UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2012

 

OR

 

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

 

For the transition period from _______ to _______

 

COMMISSION FILE NUMBER: 001-14753

 

NETWORK 1 FINANCIAL GROUP, INC.

(Exact Name of Registrant as specified in its charter)

 

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

 

2 Bridge Avenue, 4thFloor

Red Bank, NJ 07701

(Address of principal executive offices)

 

(732) 758-9001

(Registrant’s telephone number)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  YES☑;   NO☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

YES☐   NO☐  

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

YES☐¨   NO☐

 

As of May 11, 2012, the Registrant had 56,560,057 shares of its Common Stock, $.001 par value, outstanding.

 

 

 
 

NETWORK 1 FINANCIAL GROUP, INC.

FORM 10-Q

March 31, 2012

 

TABLE OF CONTENTS

 

			Page
PART I – FINANCIAL INFORMATION				1
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)			1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			2
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			5
ITEM 4.	CONTROLS AND PROCEDURES			5
PART II – OTHER INFORMATION				6
ITEM 1.	LEGAL PROCEEDINGS			6
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			6
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES			6
ITEM 5.	OTHER INFORMATION			6
ITEM 6.	EXHIBITS			6
SIGNATURES				7

 

 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

Index to Consolidated Financial Statements

 

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

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
March 31, 2012 (unaudited) and June 30, 2011
		MARCH		JUNE
		2012		2011
		(unaudited)
ASSETS
Cash		$               79,993		$           58,856
Commission Receivable from Clearing Firm		90,130		78,021
Notes Receivable from affiliates		40,302		59,002
Deposit with clearing organization		317,682		345,137
Due from Affiliates		9,934		45,482
Advances to Registered Representatives: net of reserve
for uncollectible accounts of $ 90,100 and $90,000 respectively		79,981		70,231
Securities held for resale, at market		95,089		83,415
Property and Equipment, net		23,516		17,935
Other Assets		27,000		27,000
TOTAL ASSETS:		$             763,627		$         785,079
LIABILITIES AND EQUITY
LIABILITIES
Line of Credit		$               30,000		$           30,000
Notes Payable		92,976		4,088
Due to Affiliates		2,840		-
Commissions Payable		158,193		78,943
Capital Leases payable		11,763		18,588
Accounts Payable, accrued expenses and other liabilities		167,651		173,923
TOTAL LIABILITIES		463,423		305,542
Commitments and Contingencies
EQUITY
Common Stock, $.001 par value;
100,000,000  shares authorized; 56,560,057 and 55,560,057 issued and
48,635,057 and 47,635,057 outstanding at March 31, 2012 and June 31, 2011		56,560		55,560
Additional Paid In Capital		2,059,888		2,022,888
Treasury Stock at cost; 7,925,000 shares		(5,129)		(5,129)
Accumulated deficet		(2,113,115)		(1,808,782)
Stock Subscribed		87,000		-
Total stockholders equity		85,204		264,537
Non-controlling interest		215,000		215,000
TOTAL EQUITY		300,204		479,537
TOTAL LIABILITIES AND EQUITY		$             763,627		$         785,079
(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2012 AND 2011
(unaudited)
	For The Three Months Ended				For The Nine Months Ended
	March 31,				March 31,
	2012		2011		2012		2011
Revenues:
Commissions	$                338,796		$                266,290		$         1,075,986		$              663,028
Net dealer inventory gains	46,439		(170,625)		218,111		154,075
Investment banking	107,250		99,262		211,850		227,425
Interest and Dividends	1,617		5,875		9,531		18,973
Transfer fees and clearing services	599		4,827		599		11,460
Investment advisory	109,795		93,377		251,373		478,493
Other	2,000		26,450		2,335		62,950
Total Revenue	606,496		325,456		1,769,785		1,616,404
Operating Expenses:
Commissions	304,833		534,247		824,981		699,717
Compensation and Related Expenses	187,393		220,751		570,409		758,212
Clearing Fees	13,894		41,788		101,907		141,936
Communications and data processing	29,099		44,031		84,308		117,184
Interest	580		609		1,745		4,683
Occupancy and related expenses	26,189		54,616		95,161		150,684
Office Expenses	44,466		24,371		159,423		133,001
Professional Fees	51,865		57,774		228,162		255,370
Depreciation	3,018		-		8,022		3,879
Total Operating Expenses	661,337		978,187		2,074,118		2,264,666
Loss from Operations	(54,841)		(652,731)		(304,333)		(648,262)
Other Income (expenses)
Gain (Loss) on change in derivative liability	-		8,541		-		21,723
Total Other Income (expenses)	-		8,541		-		21,723
							-
Net loss	(54,841)		(644,190)		(304,333)		(626,539)
Loss/Income attributable to non-controlling interest	-		-				-
Net loss attributable to common shareholders	$                (54,841)		$               (644,190)		$          (304,333)		$             (626,539)
Loss per common share (basic and diluted)	$                  (0.001)		$                  (0.016)		$             (0.006)		$                (0.019)
Weighted average common shares outstanding	48,635,057		41,228,408		48,616,875		32,435,075
(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

