $2 million credit line from Fifth Third
Bank. Under the credit line agreement, we pledged 100% of EFG's and
JLSC's stock as collateral. At December 31, 2007, the Company had
drawn $1,999,450 of the line. The line expired on February 1, 2008
and was converted to a note payable due January 31, 2009 and then extended to
April 2, 2009. The note was further extended and converted to a
demand note on July 2, 2009. Principal is payable at $30,000 per
month and the balance due at March 31, 2010 is $689,449, See
Note 8. All prior requirements of the original note still exist and
100% of JLSC’s stock is pledged as collateral. Should this note be
called for payment and the Company is not able to obtain an extension or
alternative financing, it could impair the Company’s liquidity and force it to
reduce or curtail operations.
15
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
10.
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
At March
31, 2010 and December 31, 2009, accounts payable, accrued expenses and other
liabilities consisted of the following:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Trade
accounts payable
|
$ | 1,596,433 | $ | 1,311,874 | ||||
Accrued
payroll
|
2,586,224 | 2,088,489 | ||||||
Payroll
taxes payable
|
2,998,567 | 2,287,834 | ||||||
Arbitration
settlements accrual
|
592,712 | 635,517 | ||||||
Accrued
legal
|
243,124 | 233,124 | ||||||
Accrued
interest on notes payable
|
682,666 | 647,728 | ||||||
Other
accrued expenses and liabilities
|
1,297,557 | 1,381,100 | ||||||
TOTAL
|
$ | 9,997,283 | $ | 8,585,666 |
11. DUE
TO CLEARING ORGANIZATIONS
At March
31, 2010 the balance due to clearing organizations includes $1,300,520 owed to
EFG's former clearing firm under a promissory note with the clearing
firm. A total of $500,000 of this amount represents a fee charged by
the clearing firm to enter into the promissory note agreement. This
promissory note memorialized our previous agreement with the clearing firm which
precludes them from collecting this note from EFG. The note bears
interest at the Broker's Call Rate plus 2.45%. The note may be paid at anytime
but has no defined maturity. The note is personally guaranteed the
Company’s Chairman and President. The note is also collateralized by
warrants held by the Company and by all of the share ownership currently held by
EFH Partners, Inc.
12.
EQUITY MARKET MAKING TRADING REVENUES, NET
Trading
revenues, net includes equity market making revenues which consist of net
realized and net unrealized gains and losses on securities traded for the
Company's own account. Trading revenues, net are generated from the
difference between the price paid to buy securities and the amount received from
the sale of securities. Volatility of stock prices, which can result
in significant price fluctuations in short periods of time, may result in
trading gains or losses. Gains or losses are recorded on a trade date
basis. Trading revenues, net consisted of the following.
Three Months Ended March
31,
|
||||||||
2010
|
2009
|
|||||||
Net
realized gains and losses
|
$ | 829,893 | $ | 389,078 | ||||
Unrealized
gain/(loss)
|
(3,328 | ) | (5,697 | ) | ||||
Trading
income, net
|
$ | 826,565 | $ | 383,381 |
16
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
13.
INVESTMENT BANKING INCOME
Investment
banking income consists of cash fees and warrants or other securities received
as payment for our investment banking services. The Black-Scholes
valuation model is used to estimate the fair value of the warrants
received. The assumptions for the Black-Scholes valuations are as
follows.
2010
|
2009
|
|||||
Risk
free interest rate:
|
0.2
to 2.7%
|
0.2
to 2.7%
|
||||
Volatility:
|
66%
-785%
|
66%
-785%
|
||||
Dividend
rate:
|
None
|
None
|
||||
Expected
life:
|
1 –
5 years
|
1 –
5 years
|
The
volatility of stock prices underlying these warrants can result in significant
price fluctuations in short periods of time. These fluctuations in
the value of the warrants results in warrant gains or
losses. Investment banking revenues consisted of the
following:
Three
months ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Investment
banking fees
|
$ | 1,156,371 | $ | 413,910 | ||||
Gains/(Loss)
from warrants
|
(295,087 | ) | 168,431 | |||||
$ | 861,284 | $ | 582,341 | |||||
Gain
and loss:
|
||||||||
Realized
gains
|
$ | 9,076 | $ | - | ||||
Unrealized
Gain/(loss)
|
(304,163 | ) | 168,431 | |||||
Net
Gain/(loss)
|
$ | (295,087 | ) | $ | 168,431 |
17
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
14. EARNINGS
(LOSS) PER SHARE
The
calculation of net income (loss) per share is as follows:
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Numerator
for loss per share:
|
||||||||
Net
loss
|
$ | (3,749,113 | ) | $ | (2,927,665 | ) | ||
Preferred
stock dividends
|
(73,400 | ) | (91,483 | ) | ||||
Net
loss attributable to common stockholders
|
$ | (3,822,513 | ) | $ | (3,019,148 | ) | ||
Denominator
for loss per share:
|
||||||||
Basic
and diluted weighted-average shares:
|
39,158,433 | 28,933,076 | ||||||
Basic
and diluted loss per share:
|
||||||||
Basic
loss per share
|
$ | (0.10 | ) | $ | (0.10 | ) | ||
Diluted
loss per share
|
$ | (0.10 | ) | $ | (0.10 | ) |
The
Company’s net loss attributable to common stockholders, along with the dilutive
effect of potentially issuable common stock due to outstanding options,
warrants, and convertible securities causes the normal computation of diluted
loss per share to be smaller than the basic loss per share; thereby yielding a
result that is counterintuitive. Consequently, the diluted loss per
share amount presented does not differ from basic loss per share due to this
“anti-dilutive” effect.
