UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K/A
Amendment
No. 2
(Mark
One)
☑
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ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the Year Ended June 30, 2011
OR
☐
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TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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
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11-3423157
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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2
Bridge Avenue, 4thFloor
Red
Bank, NJ 07701
(Address
of principal executive offices)
(732)
758-9001
(Issuer’s
telephone number)
Securities
registered under section 12(b) of the Exchange Act: None.
Securities
registered under section 12 (g) of the Exchange Act:
Common
stock, Par value $0.001
Common
Stock Purchase Warrants
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES
☐ NO ☑
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES ☐
NO ☑
Indicate
by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑
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
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Accelerated filer
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Non-accelerated filer (Do not check if a smaller reporting company)
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Smaller reporting company ☑
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Indicate
by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act)
YES ☐
NO ☑
As of
June 30, 2011 approximately 55,560,057 shares of its common stock issued and 47,635,057 shares of common stock were
outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant, as of June, 30,
2011, the last business day of the fiscal year, was approximately $371,171 based on the last sale price of $0.025 for
the registrant’s common stock as quoted on the Over-the-Counter Bulletin Board on that date. Shares of common stock held
by each director, each officer and each person who owns 10% or more of the outstanding common stock have been excluded from this
calculation in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily conclusive.
The registrant
had 56,560,057 shares of its common stock 0.001 par value issued, and 48,635,057 outstanding as of October 10, 2011.
TABLE
OF CONTENTS
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Page
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PART I
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2
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Item 1.
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Business
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2
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Item 1A.
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Risk Factors
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3
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Item 1B.
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Unresolved Staff Comments
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3
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Item 2.
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Properties
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Item 3.
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Legal Proceedings
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3
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Item 4.
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(Removed and Reserved)
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3
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PART II
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4
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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4
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Item 6.
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Selected Financial Data
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5
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Item 7.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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5
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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8
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Item 8.
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Financial Statements and Supplementary Data
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9
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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10
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Item 9A.
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Controls and Procedures
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10
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Item 9B.
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Other Information
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11
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PART III
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12
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Item 10.
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Directors, Executive Officers and Corporate Governance
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12
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Item 11.
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Executive Compensation
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14
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters
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16
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence
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17
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Item 14.
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Principal Accountant Fees and Services
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18
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Item 15.
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Exhibits
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19
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SIGNATURES
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21
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i
Explanatory
Note:
We are
filing this amendment to our Annual Report on Form 10-K to respond to SEC Comments dated June 11, 2012.
Except
as described above, we have not modified or updated disclosures presented in the original Form 10-K and Amendment No. 1 in this
amendment. Accordingly, this amendment does not reflect events occurring after the filing of our original Form 10-K or modify
or update those disclosures, including the exhibits to the original Form 10-K, affected by subsequent events. As such, this Amendment
speaks only as of the date the Original Annual Report was filed, and the Company has not undertaken herein to amend, supplement
or update any information contained in the Original Annual Report to give effect to any subsequent events.. Accordingly, this
amendment should be read in conjunction with the original Form 10-K and Amendment No. 1 and our other reports filed with
the SEC subsequent to the filing of our Form 10-K, including any amendments to those filings.
In addition,
as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), currently
dated certifications by our principal executive officer and principal financial officer are filed as exhibits to this amendment
under Item 15 of Part IV hereof.
FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) and the Private Securities Litigation Reform Act of 1995 and Network 1 Financial Group, Inc. intends that such forward-looking
statements be subject to the safe harbors created thereby. The forward-looking statements relate to future events or the future
financial performance of Network 1 Financial Group, Inc. (formerly known as International Smart Sourcing, Inc.), a Delaware corporation,
including, but not limited to, statements contained in: Item 1. “Business” and Item 7. “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.” Readers are cautioned that such statements, which may be
identified by words including ‘‘anticipates,’’ ‘‘believes,’’ ‘‘intends,’’
‘‘estimates,’’ ‘‘expects,’’ and similar expressions, are only predictions or estimations
and are subject to known and unknown risks and uncertainties. In evaluating such statements, readers should consider the various
factors identified in this Annual Report on Form 10-K which could cause actual events, performance or results to differ materially
from those indicated by such statements. In light of the significant uncertainties inherent in the forward-looking information
included herein, the inclusion of such information should not be regarded as a representation by Network 1 Financial Group, Inc.
or any other person that its objectives or plans will be achieved. Network 1 Financial Group, Inc. does not undertake and specifically
declines any obligation to update any forward-looking statements or to publicly announce the results of any revisions to any statements
to reflect new information or future events or developments, unless required by law or regulation.
1
PART
I
Item
1. Business.
Corporate
Overview
In March
1998, we were incorporated in Delaware under the name “International Plastic Technologies, Inc.” as a holding company
for the purpose of acquiring the common stock of Electronic Hardware Corp. (“EHC”) and Compact Disc Packaging Corp.,
(“CDP”), an inactive corporation. On December 7, 1998, we changed our name to “International Smart Sourcing,
Inc.” On May 7, 1999, we formed a company called Smart Sourcing Inc. (“SSI,” and together with EHC
and CDP, the “Subsidiaries”), a Delaware corporation. EHC manufactured, distributed and warehoused knobs,
dials and pointers. SSI specialized in assisting companies in reducing their cost of manufacturing by outsourcing manufacturing
in China.
On June
26, 2000, we changed our name to “CHINAB2BSOURCING.COM, INC.” We specialized in the outsourcing of manufacturing
and the manufacturing of injection molded plastic components, products and assemblies. We performed the manufacturing and outsourcing
functions for our customers, through our United States facilities and through our outsourcing contacts and offices in the People’s
Republic of China. On August 17, 2001, we changed our name back to “International Smart Sourcing, Inc.”
On September
28, 2006, we sold the Subsidiaries. Effective September 28, 2006, we began reporting as a development-stage company.