 

 

NETWORK 1 FINANCIAL GROUP, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
For the nine months ended March 31, 2012
(Unaudited)
							Common
				Additional	Treasury	Accumulated	Stock	Non-Controlling
	Common Stock			paid-in-capital	Stock	Defecit	Subscribed	interest	Total
	Shares		Amount
Balance - June 30, 2011	55,560,057		$     55,560	$        2,022,888	$            (5,129)	$     (1,808,782)	$              -	$     215,000	$     479,537
Sale of common stock							87,000		87,000
Stock issued for services	1,000,000		1,000	37,000					38,000
Net loss						(304,333)			(304,333)
Balance - March 31, 2012	56,560,057		$     56,560	$        2,059,888	$            (5,129)	$     (2,113,115)	$    87,000	$     215,000	$     300,204
(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine months ended March 31, 2012 and 2011
(unaudited)
		2012		2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss attributable to common shareholders		$                 (304,333)		$                      (626,539)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		8,022		3,879
(Gain) Loss on change in derivative liability		-		(21,723)
Stock based compensation		2,000		248,000
Changes in operating assets and liabilities
Due from clearing organization		(12,109)		(80,178)
Securities held for resale, at market		47,396		10,662
Advances to/from registered representatives		(9,750)		(14,445)
Other assets		-		1,433
Due from affiliates		38,388		-
Due to clearing organization		27,455		325,301
Accounts Payable, accrued expenses & other Liabilities		108,979		537
	TOTAL ADJUSTMENTS	210,381		473,466
	NET CASH (USED IN) OPERATING ACTIVITIES	(93,952)		(153,073)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment		(13,602)		(2,181)
	NET CASH (USED IN) INVESTING ACTIVITIES	(13,602)		(2,181)
CASH  FLOWS FROM FINANCING ACTIVITIES
Repayment of notes receivable		18,700		-
Advances from affiliated companies		-		20,395
Proceeds from sale of common stock		87,000		360,000
Proceeds (repayment) of Notes Payable		29,818		(5,972)
Repayment of line of credit		-		(25,000)
Repayment of capital lease		(6,827)		(5,210)
	NET CASH PROVIDED BY FINANCING ACTIVITIES	128,691		344,213
NET INCREASE IN CASH		21,137		188,959
CASH - Beginning of Period		58,856		2,635
CASH - End of Period		$                    79,993		$                        191,594
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during year
	Interest	$                      2,837		$                            4,682
	Income Taxes	$                      2,645		$                            2,726
(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2012

(unaudited)

 

NOTE 1 – Basis of Presentation (Reverse Merger and Corporate Structure)

 

Network 1 Financial Securities, Inc. (“NETW”) was organized as a Texas corporation on March 15, 1983 and is registered as a broker-dealer with the Securities and Exchange Commission (SEC), the State of Texas and various other states.  NETW is an introducing broker-dealer that clears all transactions with and for customers on a fully disclosed basis with a clearing broker.

 

On June 9, 2009, NETW completed a merger transaction (the “Reverse Merger”) with International Smart Sourcing, Inc. (“ISSI”), an inactive publicly registered shell corporation with no significant assets or operations.  ISSI was incorporated in February 1998 in Delaware.  As a result of the Reverse Merger, NETW became a wholly owned subsidiary of ISSI and the current assets of NETW were merged with ISSI.