At March
31, 2010 and 2009, the Company had potentially dilutive common shares
attributable to the following:
As
of March 31,
|
||||||||
2010
|
2009
|
|||||||
9,450,775 | 7,024,242 | |||||||
Stock
options
|
1,979,022 | 3,421,522 | ||||||
Convertible
preferred stock Series F and G
|
2,937,193 | 3,615,987 | ||||||
Convertible
notes
|
6,408,840 | 6,597,124 | ||||||
Warrants
subscribed
|
2,395,045 | 1,998,272 | ||||||
23,170,875 | 22,657,147 |
15.
EQUITY
During
the three months ended March 31, 2010 the Company received and recorded stock
subscriptions totaling $1,616,000 for stock offerings to be completed during the
second quarter of 2010. There were no shares issued related to
subscriptions during the quarter ended March 31, 2010.
18
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
The table
below outlines the conversion price of all outstanding convertible preferred
stock issues:
Convertible Issues
|
Outstanding
Shares
|
Preferred
Dividend
Rate
|
Convertible
to Common
Shares
|
Conversion
Price
|
||||||||||||
Series
F participating, cumulative convertible preferred stock, 877,000 shares
authorized, liquidation preference at the $3.25 per share stated
value.
|
696,913 | 4.0 | % | 696,913 | $ | 3.25 | ||||||||||
Series
G participating, cumulative convertible preferred stock, 4000 shares
authorized, liquidation preference at the $1,000 per share stated
value.
|
1,524 | 10.0 | % | 2,240,280 | $ | 0.68 | ||||||||||
Totals
|
698,437 | 2,937,193 |
16. STOCK
OPTIONS
The
Company currently has two stock option plans in effect, the Amended and Restated
2000 Incentive Compensation Plan and the 2007 Incentive Compensation Plan
(collectively the "Plans"). The Plans are designed to serve as
incentives for retaining directors, key employees, and other outside advisors or
consultants. Stock options, stock appreciation rights and restricted
stock options may be granted to certain persons in proportion to their
contributions to the overall success of the Company as determined by the Board
of Directors.
Of the
stock options outstanding at March 31, 2010, 730,000 vested immediately upon
grant, 566,522 vests over a two year period from the date of grant, and 693,000
vests over a three year period from the date of grant. At December
31, 2009 there were 957,500 stock options that were offered to employees but not
approved and granted by the Company’s Board of Directors.
The
Company did not grant any options during the first quarter ended March 31, 2010
and during the year ended December 31, 2009.
17.
EMPLOYEE BENEFIT PLANS
The
Company has a savings plan (the "Plan"), provided to our employees, that
qualifies as a deferred salary arrangement under Section 401(d) of the Internal
Revenue Code of 1986. To participate in the Plan, an employee of the
Company must have at least three months of full time service with the Company
and be at least 18 years old. The amount of salary deferral during
any year for a Plan participant cannot exceed the dollar limit imposed by
applicable federal law. The Plan also provides that the Company may
match employee contributions to the Plan. The Company did not make
any contributions to the Plan during the quarter ended march 31,
2010.
19
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
The
Company has a second Plan which is provided to the employees of
JLSC. The JLSC 401(k) retirement plan conforms to and qualifies under
articles 401 and 501 of the Internal Revenue Code of 1986. Employees
are able to elect to reduce their salary by a specific percentage or dollar
amount and have that amount contributed on a pre-tax basis as a salary
deferral. Employees are eligible to participate as of date of hire
but must wait for "entry" until the first day of the next Plan year quarter
after eligibility. The amount of salary deferral during any year for
a Plan Participant cannot exceed the dollar limit imposed by applicable federal
law. The Plan also provides that JLSC may match employee
contributions to the plan. JLSC has not made any contributions to the Plan since
its acquisition by the Company.
18.
INCOME TAXES
The
current loss for the three months ended March 31, 2010 results in an increase in
the Company’s net operating loss carryforward and causes the net deferred tax
assets to increase by $1,444,000 to $15,894,000 at March 31, 2010 from
$14,450,000 at December 31, 2009. Management increased the valuation
allowance to $13,777,000 or a net of $2,117,000, resulting in no deferred taxes
for the three months ended March 31, 2010.
The
Company has net operating loss carry forwards for federal tax purposes of
approximately $38,600,000 which expire in years 2022 through
2030. The amount deductible per year is limited to $576,000 on
carryforward losses of approximately $4.4 million and unlimited on the remaining
carryforward losses under current tax regulations.
19.
COMMITMENTS AND CONTINGENCIES
Lease
Commitments
The
Company and its subsidiaries lease branch offices and office equipment under
operating lease agreements. Lease expense totaled $900,011 and $462,787 for the
three months ended March 31, 2010 and 2009, respectively.
Regulatory
and Legal Matters
A former
employee has filed a claim against the Company in the amount of $5 million
alleging employee discrimination. The Company intends to defend this
claim vigorously and in the opinion of management, based on its discussions with
legal counsel, the outcome of this claim will not result in a material adverse
affect on the financial position or results of operations of the Company or its
subsidiaries.