On June
9, 2009, we 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 our Company, of approximately
97.55% of the outstanding common shares of NETW.
As of
the closing date, the former shareholders of NETW hold approximately 66% of the issued and outstanding common shares of our 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” or the “Company”).
The address
of our principal executive offices is 2 Bridge Avenue, 4th Floor, Red Bank, New Jersey 07701. Our telephone number is (732) 758-9001.
Our facsimile number is (732) 758-6671.
Our common
stock is quoted on the Over-the-Counter Bulletin Board under the symbol “NTFL.”
Current
Business of our Company
As of
June 9, 2009, the closing date of the Reverse Merger, through our wholly owned subsidiary, NETW, we commenced the business of
providing broker-dealer services. NETW is registered as a broker-dealer with the SEC, 40 states and Puerto Rico. NETW is an introducing
broker-dealer that clears all transactions with and for customers on a fully disclosed basis with its clearing broker, Legent
Clearing LLC a FINRA member Firm. NETW is a member of the Financial Industry Regulatory Authority (“FINRA”), the Securities
Investor Protection Corporation (“SIPC”) and NASDAQ.
Our customer
base is made up primarily of individual investors. We generate income from transactional business, mutual fund sales, business
consulting fees, finder’s fees, annuity sales, register representative investment advisor fees, fees for providing investment
banking services, placement agent fees for capital raises, bond transactions, and underwriting fees and concessions.
2
We compete
with other broker-dealers by offering services to small and microcap public companies which we believe are significantly underserved
by the investment community. These companies may have little or no analysts following their growth and may be shut out of the
capital markets due to their size and current market cap. Many of our competitors are larger and have substantially more capital
resources than us, and could potentially enter our market space.
Employees
We currently
have 21 full-time employees and 2 part-time employees. None of our employees are represented by a union. We believe that our relationship
with all of our employees is good.
Item
1A. Risk Factors.
Not applicable.
Item
1B. Unresolved Staff Comments.
Not applicable.
Item
2. Properties.
We currently
lease office space that is approximately 3800 square feet at 2 Bridge Avenue, 4th Floor, Red Bank, New Jersey 07701. In August
2009, the term of the lease was extended from June 30, 2010 to June 30, 2012 and the annual rent was reduced to $108,000 per year.
Item
3. Legal Proceedings.
There
are no pending, nor to our knowledge threatened, legal proceedings against us.
Item
4. (REMOVED AND RESERVED).
3
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common
stock is traded on NASDAQ’s Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “NTFL.”
The following
table sets forth the high and low bid prices for the common stock as reported on the OTCBB for the last two fiscal years. The
high and low bid prices reflect inter-dealer prices, without mark-up, markdown or commission, and may not necessarily represent
actual transactions.
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Common Stock Sale
Prices
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2011
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High
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Low
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First Quarter
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0.09
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.029
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Second Quarter
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0.10
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.021
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Third Quarter
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0.04
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0.039
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Fourth Quarter
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0.025
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.025
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Common Stock Sale Prices
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2010
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High
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Low
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First Quarter
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0.14
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.042
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Second Quarter
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.08
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.082
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Third Quarter
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.06
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.015
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Fourth Quarter
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.05
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.02
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On August
2, 2011 (the most recent date that our common stock has traded), the last sale price of the common stock as reported on the OTCBB
was $0.0162 per share.
Holders
On October
10, 2011 there were 126 shareholders of record of our common stock.
Dividend
Policy on Common Stock
We have
not given any cash dividends to our common stockholders in the last two fiscal years. In addition, we intend to retain future
earnings for use in our business for the foreseeable future. The payment of cash dividends, if any, in the future is within the
discretion of the Board of Directors and will depend upon our earnings, capital requirements, financial condition and other relevant
factors.
Securities
Authorized for Issuance Under Equity Compensation Plans
We do
not have any equity compensation plans in place. However, the Company sponsors a 401(k) profit-sharing plan that covers substantially
all of its employees. The plan provides for a discretionary annual contribution, and is allocated in proportion to compensation.
In addition, each participant may elect to contribute to the Plan by way of a salary deduction. An employee becomes fully vested
in our contribution after 6 years and is fully vested in his own contributions immediately.
Performance
Graph
Not applicable.
Repurchase
of Securities
We did
not repurchase any of our common stock during the year ended June 30, 2011
4
Recent
Sales of Unregistered Securities
On March 4,
2011, the Company sold 9,000,000 shares of its common stock to Windex Capital LLC an unaffiliated investor for proceeds of $360,000
before expenses associated with the placement.
Item
6. Selected Financial Data.
Not applicable.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You
should read the following discussion of our financial condition and results of operations together with the audited financial
statements and the notes to the audited financial statements attached thereto and the other financial information included elsewhere
in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results
could differ significantly from those projected in the forward-looking statements as a result of many factors.
Basis
of Presentation of Financial Information
On June
9, 2009, we completed the Reverse Merger with NETW and the former shareholders of NETW. As a result of the Reverse Merger, we
abandoned our previous business and commenced the business of being an introducing broker-dealer. Because we are the successor
business to NETW and because the operations and assets of NETW represent our entire business and operations from the closing date
of the Reverse Merger, our management’s discussion and analysis and audited financial statements are based on the consolidated
financial results of post-merged NETW Group for the relevant periods. NETW Group will continue to report on a quarterly and year-end
basis, with a fiscal year end of June 30.
Overview
Our wholly
owned, operating subsidiary, NETW, is an introducing broker-dealer that clears all transactions with and for customers on a fully
disclosed basis with a clearing broker. NETW is a member of the Financial Industry Regulatory Authority (“FINRA”).
Management
believes that the trend for smaller companies that are public is to grow through consolidation or seek investors to help fuel
their growth in their market space. Our management has experience in assisting smaller companies in meeting their capital needs.