 

Upon completion of the Reverse Merger transaction, ISSI changed its name to Network 1 Financial Group, Inc. (the “Company”).

 

All references to Common Stock, share and per share amounts have been retroactively restated to reflect the exchange ratio of 17.16 shares of ISSI’s Common Stock for one (1) share of the acquirer's Common Stock outstanding immediately prior to the Reverse Merger, as if the exchange had taken place as of the beginning of the earliest period presented.

 

The accompanying unaudited condensed consolidated financial statements present on a consolidated basis the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements for the nine month periods ended March 31, 2012 and 2011 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-Q and Regulation S-X.  The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations.  The Company believes that the disclosures provided are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements and explanatory notes for the year ended June 30, 2011 as disclosed in the Company's 10-K for that year, as filed with the SEC.

 

The results of the nine months ended March 31, 2012 are not necessarily indicative of the results to be expected for the pending full year ending June 30, 2012

 

 

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2012

(Unaudited)

 

NOTE 2 - Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Revenue Recognition

 

Customer security transactions and the related commission income and expense are recorded as of the trade date.  Investment banking revenues include gains, losses, and fees, net of syndicate expenses, arising from securities offerings in which the Company acts as an underwriter or agent. Investment banking revenues also include fees earned from providing financial advisory services.  Investment banking management fees are recorded on the offering date, sales concessions on the settlement date, and underwriting fees at the time the underwriting is completed and the income is reasonably determinable. Customers who are financing their transaction on margin are charged interest. The Company’s margin requirements are in accordance with the terms and conditions mandated by its clearing firm. The interest is billed on the average daily balance of the margin account.

 

Net dealer inventory gains result from securities transactions entered into for the account and risk of the Company. Net dealer inventory gains are recorded on a trade date basis. Investment advisory fees are account management fees for high net worth clients based on the amount of the assets under management. These fees are billed quarterly and recognized at such time that the service is performed and collection is probable.

 

The Company generally acts as an agent in executing customer orders to buy or sell listed and over-the-counter securities in which it does not make a market, and charges commissions based on the services the Company provides to its customers. In executing customer orders to buy or sell a security in which the Company makes a market, the Company may sell to, or purchase from, customers at a price that is substantially equal to the current inter-dealer market price plus or minus a mark-up or mark-down. The Company may also act as agent and execute a customer's purchase or sale order with another broker-dealer market-maker at the best inter-dealer market price available and charge a commission. Mark-ups, mark-downs and commissions are generally priced competitively based on the services it provides to its customers. In each instance the commission charges, mark-ups or mark-downs, are in compliance with guidelines established by FINRA.

 

Marketable securities are carried at fair value, with changes in value included in the statement of income in the period of change. Fair value is generally determined by quoted market prices. Non-marketable securities are valued at fair value as determined by management.

 

 

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2012

(Unaudited)

 

Fair Value of Financial Instruments

 

FASB requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statement of financial position for current assets and current liabilities qualifying as financial instruments approximate fair value because of their short maturities.

 

In April 2009, the FASB issued provisions that require that companies also disclose the fair value of financial instruments during interim reporting periods similar to those that are currently provided annually. These pronouncements are effective for interim reporting periods ending after June 15, 2009.

 

On July 1, 2008, the Company adopted the provisions of Accounting Standard Codification (“ASC”) Topic 820, which defines fair value for accounting purposes, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurements.  The Company’s adoption of ASC 820 did not have a material impact on its condensed consolidated financial statements.  Fair value is defined as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date.  The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability.  Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value.  Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation methods that require more judgment.  These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability.  The Company has categorized its financial assets and liabilities measured at fair value into a three level hierarchy in accordance with ASC 820.