On
November 12, 2008, EFG received notice from FINRA that an arbitration award had
been awarded against EFG for $772,000 plus costs and fees of approximately
$80,000. On December 31, 2008, EKN and EFG entered into a settlement
agreement which addressed the payment and satisfaction of the
award. EFG and EKN agreed that the terms of that settlement would
remain confidential. Such settlement agreement was amended in March
2010 for $500,000.
20
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
Customer
Complaints and Arbitration
The
Company's subsidiaries' business involves substantial risks of liability,
including exposure to liability under federal and state securities laws in
connection with the underwriting or distribution of securities and claims by
dissatisfied clients for fraud, unauthorized trading, churning, mismanagement
and breach of fiduciary duty. In recent years there has been an
increasing incidence of litigation involving the securities industry, including
class actions which generally seek rescission and substantial
damages. In the ordinary course of business, the Company operating
through its subsidiaries and its principals are, and may become a party to
additional legal or regulatory proceedings or arbitrations. Except as
discussed below, the Company is not currently involved in any additional legal
or regulatory proceeding or arbitrations, the outcome of which is expected to
have a material adverse impact on the Company's business.
Legal
Proceedings
Empire
Financial Group, Inc. vs Penson Financial Services, Inc.
On
January 15, 2009, the Company announced that EFG had filed a $25 million
arbitration claim against one of its clearing brokers, Penson Financial
Services, Inc., a NASDAQ listed company, its CEO, Phil Pendergraft, its
President, Daniel Son and its Chairman, Roger Engemoen. Empire’s
causes of action include extortion, civil theft, conspiracy, tortuous
interference with contractual relationships and aiding and abetting breach of
fiduciary duty. The claims relate to the assistance Penson provided
in connection with a fraud perpetrated upon Empire, Penson’s collusion with a
“raid” of Empire’s global execution services business, and Penson’s
inappropriate demands for payments in connection with EFG’s closure by FINRA in
April 2008. Penson has filed various counterclaims seeking damages,
collections, etc.
Empire
further alleges that Penson sought to profit by making false statements to
FINRA, Empire’s primary regulator, in the interest of closing the
firm. Thereafter, Penson demanded payments of over $1 million before
Empire could reopen. Penson has also seized a $1.6 million clearing
deposit of Empire’s as well as commission revenue. As a result of these acts,
the brokerage firm has sustained significant harm. EFG has sued to
recover the clearing deposit.
Jesup
& Lamont Securities Corp. vs Penson Financial Services, Inc.
On
February 12, 2009 the Company filed a $500,000 claim against Penson Financial
Services, Inc. seeking temporary restraining order against use of JLSC clearing
deposit and return of such funds.
20. OFF
BALANCE SHEET RISKS
Clearing
Arrangements.
The
Company does not carry accounts for customers or perform custodial functions
related to customers' securities. The Company introduces all of its
customer transactions to its clearing brokers, who maintain the customers'
accounts and clear/settle such transactions. Additionally, the
clearing brokers provide the clearing and depository operations for the
Company’s market making and proprietary securities
transactions. These activities may expose the Company to
off-balance-sheet risk in the event that customers do not fulfill their
obligations with the primary clearing brokers, as the Company has agreed to
indemnify its clearing brokers for any resulting losses. The Company
continually assesses risk associated with each customer who is on margin credit
and evaluates the recognition of an estimated loss when the collection from the
customer is doubtful.
21
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
Customer
Claims, Litigation and Regulatory Matters.
In the
normal course of business, the Company has been and continues to be the subject
of civil actions and arbitrations arising out of customer complaints relating to
normal business activities of its subsidiaries, or as an employer resulting from
operational business activities.
The
Company has sold securities which it does not currently own and therefore will
be obligated to purchase the securities at a future date. The Company
has recorded these obligations in the financial statements at March 31, 2010 and
December 31, 2009 at the market values of the securities and may incur a loss if
the market value increases subsequent to March 31, 2010 or December 31, 2009,
respectively. The occurrence of any off-balance sheet losses could
impair the Company’s liquidity and force it to dramatically alter or curtail
operations.
21.
|
CONCENTRATION
OF CREDIT RISKS
|
The
Company is engaged in various trading, market making and brokerage activities in
which counterparties primarily include broker-dealers, banks and other financial
institutions. In the event counterparties do no fulfill their
obligations, the Company may be exposed to risk. The risk of default
depends on the creditworthiness of the counterparty or issuer of the
instrument. It is the Company’s policy to review, as necessary, the
credit standing of each counter party.
The
Company’s cash in bank accounts, at times, may exceed the Federal Deposit
Insurance Corporation ("FDIC") insurable limit of $250,000. The
Company has not experienced any previous losses due to this
condition.
22.
|
NET
CAPITAL REQUIREMENTS AND VIOLATIONS OF BROKER DEALER
SUBSIDIARIES
|
Currently,
the Company’s operating broker-dealer subsidiary, JLSC, is subject to the
requirements of the Net Capital Rule of the Securities Exchange Act of 1934,
which requires the maintenance of minimum net capital, JLSC has elected to
calculate its minimum net capital requirements under the alternative method
(fixed amount of $250,000), therefore it is exempt from the requirement that the
ratio of aggregate indebtedness to net capital, both as defined, does not exceed
15 to 1. Net capital, as defined, may fluctuate on a daily
basis.