The inherent risk of this market space is that smaller companies could fail to compete with larger competitors and risk the failure
of their business. Since these businesses are not proven in respect of size and penetration of their product, we may be unable
to attract sufficient capital for our investment banking clients resulting in a decrease of fees generated. However, management
believes that we can attract registered personnel to our firm because the market we are serving and the opportunities we provide
will provide the ability to increase our sales force.
It is
our goal to provide investment banking support for small and microcap companies who have had an extremely difficult time finding
professional investment banking assistance in growing their business. We will provide such services as capital raising, bank financing,
merger and acquisition assistance and traditional financial consulting.
We also
believe that the turmoil surrounding the financial community will allow the firm to attract talented people in investment banking
and sales that would be difficult to attract in other times. We believe these professionals should help build the firm’s
service and capital-raising abilities.
The current
economic environment has adversely impacted our financial condition as it has for many financial institutions. Although the revenue
has not declined significantly, the product mix has impacted the firm’s profitability. During these times the day-to-day
transactional business of the firm has declined as investors have been reluctant to enter the capital markets. The firm’s
net worth has decreased and our liquidity has been impacted. We have taken steps to reduce expenses and realign our activities
into investment banking. Management believes that the Reverse Merger will provide us with the opportunity to aggressively
grow NETW and expand its services at a time when most financial institutions are retrenching.
5
During
the year ended June 30, 2011, NETW investment banking fees decreased, its investment advisory consulting fees decreased. In
the same period, we had an increase in commission income and trading profits. The decrease in investment banking fees
was attributable to fewer large private placements and the decrease in advisory consulting fees was due to lower fees paid
by companies seeking our services. The increase in commissions earned in NETW’s daily transaction business was
due primarily to adding more retail registered representatives which resulted in an increase in activity from NETW’s
retail clients. The increase in trading profits was due to increased market volatility. Overall, NETW experienced
an increase in losses in the year ended June 30, 2011 compared to the same period in the prior year.
NETW had
a net loss of approximately $812,447 for the year ended June 30, 2011, which represents an increase of $204,211 from our net loss
in the same period in the prior year (which was approximately $608,236), due to increased operating expenses. NETW’s 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.
Results
of Operations
For
the Fiscal Years Ended June 30, 2011 and 2010
For the
years ended June 30, 2011 and 2010, NETW generated $2,051,656 and $2,929,721 of consolidated revenue, respectively. The decreased
revenue of $878,065 in 2011 represents a 29.97% decrease in revenue over 2010, which is the result of a decrease in investment
banking fees earned from private placements and institutional investments in funds.
During
the year ended June 30, 2011, NETW investment banking fees for the year were $293,799 a decrease of $950,984 or 76.4%, and its
investment advisory consulting fees for the year ending June 30, 2011 were $411,775 a decrease of $237,684 or 36.6% versus
the fiscal year ending June, 30 2010. In the same period, we had commission income and trading profits of $1,269,563
or an increase of $320,576 or 33.8% over the fiscal year ending June 30, 2010. The decrease in investment banking fees
was attributable to fewer
large private placements and the decrease in advisory consulting fees was due to lower fees
paid by companies seeking our services. The increase in commissions earned in NETW’s daily transaction business
was due primarily to adding more retail registered representatives which resulted in an increase in activity from NETW’s
retail clients. The increase in trading profits was due to increased market volatility. Overall, NETW experienced
an increase in losses in the year ended June 30, 2011 compared to the same period in the prior year.
NETW’s
consolidated operating expenses were $2,887,934 and $3,537,022 for the years ended June 30, 2011 and 2010, a decrease of
$649,088, or 18.35% from the prior period, and represent 140.76% and 120.72% of revenue, respectively. The decrease is due primarily
to the reduction of commissions and fees paid due to lower volume of investment banking fees and completed private placements. Offsetting
the decrease was an increase in costs of personnel hired and office expense for the fiscal year ending June 30, 2011 .
Loss from
operations was $836,278 and $607,301 for the years ended June 30, 2011 and 2010, and represents 40.76% and 20.72% of revenue,
respectively.
Interest
expense was $5,254 and $19,021 for the years ended June 30, 2011 and 2010, respectively, a decrease of $13,767 or 72%. The
decrease was due to a reduction of interest rates and a reduction in debt balances.
NETW’s
consolidated loss was $ 812,447 and $ 608,236 for the years ended June 30, 2011 and 2010, respectively.
LIQUIDITY
AND
CAPITAL RESOURCES
Our primary
source of liquidity is cash generated from operations and from short-term financing arrangements. We had $58,856 in cash as of
June 30, 2011 and $ 2,635 in cash as of June 30, 2010. We believe that we will need capital investment in order to meet our
liquidity requirements, including debt service and interest expense which was $44,585 for year ending June 30, 2011 and is estimated
to be $19,980 for the next fiscal year.
The Company
is actively exploring funding options, including, but not exclusive to, the sale of securities. Our cash flow from operations
is currently insufficient to fund our debt service and other obligations. As a result, we have decreased our borrowings,
reduced or delayed capital expenditures, and are seeking additional capital. There can be no assurance, however, that we will
return generating cash flows sufficient to meet our obligations.
We generated
a deficit in cash flow from operations of $ 271,020 for the year ended June 30, 2011. Cash used in investing activities
was $7,749 and cash provided by financing activities was $58,856 for the year ended June 30, 2011.
6
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.
Significant
Accounting Policies
The discussion
and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the U.S. While these significant accounting policies are described
in more detail in Note 2 to our financial statements, our management believes the following accounting policies to be critical
to the judgments and estimates used in preparation of the financial statements:
Use
of Estimates:
The preparation of these 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.
Principles
of Consolidation and Basis of Presentation:
FASB ASC 810-10 Consolidations – Variable Interest Entities requires a variable
interest entity, as defined, to be consolidated by a company, if that company is subject to a majority of the risk of loss from
the variable interest entity’s activities, entitled to receive a majority of the entity’s residual returns, the purpose
of the entity is for the benefit of the reporting entity, or if the entity is substantially financed by the reporting entity.