 

 

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2012

(Unaudited)

 

  

Reclassifications

 

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

 

NOTE 3 - Recent Accounting Pronouncements

 

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

 

 

NOTE 4 - Securities Owned and Securities Sold, But Not Yet Purchased, At Market

 

The following table shows the market values of the Company's investment securities owned and securities sold, but not yet purchased as of March 31, 2012 and June 30, 2011, respectively:

 

		March 31, 2012			June 30, 2011
Securities:		Owned			Owned
		$	95,089		$	83,415

   

 

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2012

(Unaudited)

 

NOTE 5 - Due from Clearing Organization

 

The following represents amounts on deposit with the Company’s former clearing broker, Southwest Securities, Inc. (“Southwest”)and Legent Clearing LLC (“Legent”) for the 9 months ending March 31, 2012 in the Company’s clearing broker inventory account:

 

		March 31, 2012				June 30, 2011
Cash		$	224,495			$	275,380
Marketable securities			93,187				69,757
Total		$	317,682			$	345,137

 

The marketable securities are primarily comprised of corporate stocks. Marketable securities on deposit with Legent as of March 31, 2012 and June 30, 2011 are reflected at fair value. The Company is required to maintain a deposit balance of $100,000 with Legent. Currently Southwest retains $14,495 in deposit and Legent currently retains $303,000 in deposits for the firm.

 

For the nine months ending March 31, 2012 the Company used the services of Legent to clear its brokerage business. The Company ceased using Southwest Securities on August 13, 2010 and Legent commenced clearing on August 16, 2010. The Company incurred charges of approximately $23,086 and $81,527 for the three and nine months ended March 31, 2012 and approximately $22,813 with Southwest and $61,280 with Legent for the nine months ended March 31, 2011.

 

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2012

 (Unaudited)

 

NOTE 6 - Related Party Transactions

 

As of March 31, 2012 and June 30, 2011, due to (from) affiliated companies consisted of the following:

 

		March 31,				June 30,
		2012				2011
Network 1 Financial Advisors Inc. (a) (b)		$	41,352			$	67,095
Network  1 Financial Assurance, Inc. (b)		$	(2,840)			$	200
National Financial Services Group (b)		$	8,884			$	37,189

 

(a)

Represents amounts due in the form of a promissory note from an affiliated company whose officers and shareholders are officers and shareholders of the Company.

 

(b)

Represents amounts due from an affiliated company whose officers and shareholders are officers and shareholders’ of the Company.

 

 

 

 

NOTE 7 - Line of Credit – Bank

 

The Company’s bank line of credit is payable on demand. The maximum amount the Company could borrow is $100,000.  Indebtedness under the line of credit provides for interest at the bank’s prime rate, plus 1.0% (approximately 4.25% at March 31, 2012). As of March 31, 2012 and June 30, 2011 the amount outstanding under this credit facility was $30,000 and $30,000 respectively. The Company is currently not in default of its line of credit with the bank. 

 

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

 

NOTE 8 – Capital Lease Obligation

 

The Company has equipment under a capital leases expiring in August 2012 and September 2015. The assets and liabilities under the capital lease are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are included in property and equipment and is amortized over the estimated life of the assets. The interest rate under the lease is 6.60% and 6.89% and is imputed based on the lessor’s implicit rate of return. The Capital lease is payable in monthly installments of $532 and $214, including interest through August 2012 and September 2015.

 

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

 

At March 31, 2012, annual minimum future lease payments under the capital lease are as follows:

 

March 31,		Amount
2013		$	5,129
2014			2,517
2015			2,517
2016			1,600
Total minimum lease payments		$	11,763

 

 

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2012

 (Unaudited)

 

 

 

 

 

NOTE 9 – Notes Payable

 

On January 31, 2012, the Company borrowed $59,070 from a shareholder by issuing a three (3) year non-interest bearing, non-recourse promissory note maturing on February 1, 2015 at a face of $100,000. The note will accrue 36 equal payments of $1,136.95 until the February 1, 2015. The firm also will issue to the investor 500,000 warrants to purchase the Company’s common stock at $0.10 per share expiring February 1, 2015

 

On March 31, 2012, the Company borrowed $25,000 from an officer by issuing a promissory note maturing on March 23, 2013. The promissory note bears interest at 5%.