In
November, 2008, EFG was out of compliance with the above Net Capital Rule and,
accordingly, EFG immediately ceased conducting a securities business, other than
liquidating transactions. EFG’s out of compliance condition was
caused by an arbitration award against it for $772,000 plus related costs and
fees of approximately $100,000. In March 2009 EFG filed a Broker
Dealer withdrawal with FINRA.
22
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
At March
31, 2010, JLSC had net capital of $771,652, which was $521,652 in excess of the
minimum net capital requirement. JLSC’s ratio of aggregate
indebtedness to net capital was 2.24 to 1 as of March 31, 2010. JLSC
is exempt from Rule 15c3-3 because all customer transactions are cleared through
other broker-dealers on a fully-disclosed basis.
23.
|
LIQUIDITY
MATTERS/GOING CONCERN
CONSIDERATIONS
|
The
Company incurred losses and negative cash flows from operations for the quarter
ended March 31, 2010 and year ended December 31, 2009. The results of
the Company’s operations have been adversely impacted due to the general
downturn of the market and economic conditions, the start-up of fixed income
activities; the costs of rebuilding a retail branch network and the costs of
enhancing the Company’s equity research capabilities.
The
Company’s plan for future operations has several different
aspects. The Company has reduced its overhead costs by combining
tasks which helped eliminate positions, restructured various contracts with
vendors to lower general and administrative expenses and reworked compensation
arrangements to improve profit margins. In addition, the Company has taken and
will continue to take steps to increase revenues as outlined below:
|
·
|
Increase
the Company’s trading revenue by adding additional stocks in which we make
a market;
|
|
·
|
Expand
the Company’s trading capabilities by establishing fixed income trading
desks that serve both institutional and retail
clients;
|
|
·
|
Expand
the Company’s institutional trading activities by continuing to add
quality trading personnel with existing institutional
clients;
|
|
·
|
Continue
to recruit quality registered
representatives;
|
|
·
|
Expand
the Company’s offering of proprietary financial products to its retail and
institutional customers;
|
|
·
|
Continue
to look for and close acquisitions of similar
businesses.
|
In
addition, the Company plans to raise additional capital through either equity or
debt offerings. In the quarter ended March 31, 2010 and year ended December 31,
2009 the Company was able to raise approximately $1.6 million and $9 million,
respectively through equity offerings. In connection with its
proposed merger, the Company intends to raise additional equity capital, which
it believes will protect itself against any further negative
consequences.
If the
Company’s plans change, or its assumptions change or prove to be inaccurate, or
if available cash otherwise proves to be insufficient to implement its business
plans, the Company may require additional equity or debt
financing. Given the uncertain economic environment and the pressure
that the financial sector has been under, the Company cannot predict whether
additional funds will be available in adequate amounts. If funds are
needed but not available, the Company’s business may need to be altered or
curtailed.
23
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
24.
|
SUBSEQUENT
EVENTS
|
The
following are material subsequent events reflected in the accompanying financial
statements.
During
April 2010 the Company received adverse decisions in two legal/arbitration
matters which caused the Company to recognize approximately $210,000 of
additional expenses. The Company had accrued $100,000 for one of the
matters that had been previously settled but where the Company violated the
settlement agreement and, as a consequence, the claimant was able to obtain a
default judgment for approximately $260,000 which the Company fully paid in May
2010. The other matter was an arbitration award based upon the
Company’s failure to respond to a request for information from
FINRA. As a result FINRA sanctioned the Company and the Claimant was
awarded damages of $60,000. The Company is attempting to vacate such
award but has recorded the liability pending the outcome of this
matter.
During
April 2010, the Company issued 5,075,000 stock options to employees which were
approved by the Board of Directors.
During
May 2010 the Company received approval from the NYSE Amex to issue approximately
9.3 million shares related to the capital subscriptions on the Company’s books
as of March 31, 2010. The Company is in the process of getting those
shares issued through its transfer agent.
24
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF
OPERATIONS
|
The
following discussion of our financial condition and results of operations should
be read in conjunction with the Selected Consolidated Financial Data and the
Consolidated Financial Statements and Notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2009, as previously filed
with the Securities and Exchange Commission (the “SEC”). Our significant
accounting policies are disclosed in the Notes to Consolidated Financial
Statements found in our Annual Report on Form 10-K for the year ended December
31, 2009.
This
Form 10-Q contains statements about future events and expectations which are
"forward looking statements". Any statement in this Form 10-Q that is not a
statement of historical fact may be deemed to be a forward looking statement.
Forward-looking statements represent our judgment about the future and are not
based on historical facts. These statements include: forecasts for growth in the
number of customers using our service, statements regarding our anticipated
revenue, expense levels, liquidity and capital resources and other statements
including statements containing such words as "may," "will," "expect,"
"believe," "anticipate," "intend," "could," "estimate," "continue" or "plan" and
similar expressions or variations. These statements reflect the current risks,
uncertainties and assumptions related to various factors including, without
limitation, fluctuations in market prices, competition, changes in securities
regulations or other applicable governmental regulations, technological changes,
management disagreements and other factors described under the heading "Factors
affecting our operating results, business prospects, and market price of stock"
contained in our Annual Report on Form 10-K for the year ended December 31,
2009, as previously filed with the SEC. Based upon changing conditions, should
any one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may vary materially from
those described in this report as anticipated, believed, estimated or intended.