For these purposes, variable interests held by related parties should be consolidated with the reporting entity.
7
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
NETW 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. NETW’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 NETW. 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.
NETW 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 it provides to its customers. In executing customer orders to buy or sell
a security in which it makes a market, NETW 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. NETW may also act as agent and execute a customer's
purchase or sale order with another broker-dealer market-maker at the best inter-dealer market price available and charge a commission.
Mark-ups, mark-downs and commissions are generally priced competitively based on the services it provides to its customers. In
each instance the commission charges, mark-ups or mark-downs, are in compliance with guidelines established by the FINRA.
Marketable
securities are carried at fair value, with changes in value included in the statement of income in the period of change. Fair
value is generally determined by quoted market prices. Non-marketable securities are valued at fair value as determined by management.
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.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
8
Item
8. Financial Statements and Supplementary Data
Index to Financial Statements
|
Page
|
Report of Independent Registered Public Accounting Firm
|
F-1
|
Consolidated Statements of Financial Condition
|
F-2
|
Consolidated Statements of Operations
|
F-3
|
Consolidated Statements of Stockholders’ Equity
|
F-4
|
Consolidated Statements of Cash Flows
|
F-5
|
Notes to Consolidated Financial Statements
|
F-6
|
9
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors of
Network
1 Financial Group, Inc. and Subsidiaries
We have
audited the accompanying consolidated statement of financial condition of Network 1 Financial Group, Inc and Subsidiaries (the
“Company”) as of June 30, 2011 and 2010 and the related consolidated statements of operations, changes in equity and
cash flows for each of the two years in the period ended June 30, 2011. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted
our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Network 1 Financial Group, Inc, and Subsidiaries as of June 30, 2011 and 2010, and the results of its operations and its cash
flows for each of the two years in the period ended June 30, 2011 in conformity with United States generally accepted
accounting principles.
/s/ RBSM
LLP
|
|
|
|
New York, New York
|
|
October 13, 2011
|
|
F-1
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION
JUNE
30, 2011 and 2010
|
|
2011
|
|
|
2010
|
|
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
58,856
|
|
|
$
|
2,635
|
|
Notes Receivable - Related party
|
|
|
59,002
|
|
|
|
90,212
|
|
Deposit with clearing organization
|
|
|
345,137
|
|
|
|
685,612
|
|
Due from Affiliates
|
|
|
45,482
|
|
|
|
40,351
|
|
Advances to Registered Representatives: net of reserve
|
|
|
|
|
|
|
|
|
for uncollectible accounts of $90,000
|
|
|
70,231
|
|
|
|
76,286
|
|
Securities held for resale, at market
|
|
|
83,415
|
|
|
|
152,025
|
|
Commission receivable from clearing firm
|
|
|
78,021
|
|
|
|
-
|
|
Property and Equipment, net.
|
|
|
17,935
|
|
|
|
3,878
|
|
Other Assets
|
|
|
27,000
|
|
|
|
28,433
|
|
TOTAL ASSETS:
|
|
$
|
785,079
|
|
|
$
|
1,079,432
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Line of Credit
|
|
$
|
30,000
|
|
|
$
|
55,000
|
|
Notes Payable
|
|
|
4,088
|
|
|
|
12,966
|
|
Commissions Payable
|
|
|
78,943
|
|
|
|
51,128
|
|
Capital Leases payable
|
|
|
18,588
|
|
|
|
7,626
|
|
Warrant Liability
|
|
|
-
|
|
|
|
23,831
|
|
Accounts Payable, accrued expenses and other liabilities
|
|
|
173,923
|
|
|
|
223,484
|
|
Bank Overdraft
|
|
|
-
|
|
|
|
21,413
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
305,542
|
|
|
|
395,448
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, $.001 par value;
|
|
|
|
|
|
|
|
|
100,000,000 shares authorized; 55,560,057 and 40,360,057
|
|
|
|
|
|
|
|
|
issued and 47,635,057 and 32,435,057 outstanding, respectively
|
|
|
55,560
|
|
|
|
40,360
|
|
|
|
|
|
|
|
|
|
|
Additional Paid In Capital
|
|
|
2,022,888
|
|
|
|
1,430,088
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock at cost; 7,925,000 shares
|
|
|
(5,129
|
)
|
|
|
(5,129
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated defecit
|
|
|
(1,808,782
|
)
|
|
|
(996,335
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
264,537
|
|
|
|
468,984
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest
|
|
|
215,000
|
|
|
|
215,000
|
|
TOTAL EQUITY
|
|
|
479,537
|
|
|
|
683,984
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
AND EQUITY
|
|
$
|
785,079
|
|
|
$
|
1,079,432
|
|
(the
accompanying notes are an integral part of these consolidated financial statements)
F-2
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the years ended June 30, 2011 and 2010
|
|
2011
|
|
|
2010
|
|
Revenues:
|
|
|
|
|
|
|
Commissions
|
|
$
|
943,410
|
|
|
$
|
920,368
|
|
Net dealer inventory gains
|
|
|
326,153
|
|
|
|
28,619
|
|
Investment banking
|
|
|
293,799
|
|
|
|
1,244,780
|
|
Interest and Dividends
|
|
|
25,521
|
|
|
|
37,761
|
|
Transfer fees and clearing services
|
|
|
11,460
|
|
|
|
27,242
|
|
Investment advisory
|
|
|
411,775
|
|
|
|
649,459
|
|
Other
|
|
|
39,538
|
|
|
|
21,492
|
|
Total Revenues
|
|
|
2,051,656
|
|
|
|
2,929,721
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
872,309
|
|
|
|
1,643,558
|
|
Compensation and Related Expenses
|
|
|
1,012,836
|
|
|
|
694,869
|
|
Clearing Fees
|
|
|
158,975
|
|
|
|