 

Notes payable include settlement agreements entered into with FINRA in September 2010 and May 2010 for monetary sanctions imposed against the Company. As of March 31, 2012 and June 30, 2011, notes payable consists of the following:

 

		March 31, 2012				June 30, 2011
Promissory Note - Officer		$	25,000			$	-
Promissory Note - Shareholder			61,344
Note payable to FINRA in monthly installments of $500 per month including interest at a rate of 6.25% through January 2012			-				3,264
Note payable to FINRA in monthly installments of $500 per month including interest at a rate of 6.25% through May 2013.			6,632				-
Note payable to FINRA in monthly installments of $500. per month including interest at a rate of 6.25% through August 2011			-				824
Total notes payable		$	92,976			$	4,088

 

NOTE 10 – Capital Stock.

 

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

 

On March 4, 2011, the Company issued 9,000,000 million shares of $0.001 par value Company common stock to an accredited investor.  As consideration for such shares, the investor paid $360,000 in cash. 

 

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

 

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

 

On October 28, 2011, the Company authorized the issuance of 4,350,000 share of $0.001 par value common stock valued at $0.02 to an investor for $87,000. As of May 14, 2012 the authorized stock has not been issued and is listed under Common Stock Subscribed.

 

 

 

 

 

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2012

(unaudited)

 

NOTE 11 - Net Capital Requirements

 

Network 1 Financial Securities, Inc. (“NETW”) is a registered broker-dealer and is subject to the SEC’s Uniform Net Capital Rule 15c3-1. This requires that NETW maintain minimum net capital of $100,000 and also requires that the ratio of aggregate indebtedness, as defined, to net capital, shall not exceed 15 to 1.

 

As of March 31, 2012 and June 30, 2011, NETW’s net capital exceeded the requirement by approximately $61,186 and $65,212 respectively.

 

Advances, dividend payments and other equity withdrawals are restricted by the regulations of the SEC, and other regulatory agencies are subject to certain notification and other provisions of the net capital rules of the SEC. NETW qualifies under the exemptive provisions of Rule 15c3-3 as NETW does not carry security accounts for customers or perform custodial functions related to customer securities.

 

 

NOTE 12- Fair Value Measurements

 

The financial assets of the Company measured at fair value on a recurring basis are cash, due from clearing organization, marketable securities, derivatives and debt.  The Company’s cash equivalents, due from clearing organization and marketable securities are generally classified within Level 1 of the fair  value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.  The Company’s long-term investments, derivative liabilities and debt are classified within level 3 of the fair value hierarchy because they are valued using unobservable inputs, due to the fact that observable inputs are not available, or situations which there is little, if any, market activity for the asset or liability at the measurement date.

 

	·	Level 1:  Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities;
	·	Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly , for substantially the full term of the asset or liability; or
	·	Level 3: Prices or valuation techniques that require inputs that require inputs that are both significant to the fair value measurement and are unobservable.

 

The following table sets forth the Company’s short and long term investments as of March 31, 2012, which are measured at fair value on a recurring basis by level within the fair value hierarchy.  As required, by ASC 820 (formerly SFAS No. 157), these are classified based on the lowest level of input that is significant to the fair value measurement (in thousands):

 

		Level 1			Level 2		Level 3				Total
Due from clearing organization		$	93,187		-			-			$	93,187
Securities owned, at market values			95,089		-			-				95,089
Total assets			188,276									188,276

 

 

 

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

Some of the statements contained in this Quarterly Report on Form 10-Q, which are not purely historical, are forward-looking statements, including, but not limited to, statements regarding the Company’s objectives, expectations, hopes, beliefs, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by the use of the words “may,” “will,” “should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of those terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our actual results could differ materially from those disclosed in these statements due to various risk factors and uncertainties affecting our business. We caution you not to place undue reliance on these forward-looking statements. We do not assume responsibility for the accuracy and completeness of the forward-looking statements and we do not intend to update any of the forward-looking statements after the date of this report to conform them to actual results. You should read the following discussion in conjunction with our financial statements and related notes included elsewhere in this report. For a more complete understanding of our industry, the drivers of our business and our current period results, you should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operation in conjunction with the audited financial statements and notes thereto set forth in our Annual Report on Form 10-K for the year ended June 30, 2011and our other filings with the SEC.