We undertake no obligation to update, and we do not have a policy of updating or
revising, these forward-looking statements. Except where the context otherwise
requires, the terms “JLI,” "we," "us," or "our" refer to the business of Jesup
& Lamont, Inc. and its wholly-owned subsidiaries.
COMPANY
OVERVIEW
We were
incorporated in Florida in February 2000. Our business is conducted through our
wholly owned subsidiary, Jesup & Lamont Securities Corporation (JLSC). In
2010, the Company is transitioning its investment advisory and asset management
services to Empire Investment Advisors (EIA) which will be doing business as
Jesup & Lamont Advisors.
Empire
Financial Group, Inc. (EFG) was founded in 1992 and acquired by Jesup &
Lamont Inc. (JLI) (formerly known as Empire Financial Holding Company) in 2000.
On November 12, 2008, EFG was out of compliance with the SEC's Net Capital Rule
15c3-1 and, accordingly, ceased conducting a securities business, other than
liquidating transactions, while remaining out of compliance with this rule.
EFG's out of compliance condition was caused by an arbitration award against it
for $772,000 plus costs and fees of approximately $100,000, notice of which was
received by EFG on November 12, 2008. On November 10, 2006, effective
as of November 1, 2006, we acquired Jesup & Lamont Securities Corporation.
Effective January 2, 2008, we changed the name of Empire Financial Holding
Company to Jesup & Lamont, Inc., accordingly, the following discussion and
analysis of our financial condition and results of operations is based on the
combined results of these businesses.
25
JLSC is
our financial brokerage services subsidiary providing brokerage services to full
service retail and institutional customers. We provide employees and independent
registered representatives and advisors back office, clearance, compliance,
accounting and administrative services. We provide retail customers access to
useful financial products and services through our website, and by telephone and
electronic systems. Our customers may, upon request, also receive advice from
our brokers regarding equities, fixed income products, mutual funds and fixed
and variable insurance products. We also provide securities execution and market
making services to both institutional and retail customers. Execution
services involve buying or selling securities and providing such filled orders
to purchase or sell securities received from unaffiliated broker dealers on
behalf of their retail customers. We typically act as riskless principal in
these transactions and derive our net trading revenues from the difference
between the price paid when a security is bought and the price received when
that security is sold. Market price fluctuations could result in
reduced revenues or trading losses which could adversely affect the Company’s
profitability.
The
Company’s equity market making activities involves the purchase or sale of
securities acting as a principal to the transaction instead of buying and
selling securities as an agent or riskless principal for its
customers.
Additionally
we offer fee-based investment advisory services to our retail customers, and
independent registered investment advisors. These services are web-based and are
delivered through a platform that combines a variety of independent third party
providers.
Services
include access to separate account money managers, managed mutual fund
portfolios, asset allocation tools, separate account manager and mutual fund
research, due diligence and quarterly performance reviews. We charge the
customer an all-inclusive fee for these services, which is based on the
customer’s assets under management. As of December 31, 2009, we earned fees of
approximately $1.0 million based upon a monthly average of $240 million of
assets under management.
RESULTS
OF OPERATIONS:
The three
months ended March 31, 2010 were a continuation of 2009. The Company
has emphasized revenue growth and strategic diversification from retail
brokerage and market making to include institutional equities and fixed
income. The Company’s relationship with a new clearing firm in early
2009 has given our institutional fixed income and equities activities that were
commenced in 2008 and 2009, respectively, capability to grow and mature into
profitable activities. During the first three months of 2010 the
Company’s revenues, excluding revenues earned related to investment banking, hit
a three year high of $9.4 million. The Company continues to brand and
build its activities as offering a full line of services to retail and
institutional clients. As the US stock markets have recovered off of
their 2009 lows, the economy continues to be driven by the United States
government introducing healthcare reform and encouraging financial service
companies to begin lending to consumers while beginning to influence
compensation at major banks in the financial services industry.
26
As larger
financial service firms have recovered from their stock price lows and have
repaid the US government, they have begun to hire and retain top tier revenue
producing personnel. Consequently in the three months ended March 31,
2010 the Company hired less than 20 retail revenue producers because the
competition for talent is increasing. On the institutional activities
the Company hired several revenue producers who focused on international fixed
income and had relationships with larger size asset management firms that value
research ideas. The Company’s transition from a year ago of hiring
new registered representatives as employees versus independent contractors for
its retail network is complete. The Company continues to struggle
with controlling its compensation as a percentage of revenue. In an
effort to avoid providing for large up-front advance payments, the Company has
continued to offer above market pay-out rates in the retail
network. During the three months ended March 31, 2010 the Company has
focused on providing strategic coverage in research and accordingly reduced its
industry coverage and sector coverage by downsizing its research
personnel.
Total
revenues for the three months ended March 31, 2010 increased $3,774,967 or 58%,
to $10,282,086 from $6,507,119 for the three months ended March 31,
2009.
Three Months Ended March 31,
|
%
|
|||||||||||||||
2010
|
2009
|
Difference
|
Change
|
|||||||||||||
Revenues
|
$ | 10,282,086 | $ | 6,507,119 | $ | 3,774,967 | 58 | % | ||||||||
Less:
Independent Contractors
|
$ | (2,286,189 | ) | $ | (1,179,174 | ) | $ | (1,107,015 | ) | 94 | % | |||||
Less:
Independent Sales Group
|
$ | - | $ | (510,264 | ) | $ | 510,264 | -100 | % | |||||||
Revenues,
net
|
$ | 7,995,897 | $ | 4,817,681 | $ | 3,178,216 | 66 | % |
The
Company’s revenue growth, net of independent contractors and sales groups was
$3.2 million or 66%. The breakdown of the mix of 2010 revenues
between business lines is more balanced then a year ago with no one product area
contributing more than 50% of the revenues.