260,680
|
|
Communications and data processing
|
|
|
116,841
|
|
|
|
116,450
|
|
Interest
|
|
|
5,254
|
|
|
|
19,021
|
|
Occupancy and related expenses
|
|
|
110,483
|
|
|
|
133,621
|
|
Office Expenses
|
|
|
339,979
|
|
|
|
298,930
|
|
Professional Fees
|
|
|
265,673
|
|
|
|
360,974
|
|
Depreciation
|
|
|
5,584
|
|
|
|
8,919
|
|
Total Operating
Expenses
|
|
|
2,887,934
|
|
|
|
3,537,022
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(836,278
|
)
|
|
|
(607,301
|
)
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
|
|
Loss (Gain) on change in derivative
liability
|
|
|
(23,831
|
)
|
|
|
935
|
|
Total Other Income
|
|
|
(23,831
|
)
|
|
|
935
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(812,447
|
)
|
|
|
(608,236
|
)
|
|
|
|
|
|
|
|
|
|
Income attributable to non-controlling
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable
to common shareholders
|
|
$
|
(812,447
|
)
|
|
$
|
(608,236
|
)
|
|
|
|
|
|
|
|
|
|
Loss per common share (basic and diluted)
|
|
$
|
(0.018
|
)
|
|
$
|
(0.015
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
46,416,495
|
|
|
|
40,360,057
|
|
(the
accompanying notes are an integral part of these consolidated financial statements)
F-3
NETWORK
1 FINANCIAL GROUP, INC. and SUBSIDIARIES
CONSOLIDATED
STATEMENT OF EQUITY
For
the years ended June 30, 2011 and 2010
|
|
|
|
|
Additional
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Non-Controlling
|
|
|
|
|
|
|
Common Stock
|
|
|
paid-in-capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
interest
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- June 30, 2009
|
|
|
4
0,360,057
|
|
|
$
|
40,3
60
|
|
|
$
|
1,397,181
|
|
|
$
|
(5,129
|
)
|
|
$
|
(388,099
|
)
|
|
$
|
215,000
|
|
|
$
|
1,259,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Contributions
|
|
|
|
|
|
|
|
|
|
$
|
32,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(608,236
|
)
|
|
|
|
|
|
$
|
(608,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30,
2010
|
|
|
40,360,057
|
|
|
$
|
40,360
|
|
|
$
|
1,430,088
|
|
|
$
|
(5,129
|
)
|
|
$
|
(996,335
|
)
|
|
$
|
215,000
|
|
|
$
|
683,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock
|
|
|
9,000,000
|
|
|
|
9,000
|
|
|
|
351,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for
services
|
|
|
6,200,000
|
|
|
|
6,200
|
|
|
|
241,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
248,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(812,447
|
)
|
|
|
|
|
|
|
(812,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
-June 30, 2011
|
|
|
55,560,057
|
|
|
$
|
55,560
|
|
|
$
|
2,022,888
|
|
|
$
|
(5,129
|
)
|
|
$
|
(1,808,782
|
)
|
|
$
|
215,000
|
|
|
$
|
479,537
|
|
(the
accompanying notes are an integral part of these consolidated financial statements)
F-4
NETWORK
1 FINANCIAL SECURITIES, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
For
the Years Ended June 30, 2011 and 2010
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(812,447
|
)
|
|
$
|
(608,236
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,584
|
|
|
|
8,920
|
|
(Gain) Loss on change in derivative liability
|
|
|
(23,831
|
)
|
|
|
935
|
|
Stock based compensation
|
|
|
248,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Due from/to affliates
|
|
|
(5,131
|
)
|
|
|
-
|
|
Due from clearing organization
|
|
|
340,475
|
|
|
|
65,707
|
|
Securities held for resale, at market
|
|
|
68,610
|
|
|
|
(34,934
|
)
|
Advances to/from registered representatives
|
|
|
6,055
|
|
|
|
(10,702
|
)
|
Other assets
|
|
|
1,433
|
|
|
|
(1,833
|
)
|
Commissions payable
|
|
|
27,815
|
|
|
|
9,825
|
|
Securities sold, but not yet purchased, at market
|
|
|
-
|
|
|
|
(1,215
|
)
|
Due to/from clearing organization
|
|
|
(78,021
|
)
|
|
|
(17,477
|
)
|
Accounts Payable, accrued expenses
& other Liabilities
|
|
|
(49,562
|
)
|
|
|
(26,011
|
)
|
TOTAL ADJUSTMENTS
|
|
|
541,427
|
|
|
|
(6,785
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH (USED
IN) OPERATING ACTIVITIES
|
|
|
(271,020
|
)
|
|
|
(615,021
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of property & equipment
|
|
|
(7,749
|
)
|
|
|
-
|
|
NET CASH (USED
IN) INVESTING ACTIVITIES
|
|
|
(7,749
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Repayment of line of credit
|
|
|
(25,000
|
)
|
|
|
(38,000
|
)
|
Proceeds from bank overdraft
|
|
|
(21,413
|
)
|
|
|
21,413
|
|
Cash from certificate of deposit
|
|
|
-
|
|
|
|
550,942
|
|
Proceeds from sale of common stock
|
|
|
360,000
|
|
|
|
-
|
|
Advances repaid from affiliated companies
|
|
|
31,211
|
|
|
|
16,318
|
|
Repayment of Notes Payable
|
|
|
(8,878
|
)
|
|
|
(19,503
|
)
|
Repayment of capital lease
|
|
|
(930
|
)
|
|
|
(5,397
|
)
|
NET CASH PROVIDED
BY FINANCING ACTIVITIES
|
|
|
334,990
|
|
|
|
525,773
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
56,221
|
|
|
|
(89,248
|
)
|
|
|
|
|
|
|
|
|
|
CASH - Beginning of Year
|
|
|
2,635
|
|
|
|
91,882
|
|
|
|
|
|
|
|
|
|
|
CASH - End of Year
|
|
$
|
58,856
|
|
|
$
|
2,635
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid during year
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,537
|
|
|
$
|
19,020
|
|
Income Taxes
|
|
$
|
2,726
|
|
|
$
|
725
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Equipment acquired under capital lease
|
|
$
|
11,892
|
|
|
$
|
-
|
|
(the
accompanying notes are an integral part of these consolidated financial statements)
F-5
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE
1 – Basis of Presentation (Reverse Merger and Corporate Structure)
Network
1 Financial Securities, Inc. (the "Company" or "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.
The Company 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, the Company completed a merger transaction 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 .