 

OVERVIEW

 

On June 9, 2009, the Company (then known as “International Smart Sourcing, Inc.” or “ISSI”) closed certain transactions contemplated in a certain Stock Purchase Agreement dated as of March 26, 2009 (the “Agreement”) which we entered into with Network 1 Financial Securities, Inc., a privately held Texas corporation (“NETW”), and certain former shareholders of NETW. At the closing, we acquired 1,250,528 shares, or approximately 97.55%, of common stock of NETW outstanding on such date (the “Reverse Merger”). In accordance with the terms of the Agreement, we issued 21,460,622 shares of our common stock to the former shareholders of NETW, in exchange for the acquisition, by the Company, of approximately 97.55% of the outstanding common shares of NETW.

 

As of the closing date, the former shareholders of NETW held approximately 66% of the issued and outstanding common shares of the Company. The issuance of the 21,460,622 common shares to the former shareholders of NETW was deemed to be a reverse acquisition for accounting purposes, by ISSI of NETW, as NETW will control the post-merged company. Accordingly, NETW, the accounting acquirer entity, is regarded as the predecessor entity as of June 9, 2009.

 

Upon the completion of the Reverse Merger, we became the ultimate parent company of NETW and we changed our name from “International Smart Sourcing, Inc.” to “Network 1 Financial Group, Inc.” (“NETW Group,” the “Company,” “we,” “us,” or “our”).

 

During the quarter ended March 31, 2012, we had an increase in our investment banking fees, an increase in investment advisory consulting fees.  In the same period, we had an increase in commission income. The increase in investment banking fees was attributable to the increased fees paid to us by investment banking clients versus the same period in 2011  Our investment advisory fees showed an increase resulting from greater investment banking fees earned.  The increase in advisory consulting fees was due to an increase number of companies seeking our services. The increase in commissions earned in NETW’s daily transaction business was due primarily to an increase in activity and commissions charged to NETW’s retail clients. The increase in trading profits was due to increased market volatility and mark to market pricing of securities held. Overall, we experienced a decrease in losses in the quarter ended March 31, 2012 compared to the same period in the prior year.

 

We had a loss from operations of approximately $54,841 for the quarter ended March 31, 2012 , which represents an decrease of $597,890 over our net loss of $652,731 in the same period in the prior year.  This decrease in loss was primarily due to increased revenues, decreased operating expenses, which consisted of lower commissions paid, lower compensation and related expenses, lower clearing fees, lower professional fees, lower communications and data processing, offset by an increase in office expenses.  Management continues to seek income stabilization from consulting and investment banking fees as well as by reducing its exposure to market positions.  Management believes that in order to expand its marketing and recruitment of experienced registered representatives it will need to seek additional sources of funding.

 

 

 

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of financial condition and results of operations are based upon the unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles as recognized in the United States of America.  The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities.  We base our estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.  For a complete description of accounting policies, see Note 2 to our financial statements included in our Form 10-K for the year ended June 30, 2011.  There were no significant changes in critical accounting estimates.

 

Results of Operations

 

For the nine months ended March 31, 2012 compared to the nine months ended March 31, 2011

 

Revenues.  Our consolidated income results for the nine months ended March 31, 2012 compared to the nine months ended March 31, 2011 showed an increase of $153,381. Total revenue for the nine months ended March 31, 2012 was $ 1,769,785 versus $1,616,404 for the nine months ended March 31, 2011.

 

We experienced an increase in revenue of $153,381, or 9% for the nine month period ended March 31, 2012, compared to the nine months ended March 31, 2011.

 

The increase in revenue for the nine month period ended March 31, 2012 was due primarily to a increase of $412,968 or 62 %, in commissions earned in transactions with customers and $64,036 increase in net dealer inventory gains. The increase in commissions earned was attributed to higher commission received from customers. for the nine months ended in March 31, 2012 as compared to the nine months ended March 31, 2011.   The firm experienced an increase of $64,036, or 42% for net dealer inventory gains compared to our net dealer inventory gains in the nine months ended March 31, 2011. The increase in commissions were attributed to increased transactions and higher paid commissions by our customers and increased net dealer inventory gains were due to increased market volatility. This was offset by decreases in investment advisory of $227,120 or 47% and decrease in investment banking of $15,575 or 7%.