Operating
expenses for the three months ended March 31, 2010 and 2009 were $13,584.179 and
$9,198,355, respectively, an increase of $4,385,824 or 47%. The
details are described in more detail below:
Commissions,
clearing and execution costs for the three months ended March 31, 2010 increased
$1,024,206, or approximately 44%, to $3,328,787 from $2,304,581 for the same
period in 2009. The following table compares these costs for 2010 and 2009,
removing the payments to independent contractors and independent sales
groups:
Three Months Ended March 31,
|
%
|
|||||||||||||||
2010
|
2009
|
Difference
|
Change
|
|||||||||||||
Commissions,
clearing and execution costs
|
$ | 3,328,787 | $ | 2,304,581 | $ | (1,024,206 | ) | -44 | % | |||||||
Less:
Independent Contractors
|
$ | (1,692,881 | ) | $ | (847,745 | ) | $ | 845,136 | -100 | % | ||||||
Less:
Independent Sales Group
|
$ | - | $ | (481,792 | ) | $ | (481,792 | ) | 100 | % | ||||||
Commissions,
clearing and execution costs, net
|
$ | 1,635,906 | $ | 975,044 | $ | (660,862 | ) | -68 | % |
The
remaining commissions, clearing and execution costs have increased by $0.6
million or 68% versus prior year. Such increase is in line with the
revenue increase for the three months ended March 31, 2010.
27
Employee
compensation and benefits for the three months ended March 31, 2010 and 2009
were $7,123,415 and $4,959,831, respectively. Such increase is due to
higher revenues from a year ago which led to increased commissions being
incurred and a marginal increase in the number of support personnel that receive
salaries.
Three Months Ended March 31,
|
%
|
|||||||||||||||
2010
|
2009
|
Difference
|
Change
|
|||||||||||||
Salaries
and wages
|
$ | 2,135,234 | $ | 2,017,522 | $ | (117,712 | ) | -6 | % | |||||||
Employee
commissions
|
4,440,775 | 2,725,556 | $ | (1,715,219 | ) | -63 | % | |||||||||
Employee
benefits
|
547,406 | 216,753 | $ | (330,653 | ) | -153 | % | |||||||||
Total
|
$ | 7,123,415 | $ | 4,959,831 | $ | (2,163,584 | ) | -44 | % | |||||||
Employee
count
|
200 | 164 |
General
and administrative and communication and data processing expenses increased
$1,198,034 or approximately 62%, to $3,131,977 from $1,933,943 for the three
months ended March 31, 2009. This increase was primarily due to legal and
professional costs incurred and, to a lesser extent, to the increased number of
offices from a year ago, most notably, Boca Raton, Ft. Lauderdale, Hoboken,
Stamford, and Beverly Hills. The base rent cost of these offices is
approximately $108,000 for the quarter ended March 31, 2010. In
addition during the quarter ended March 31, 2010 the Company incurred
arbitration awards of approximately $200,000 and legal costs in its on-going
matters of $280,000. The Company also has incurred other professional
fees for the quarter of $300,000 relating to new businesses that the Company
entered into in the later part of 2009 (options), consultants working with
management in improvement of processes and documentation of such processes and
external advisor costs which were higher than a year ago. As a
percentage of total expenses, general and administrative expenses were 23% and
21% for the three months ended March 31, 2010 and 2009,
respectively.
Other
income (expenses) was ($447,020) for the three months March 31, 2010 as compared
to ($236,429) for the three months ended March 31, 2009 an increase in net
expense of ($210,591) or 89%. The principal reasons for the increase
in net expense is due to increased borrowing costs on the Company’s increasing
debt level and the costs of closing offices in Edison, New Jersey, Wilmington,
Delaware and Uniondale, New York.
For the
three months ended March 31, 2010, we reported a net loss applicable to common
stockholders of $3,822,513, or $0.10 per basic and diluted share, as compared to
a net loss applicable to common stockholders of $3,019,148, or $0.10 per basic
and diluted share for the three months ended March 31, 2009.
LIQUIDITY
AND CAPITAL RESOURCES
Our
principal sources of cash have been from new financings consisting of private
placements of stock, and debt offerings. Our historical use of funds
has been for operations, and payment of debt. As of March 31, 2010,
we had $30,639,724 in total assets, of which, $6,177,410 or approximately 20%
consisted of cash or assets readily convertible into cash, securities owned and
receivables from clearing brokers, which include interest bearing cash balances
held with our clearing organization. At March 31, 2010, we had liabilities due
within one year totaling $15,267,838.
28
Operating
Activities
Net cash
used in operations for the three months ended March 31, 2010 was $1,239,506 as
opposed to net cash used in operations for the same period in 2009 of
$3,425,457. The loss from operations accounted for most of the
operating cash used. Other significant items that reduced the
loss from operations was an increase in accounts payable, accrued expenses and
other liabilities of $1,455,442, and a decrease in deposits at clearing
organizations of $540,716.
Investing
Activities
Cash used
in investing activities for the three months ended March 31, 2010 was $77,756.