Upon completion
of the reverse merger transaction, ISSI changed its name to Network 1 Financial Group, Inc.
All references
to Common Stock, share and per share amounts have been retroactively restated to reflect the exchange ratio of 17.16 shares of
ISSI’s Common Stock for 1 share of all of the classes of the acquirer's Common Stock outstanding immediately prior to the
merger as if the exchange had taken place as of the beginning of the earliest period presented.
The accompanying
consolidated financial statements present the historical financial condition, results of operations and cash flows of the Company
prior to the merger with ISSI.
The accompanying
consolidated financial statements present on a consolidated basis the accounts of Network 1 Financial Group, Inc. and
its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Upon the
closing date of the Reverse Merger, through its wholly owned subsidiary, NETW, the Company commenced the business of providing
broker-dealer services. NETW is registered as a broker-dealer with the SEC, 40 states and Puerto Rico. NETW is an introducing
broker-dealer that clears all transactions with and for customers on a fully disclosed basis with its clearing broker, Legent
Clearing LLC, a FINRA member firm. NETW is a member of the Financial Industry Regulatory Authority (“FINRA”), the
Securities Investor Protection Corporation (“SIPC”) and NASDAQ.
The Company’s
customer base is made up primarily of individual investors. The Company generates income from transactional business, mutual fund
sales, business consulting fees, finder’s fees, annuity sales, register representative investment advisor fees, fees for
providing investment banking services, placement agent fees for capital raises, bond transactions, and underwriting fees and concessions.
The Company
competes with other broker-dealers by offering services to small and microcap public companies which we believe are significantly
underserved by the investment community. These companies may have little or no analysts following their growth and may be shut
out of the capital markets due to their size and current market cap. Many of our competitors are larger and have substantially
more capital resources than us, and could potentially enter our market space.
F-6
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR
THE YEARS ENDED JUNE 30, 2011AND 2010
NOTE
2 - Summary of Significant Accounting Policies
Use
of Estimates
The preparation
of the 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.
F-7
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR
THE YEARS ENDED JUNE 30, 2011 AND 2010
Revenue
Recognition
Customer
security transactions and the related commission income and expense are recorded as of the trade date. Investment banking revenues
include gains, losses, and fees, net of syndicate expenses, arising from securities offerings in which the Company acts as an
underwriter or agent. Investment banking revenues also include fees earned from providing financial advisory services. Investment
banking management fees are recorded on the offering date, sales concessions on the settlement date, and underwriting fees at
the time the underwriting is completed and the income is reasonably determinable. Customers who are financing their transaction
on margin are charged interest. The Company’s margin requirements are in accordance with the terms and conditions mandated
by its clearing firm. The interest is billed on the average daily balance of the margin account.
Net dealer
inventory gains result from securities transactions entered into for the account and risk of the Company. Net dealer inventory
gains are recorded on a trade date basis. Investment advisory fees are account management fees for high net worth clients based
on the amount of the assets under management. These fees are billed quarterly and recognized at such time that the service is
performed and collection is probable.
The Company
generally acts as an agent in executing customer orders to buy or sell listed and over-the-counter securities in which it does
not make a market, and charges commissions based on the services the Company provides to its customers. In executing customer
orders to buy or sell a security in which the Company makes a market, the Company may sell to, or purchase from, customers at
a price that is substantially equal to the current inter-dealer market price plus or minus a mark-up or mark-down. The Company
may also act as agent and execute a customer's purchase or sale order with another broker-dealer market-maker at the best inter-dealer
market price available and charge a commission. Mark-ups, mark-downs and commissions are generally priced competitively based
on the services it provides to its customers. In each instance the commission charges, mark-ups or mark-downs, are in compliance
with guidelines established by the FINRA.
Marketable
securities are carried at fair value, with changes in value included in the statement of income in the period of change. Fair
value is generally determined by quoted market prices. Non-marketable securities are valued at fair value as determined by management.
Cash
and Cash Equivalents
The Company
considers all highly liquid temporary cash investments with an original maturity of three months or less when purchased, to be
cash equivalents.
Property
and Equipment
Property
and equipment is recorded at cost. Depreciation is calculated using the straight-line method based on the estimated useful lives
of the related assets, which range from five to twenty years. Leasehold improvements are amortized using the straight-line method
over the shorter of the estimated useful lives of the assets or the terms of the leases. Maintenance and repairs are charged to
expense as incurred; costs of major additions and betterments that extend the useful life of the asset are capitalized. When assets
are retired or otherwise disposed of, the costs and related accumulated depreciation or amortization are removed from the accounts
and any gain or loss on disposal is recognized.
F-8
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR
THE YEARS ENDED JUNE 30, 2011 AND 2010
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.
Impairment
of Long-Lived Assets
The Company
assesses the recoverability of its long lived assets, including property and equipment when there are indications that the assets
might be impaired. When evaluating assets for potential impairment, the Company first compares the carrying amount of the asset
to the asset’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows
used in this analysis are less than the carrying amount of the asset, an impairment loss calculation is prepared. The impairment
loss calculation compares the carrying amount of the asset to the asset’s estimated future cash flows (discounted and with
interest charges). If the carrying amount exceeds the asset’s estimated futures cash flows (discounted and with interest
charges), the loss is allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts
of those assets. Based on its assessments, the Company did not incur any impairment charges for the years ended June 30, 2011
and 2010.