 

Operating Expenses. Our consolidated operating expenses for the nine month period ended March 31, 2012 were $2,074,118, or 117% of revenue versus $2,264,666, or 140% of revenue. This represents a decrease of $190,548 or 8%, over the corresponding period ended March 31, 2011. The decrease was due to a reduction of compensation and related expenses of $187,803; a reduction in fees paid to professionals of $27,808, a reduction of communication and data processing of $32,876 and a reduction of  clearing expenses in the amount of $40,029. These decreases were offset by an increase of office expense of $26,421, an increase of commissions of $125,264 for the nine months ended March 31, 2012 compared to the corresponding period in March 31, 2011.

 

The increase in commission expense is due to increased commissions paid due to higher commissions earned in the nine months ended March 31, 2012. The increase in office expenses is due primarily to increase costs associated with travel and meeting expense for the financial placements.  The decrease in professional fees is due to the hiring of in-house counsel.

 

Profit and Loss.  Our consolidated loss was $304,333 for the nine month period ended March 31, 2012 compared to a loss of $626,549, for the corresponding period in 2011. This represents a decrease in loss of $322,206 for the nine months ended March 31, 2012 compared to the same period in 2011.

 

The decrease in losses is attributed to higher revenue and increase in commissions from customer transactions.

 

For the three months ended March 31, 2012 compared to the three months ended March 31, 2011

 

Revenues.  Total revenue for the three months ended March 31, 2012 was $606,496 versus $325,456 for the three months ended March 31, 2011.   We experienced an increase in revenue of $281,040, or 86%, for the three months ended March 31, 2012 compared to the same period in 2011.

 

 

 

 

The increase in revenue for the three month period ended March 31, 2012 was due primarily to an increase in net dealer inventory gains of $217,064; increase in investment banking fees of $7,988; and increase of $16,418 in investment advisory fees and increases in commissions earned on transactions of $16,418, compared to the same period in 2011. The increase was attributed to more transactions and the hiring of additional registered representatives. The increase in investment banking fees earned was attributed to increase fees earned from closed financial placements. The increase in net dealer inventory gains is due to volatility and mark to market of securities held in account; the increase in investment advisory fees is due to a increase in fees earned from consulting. This was offset by a decrease in interest and dividends of $4,258; decrease in transfer fees and clearing services of $4,229 and decrease in other income of $24,450.

 

Operating Expenses.  Our consolidated operating expenses for the three month period ended March 31, 2012 were $661,337 or 109% of revenue compared to $978,186 , or 300% of revenue, for the same period in 2011, representing an decrease of $316,850, or 32%. The decrease was due to an decrease in commission expense of $229,414; an decrease in compensation and related expenses of $33,858; and a decrease in communication and data processing expenses of $14,932; and a decrease in occupancy and related expenses of $28,427. Such decreased expenses were offset by an increase of $20,094 in office expense . for the three month ended March 31, 2012 compared to the same period in 2011.

 

The decrease was due to in part the award of securities in the amount of $248,000 to the new CEO of the firm. in January 2011; The decreases in expenses were due to reduction of clearing fees, lower interest rates as well as lower balances owed to the bank in the three month ended March 31, 2012 compared to the same period in 2011.

 

Profit and Loss.  Our consolidated loss was $54,841 for the three months ended March 31, 2011 compared to a loss of $652,731 before adjustment for the gain of $8,541 from the change in derivative liability, for the same period in 2011.  This represents a decreased loss of $597,890 for the three months ended March 31, 20121, compared to the same period in 2011.  The decrease in losses incurred were attributed to an decrease in commission expense, no stock awards, a decrease in compensation and related expenses and a decrease in occupancy and related expenses and a decrease in communications and data processing expenses.

 

LIQUIDITY AND CAPITAL RESOURCES

 

 Our primary source of liquidity is cash generated from operations and from short-term financing arrangements. We had $79,993 in cash as of March 31, 2012.