We invested $49,264 to purchase furniture and equipment, and invested $63,000 in
the form of notes receivable from registered sales representatives while having
$34,508 of the notes receivables to registered representatives have been
repaid.
Financing
Activities
Cash
provided by financing activities for the three months ended March 31, 2010 was
$1,312,484. We raised $1,616,000 and $400,000 from the sale of common stock
subscriptions and new loans, respectively, and made payments of $703,516 against
notes payable.
Prospective
Liquidity Requirements
The focus
of management is to increase our profitability by focusing on more profitable
business activities while exiting activities that are marginal. We
also focus on continued expense reductions to better align our expenses with our
revenue and new business model. We continue to review and where
prudent reduce our overhead costs by combining tasks which help provide economy
of scale, where possible restructure contracts with vendors to reduce general
and administrative expense as a percentage of revenues and modify compensation
to registered representatives to improve profit margin in our retail
unit. In addition to reducing costs we have taken several steps to
increase revenue as outlined below:
|
·
|
Increase
our trading revenue by adding additional stocks in which we make a
market;
|
|
·
|
Expand
our trading capabilities by establishing fixed income trading desks that
serve both institutional and retail
clients;
|
|
·
|
Expand
our institutional trading activities by continuing to add quality trading
personnel with existing institutional
clients;
|
|
·
|
Continue
to recruit quality registered
representatives;
|
|
·
|
Expand
our offering of proprietary financial products to our retail and
institutional customers;
|
|
·
|
Continue
to look for and close acquisitions of similar
businesses.
|
As a
result of the above, we believe the historical operating losses may continue in
the near term but will not continue in the long term, whereby our equity and
debt financings to provide operating cash would be reduced.
Our plans
also include raising additional cash from equity offerings for operations as
well as to pay off substantial amounts of our liabilities. Raising
additional capital will also allow us to increase our broker dealer’s net
regulatory capital which we believe will lead to attracting larger scale
customers that provide greater margins to our business. During the three months
ended March 31, 2010, we raised a total of $1,616,000 and $400,000 from equity
and debt financings, respectively. We cannot predict whether
additional funds will be available in adequate amounts or on acceptable terms in
the future.
29
The
Company has reached an agreement-in-principle for a
combination transaction with Tri-Artisan Capital
Partners, LLC, a New York based merchant bank engaged primarily in private
equity investment and mergers and acquisitions advisory services for corporate,
private equity sponsor and institutional investor clients. The transaction is
subject to negotiation and execution of definitive agreements, Board and
shareholder approvals of Jesup & Lamont and unitholder approvals of Tri-Artisan, and
required regulatory approvals. The transaction also contemplates, as a condition
of closing, completion of an equity capital raise to fund the combined company’s
growth plan. Board of Directors and management positions will be equally shared
in the combined firm, with Steve Rabinovici serving as Jesup Lamont TriArtisan’s
Chairman, and Alan Weichselbaum and Gerald H. Cromack as Co-Chief Executive
Officers of the combined firm. The combined firm will, upon closing
of the transaction, be renamed and do business as Jesup Lamont TriArtisan, Inc.
The transaction is anticipated to close in the third quarter of
2010.
If our
plans change, or our assumptions change or prove to be inaccurate, or if our
available cash otherwise proves to be insufficient to implement our business
plans, we may require additional financing through subsequent equity or debt
financings. If funds are needed but not available, our business would be
impaired and we could be forced to reduce or curtail operations.
MARKET
RISK
Market
risk generally represents the risk of loss that may result from the potential
change in the value of a financial instrument as a result of fluctuations in
interest and currency exchange rates, equity and commodity prices, changes in
the implied volatility of interest rates, foreign exchange rates, equity and
commodity prices and also changes in the credit ratings of either the issuer or
its related country of origin. Market risk is inherent to both derivative and
non-derivative financial instruments, and accordingly, the scope of our market
risk management procedures extends beyond derivatives to include all market risk
sensitive financial instruments.
We have
sold securities which we do not currently own and therefore will be obligated to
purchase the securities at a future date. We have recorded these obligations in
our financial statements at March 31, 2010 at the market value of the securities
and will incur a loss if the market value increases subsequent to March 31,
2010. The occurrence of these off-balance sheet losses could impair our
liquidity and force us to reduce or curtail operations.
We are
engaged in various trading and brokerage activities in which counterparties
primarily include broker-dealers, banks and other financial institutions. In the
event counterparties do no fulfill their obligations, we may be exposed to risk.
The risk of default depends on the creditworthiness of the counterparty or
issuer of the instrument. It is our policy to review, as necessary, the credit
standing of each counter party. We have performed a company wide analysis of our
financial instruments and assessed the related risk. Based on this analysis, we
believe the market risk associated with our financial instruments at March 31,
2010 will not have a material adverse effect on our consolidated financial
position or results of operations.
30
CRITICAL
ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements which have been prepared in
conformity with accounting principles generally accepted in the United States of
America. Because we operate in the financial services industry, we follow
certain accounting guidance used by the brokerage industry. Our consolidated
balance sheet is not separated into current and non-current assets and
liabilities. Certain financial assets, such as trading securities are carried at
fair market value on our consolidated statements of financial condition while
other assets are carried at historic values. See Note 1 to the
Condensed Consolidated Financial Statements for a summary of our significant
accounting policies.
For
further information regarding the accounting policies that we believe to be
critical accounting policies and that affect our more significant judgments and
estimates used in preparing our interim Condensed Consolidated Financial
Statements see our December 31, 2009 Annual Report on Form
10-K.