F-9
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR
THE YEARS ENDED JUNE 30, 2011 AND 2010
Concentrations
of Credit Risk
The Company
is engaged in trading and providing a broad range of securities brokerage and investment services to a diverse group of retail
and institutional clientele, as well as corporate finance and investment banking services to corporations and businesses. Counterparties
to the Company’s business activities include broker-dealers and clearing organizations, banks and other financial institutions.
The Company uses clearing brokers to process transactions and maintain customer accounts on a fee basis for the Company. The Company
uses one clearing broker for substantially all of its business. The Company permits the clearing firms to extend credit to its
clientele secured by cash and securities in the client’s account. The Company’s exposure to credit risk associated
with the non-performance by its customers and counterparties in fulfilling their contractual obligations can be directly impacted
by volatile or illiquid trading markets, which may impair the ability of customers and counterparties to satisfy their obligations
to the Company. The Company has agreed to indemnify the clearing brokers for losses they incur while extending credit to the Company’s
clients. It is the Company’s policy to review, as necessary, the credit standing of its customers and each counter party.
Amounts due from customers that are considered uncollectible by the clearing broker are charged back to the Company by the clearing
broker when such amounts become determinable.
Upon notification
of a charge back, such amounts, in total or in part, are then either (i) collected from the customers, (ii) charged to the broker
initiating the transaction and included in other receivables in the accompanying consolidated balance sheet, and/or (iii) charged
as an expense in the accompanying consolidated statements of operations, based on the particular facts and circumstances.
The maximum
potential amount for future payments that the Company could be required to pay under this indemnification cannot be estimated.
However, the Company believes that it is unlikely it will have to make any material payments under these arrangements and has
not recorded any contingent liability in the financial statements for this indemnification.
The Company
maintains cash with major financial institutions. The Federal Deposit Insurance Corporation (“FDIC”) insures up to
$250,000 at each institution. At times such amounts may exceed the FDIC limits. At June 30, 2011 and 2010, the uninsured cash
bank balance was approximately $0 and $0, respectively. The Company believes it is not exposed to any significant credit risks
for cash.
Advances
to Registered Representatives
The Company
extends unsecured credit in the normal course of business to its registered representatives. The determination of the amount of
uncollectible accounts is based on the amount of credit extended and the length of time each receivable has been outstanding,
as it relates to each individual registered representative. The allowance for uncollectible amounts reflects the amount of loss
that can be reasonably estimated by management and is included as part of operating expenses in the accompanying consolidated
statements of operations. As of June 30, 2011 and 2010, the Company has reserved approximately $90,000, respectively for any potential
non-collection.
F-10
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR
THE YEARS ENDED JUNE 30, 2011 AND 2010
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising costs, which are included in selling, general and administrative expenses, were deemed
to be nominal during each of the reporting periods.
Non-controlling
Interest
As a result
of adopting FASB ASC 810-10 Consolidations – Variable Interest Entities, on July 1, 2009, we present non-controlling
interests (previously shown as minority interest) as a component of equity on our Consolidated Statement of Financial Condition
and Consolidated Statement of Equity. The adoption of this guidance did not have any other material impact on our financial position,
results of operations or cash flow.
Income
Taxes
In accordance
with ASC 740, “Income Taxes,” The Company accounts for income taxes under the liability method. Deferred income tax
assets and liabilities are determined based on the estimated future tax effects of temporary differences between the financial
statement and tax bases of assets and liabilities, as measured by current enacted tax rates. The Company periodically assess whether
it is more likely than not that they will generate sufficient taxable income to realize the deferred tax assets. The Company records
a valuation allowance, as necessary, to reduce the deferred tax assets to the amount of future tax benefit that The Company estimates
is more likely than not to be realized. The Company believes that their estimates are reasonable; however, the final outcome of
tax matters may be different from than the estimates reflected in their consolidated financial statements.
The Company’s
income tax provisions are based on assumptions and calculations which will be subject to examination by various tax authorities.
The Company records tax benefits for positions that they believe are probable of being sustained under such examinations. Regularly,
the Company assesses the potential outcome of such examinations to determine the adequacy of their income tax accruals. The Company
adjusts their income tax provision during the period in which they determine that the actual results of the examinations
may differ from their estimates. Changes in tax laws and rates are reflected in their income tax provision in the period in which
they occur.
ASC 740
“Income Taxes” which prescribes a recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification,
treatment of interest and penalties, and disclosure of such positions. Effective January 1, 2007, the Company adopted the
provisions of ASC 740 as required. As a result of implementing ASC 740, there has been no adjustment to the Company’s financial
statements and the adoption of ASC 740 did not have a material effect on the Company’s financial statements for the years
ending June 30, 2011 and 2010.
Net
Loss per Common Share
The Company
computes earnings per share under Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”).
Basic net income (loss) per common share is computed by dividing net loss by the weighted average number of shares of common stock.
Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding
during the period. Dilutive common stock equivalents consist of shares issuable upon conversion of convertible notes
and the exercise of the Company's stock options and warrants.
For the
years ended June 30, 2011 and 2010, common stock equivalents are not considered in the calculation of the weighted average number
of common shares outstanding because they would be anti-dilutive, thereby decreasing the net loss per common share.
Reclassifications
Certain
reclassifications have been made in prior year's financial statements to conform to classifications used in the current year.
F-11
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR
THE YEARS ENDED JUNE 30, 2011 AND 2010
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 consolidated financial statements.