 

We generated a deficit in cash flow from operations of $ 93,952 for the nine months ended March 31, 2012. Cash flows used by investing activities for the nine months ended March 31, 2012 were $13,602 , and cash flows provided by financing activities for the nine months ended March 31, 2012 was $ 128,691 , comprised primarily of cash flows from sale of common stock and borrowings.  

 

We believe that we will have available resources to meet our liquidity requirements, including debt service, for the next quarter. If our cash flow from operations is insufficient to fund our debt service and other obligations, we may be required to increase our borrowings, reduce or delay capital expenditures, and seek additional capital or refinance our indebtedness.  There can be no assurance, however, that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under revolving credit facilities.

 

In the upcoming year, we plan to finance operations with working capital and external financing. We believe that we will need additional funds in the near term to finance operations and meet revenue, profitability, growth, diversification and other strategic goals for the foreseeable future. We expect to be able to procure financing upon reasonable terms in order to finance operations. However, if we are unable to do so, or if we do not meet anticipated future revenue goals, management is committed to taking actions necessary to ensure the conservation of adequate cash to continue to finance its operations.

 

 

 

 

Off Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations.  In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations.  These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.

 

Inflation

 

We believe that inflation has not had a material effect on our operations to date.

 

Recent Accounting Pronouncements

 

See Note 3 of the Unaudited Condensed Consolidated Financial Statements for a full description of new accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2012 due to the identification of a material weakness.  A material weakness is a control deficiency or combination of control deficiencies such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

To address the material weakness described below, we performed additional analysis and performed other procedures to ensure our financial statements were prepared in accordance with GAAP.  Accordingly, management believes that the financial statements included in this Quarterly Report on Form 10-Q, fairly present, in all material aspects, our financial condition, results of operations and cash flows for the periods presented in accordance with GAAP.

 

The weakness, identified by management, related to the lack of necessary accounting resources to ensure consistently complete and accurate reporting of financial reporting.  To mitigate the current limited resources and limited number of employees, we rely heavily on direct management oversight of transactions.  As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.

 

We believe that for the reasons described above, after we hire additional qualified in-house personnel, we will be able to improve our disclosure controls and procedures, remedy the material weaknesses identified above and provide reasonable assurance that assets are safeguarded from loss or unauthorized use, that transactions are recorded in accordance with GAAP under management’s directions, and that financial records are reliable to prepare financial statements.  However, because of inherent limitations in all control systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, will be or have been detected.

 

(b) Changes in internal control over financial reporting

 

There were no changes in the Company’s internal control over financial reporting in the Company’s third fiscal quarter of the fiscal year ending June 30, 2012 covered by this Quarterly Report on Form 10-Q, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On March 31, 2010, the Company, Richard Hunt, William Hunt, and an unaffiliated third party were sued in the Superior Court of New Jersey, Mercer County (Docket No. L-572-10) (the “Complaint”).  The Complaint sought to recover $123,307 of unpaid attorney’s fees allegedly owed to Stark and Stark.  The Complaint was reinstated on April 11, 2011.  The Company retained counsel to represent the Company and Messrs. Richard and Hunt in this matter.  On May 6, 2011 the Company entered into a stipulation of agreement (the “Settlement”) with Stark and Stark whereby the Company has agreed to pay Stark and Stark $68,999.07 in 18 monthly payments of $3,833.29, which Stark and Stark has agreed to accept as full and final payment.  The firm made a payment of $11,499.87 (retroactive payment for February, March, April 2011) upon signing the Settlement and continues to make regular payments pursuant to the Settlement.

 

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

 

We have not sold any unregistered equity securities during the three-month period covered by this quarterly report.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. (REMOVED AND RESERVED).

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

No.		Description
31.1		Rule 13a–14(a)/15d–14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2		Rule 13a–14(a)/15d–14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

		NETWORK 1 FINANCIAL GROUP, INC.
May 16, 2012		/s/ Damon Testaverde
Date		Damon Testaverde
		Chief Executive Officer
May 16, 2012		/s/ William R. Hunt, Jr.
Date		William R. Hunt, Jr.
		interim principal financial officer

 

 

 

EXHIBIT INDEX

 

Exhibit No.		Description
31.1		Rule 13a–14(a)/15d–14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2		Rule 13a–14(a)/15d–14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002