ACCOUNTING
FOR CONTINGENCIES
We accrue
for contingencies, based on events that have occurred, when it is probable that
a liability has been incurred and the amount can be reasonably estimated.
Contingencies by their nature relate to uncertainties that require our exercise
of judgment both in assessing whether or not a liability or loss has been
incurred and estimating the amount of loss.
USE OF
ESTIMATES
Note 2 to
our consolidated financial statements contain a summary of our significant
accounting policies, many of which require the use of estimates. When we prepare
these financial statements, we are required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. On an
on-going basis, we evaluate our estimates and judgments, including those related
to accounts receivable, inventories, deferred tax assets, goodwill and
intangible assets and long-lived assets. We base our estimates and judgments on
historical experience and on various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for our
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
GOODWILL
AND OTHER INTANGIBLE ASSETS
The fair
value of goodwill and other intangible assets ultimately depends on the fair
value of the reporting unit to which they relate. The fair value of a
reporting unit refers to the amount at which the unit as a whole could be bought
or sold in a current transaction between willing parties. Quoted
market prices in active markets are the best evidence of fair value and shall be
used as the basis for the measurement, if available. However, the market price
of an individual equity security (and thus the market capitalization of a
reporting unit with publicly traded equity securities) may not be representative
of the fair value of the reporting unit as a whole. The quoted market price of
an individual equity security, therefore, need not be the sole measurement basis
of the fair value of a reporting unit. Substantial value may arise from the
ability to take advantage of synergies and other benefits that flow from control
over another entity. Consequently, measuring the fair value of a collection of
assets and liabilities that operate together in a controlled entity is different
from measuring the fair value of that entity's individual equity securities. An
acquiring entity often is willing to pay more for equity securities that give it
a controlling interest than an investor would pay for a number of equity
securities representing less than a controlling interest. That control premium
may cause the fair value of a reporting unit to exceed its market
capitalization.
31
To test
goodwill for impairment requires judgment, including the identification of
reporting units, assignment of assets and liabilities to reporting units,
assignment of goodwill to reporting units, and determination of the fair value
of each reporting unit. The fair value of each reporting unit is estimated using
a discounted cash flow methodology. This requires significant judgments
including estimation of future cash flows, which is dependent on internal
forecasts, estimation of the long-term rate of growth of the Company's business,
the useful life over which cash flows will occur, and determination of the
Company's weighted average cost of capital. Changes in these estimates and
assumptions could materially affect the determination of fair value and
potential goodwill impairment for each reporting unit.
If the
Company determines its goodwill and other intangible assets have been impaired,
the Company may have to write off a portion or all of such goodwill and other
intangible assets. If all goodwill and other intangible assets were written off,
the Company would record a non cash loss approximating $17.4 million to
operations and stockholders' equity.
MARKET-MAKING
ACTIVITIES
Securities
owned and securities sold, but not yet purchased, which primarily consist of
listed, over-the-counter, American Depository Receipts, foreign ordinary stocks,
and domestic fixed income securities are carried at market value and are
recorded on a trade date basis. Market value is estimated daily using market
quotations available from major securities exchanges and dealers.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
We do not
expect that the adoption of any recently issued but not yet effective accounting
pronouncements would or will have any material effect on the Company’s present
or future financial statements.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
JLI is a
“smaller reporting company,” as defined in Regulation S-K of the Securities and
Exchange Act of 1934, as amended (the “Exchange Act”), and as such, is not
required to respond to this item.
32
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
|
(a)
|
Evaluation
of Disclosure Controls and
Procedures
|
Our
management, with the participation of our chief executive and chief financial
officer, carried out an evaluation of the effectiveness of our “disclosure
controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this report (the “Evaluation
Date”). Based upon that evaluation, the chief executive and chief
financial officer concluded that as of the Evaluation Date, our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act (i)
is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms and (ii) is accumulated and communicated
to our management, including our chief executive and chief financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
|
(b)
|
Changes in Internal Control
over Financial Reporting
|
There
were no changes in our internal controls over financial reporting that occurred
during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
33
PART II -
OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
See
Footnote 19 of the Notes to unaudited Condensed Consolidated Financial
Statements.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
During
the three months ended March 31, 2010 JLI sold 4,617,143 shares of common stock
by receiving stock subscriptions totaling $1,616,000 for a stock offering to be
issued during the second quarter of 2010.
The above
sales were made for investment by accredited investors and will be issued
without registration under the Securities Act of 1933, as amended, pursuant to
the exemptions provided under sections 4(6) and 4(2) thereof, and pursuant to
the exemption provided by Regulation D. All the securities are restricted
securities and will bear a restrictive legend and be subject to stop transfer
restrictions.
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
ITEM
4.
|
[Removed
and Reserved]
|
ITEM
5.
|
OTHER
INFORMATION
|
None.
ITEM
6.
|
EXHIBITS
|
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
32.1
|
Principal
Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
Principal
Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
34
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.
JESUP
& LAMONT, INC.
|
||
(Registrant)
|
||
Date:
May 17, 2010
|
By:
|
/s/
Alan Weichselbaum
|
Alan
Weichselbaum,
|
||
Chief
Executive Officer and
|
||
Chief
Financial Officer
|
||
(Principal
Executive Officer and
|
||
Principal
Financial Officer)
|
35