NOTE
4 – Securities held for resale, at market
The following
table shows the market values of the Company's investment securities owned as of June 30, 2011and 2010, respectively:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Securities
|
|
$
|
83,415
|
|
|
$
|
152,025
|
|
|
|
|
|
|
|
|
|
|
F-12
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR
THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE
5 – Deposit with Clearing Organization
The following
represents amounts on deposit with Southwest Securities, Inc. (“Southwest”) and Legent Clearing LLC (“Legent”),
the Company’s clearing broker inventory account:
|
|
June
30, 2011
|
|
|
June
30, 2010
|
|
|
|
Southwest
|
|
|
Legent
|
|
|
Total
|
|
|
Southwest
|
|
|
Legent
|
|
|
Total
|
|
Cash
|
|
$
|
14,495
|
|
|
$
|
260,885
|
|
|
$
|
275,380
|
|
$
|
392,033
|
|
$
|
50,000
|
|
$
|
442,033
|
|
Marketable
securities, net of fair value adjustments
|
|
|
0
|
|
|
|
69,757
|
|
|
|
69,757
|
|
|
243,579
|
|
|
-
|
|
|
243,579
|
|
|
|
$
|
14,495
|
|
|
$
|
330,642
|
|
|
$
|
345,137
|
|
$
|
635,612
|
|
$
|
50,000
|
|
$
|
685,612
|
|
The marketable
securities are primarily comprised of corporate stocks. Marketable securities on deposit with Legent Securities are reflected
at fair value. As of June 30, 2011, the Company is required to maintain a clearing deposit of $100,000 with Legent.
On April
21, 2010, the Company entered into a fully executed Clearing Agreement with Legent, effective as of April 15, 2010 (the “Legent
Clearing Agreement”). Pursuant to the Legent Clearing Agreement, Legent will provide certain services to the Company with
respect to customer accounts (the “Accounts”) introduced by the Company to Legent. Among other things,
the Services shall include the following: (i) executing, clearing and settling securities transactions on behalf of the Company;
(ii) preparing and delivering confirmations and Account statements; (iii) extending credit to Accounts; (iv) performing various
cashiering functions; (v) safeguarding Account funds and securities; and (vi) maintaining books and records with respect to the
Accounts.
The Company along with Southwest and Legent entered into an agreement
to begin the transfer from Southwest to Legent of all customer accounts introduced by the Company on August 13, 2010. Subsequent
to this transfer the Company used Legent to clear its brokerage business.
As of
June 2011, the Company also has a deposit of $14,495 in cash at Southwest due to an account still held at the former clearing
company.
F-13
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR
THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE
6 - Related Party Transactions
As of
June 30, 2011 and 2010, due from affiliated companies consisted of the following:
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Legends property development
(a)
|
|
$
|
0
|
|
|
$
|
1,330
|
|
|
|
|
|
|
|
|
|
|
Network 1 Financial Advisors Inc.
(a)
|
|
$
|
8,093
|
|
|
$
|
(1,263)
|
|
|
|
|
|
|
|
|
|
|
Network 1 Financial
Assurance, Inc. (a)
|
|
$
|
200
|
|
|
$
|
400
|
|
|
|
|
|
|
|
|
|
|
National Financial Services Group
(a)
|
|
$
|
37,189
|
|
|
$
|
39,884
|
|
Total due from affiliates
|
|
|
45,482
|
|
|
|
40,351
|
|
|
(a)
|
Represents amounts due from an affiliated
company whose officers and shareholders are officers and shareholders’ of the Company.
|
|
|
|
The company
has a promissory note receivable of $100,000 bearing interest of 6% per annum. The note is payable on November 18, 2011. The balance
outstanding is $59,002 and $ 90,212 as of June 30, 2011 and 2010 respectively. The promissory note is receivable from an affiliated
company, Network 1 Financial Advisors Inc., whose officers and shareholders are officers and shareholders’ of the Company
NOTE
7 - Property and Equipment
Property
and equipment, net, consists of the following:
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
Computer equipment
|
|
$
|
135,003
|
|
|
$
|
115,363
|
|
Furniture
and fixtures
|
|
|
31,251
|
|
|
|
31,251
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
166,254
|
|
|
|
146,614
|
|
Less: accumulated
depreciation
|
|
|
(148,319)
|
|
|
|
(142,736)
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment - Net
|
|
$
|
17,935
|
|
|
$
|
3,878
|
|
Depreciation
expense for the years ended June 30, 2011 and 2010 was approximately $5,584 and $8,920, respectively.
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 are amortized over the estimated life of the assets. The interest rate under the lease
is 6.60% and 6.89% and is imputed based on the lessor’s implicit rate of return. The Capital lease is payable in monthly
installments of $532 and $210, including interest through August 2012 and September 2015.
Amortization
of assets held under the capital lease is included in depreciation expense.
F-14
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR
THE YEARS ENDED JUNE 30, 2011 AND 2010
At June
30, 2011, annual minimum future lease payments under the capital lease are as follows:
June 30,
|
|
Amount
|
|
|
|
|
|
2012
|
|
$
|
9,437
|
|
2013
|
|
|
2,517
|
|
2014
|
|
|
2,517
|
|
2015
|
|
|
2,517
|
|
2016
|
|
|
1,600
|
|
|
|
|
|
|
Total minimum
lease payments
|
|
$
|
18,588
|
|
NOTE
9 - Line of Credit
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%. As of June 30, 2011 and 2010, the amount outstanding
under this credit facility was $30,000 and $55,000, respectively. Indebtedness under the credit agreement is
collateralized by substantially all of the assets of the Company and an officers’ personal guarantee.
NOTE
10 - Notes Payable
Notes
payable include settlement agreements entered into with the FINRA in May and September 2010, for monetary sanctions imposed
against the Company, respectively (See Note 17). As of June 30, 2011, notes payable consists of as follows:
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
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 $2,500 per month including interest at a rate of 11.25% through August 2010.
|
|
|
-
|
|
|
|
5,966
|
|
Note payable
to FINRA in monthly installments of $500. per month including interest at a rate of 6.25% through August 2011
|
|
|
824
|
|
|
|
7,000
|
|
Total notes
payable
|
|
$
|
4,088
|
|
|
$
|
12,966
|
|
F-15
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR
THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE
11 - Income Taxes
As of
June 30, 2011, the Company had net operating loss carry forwards available to offset future taxable income of approximately $
2.2 million. As a result of the Reverse Merger, the amount of prior years’ net operating loss carry forwards available to
be utilized was significantly reduced due to the change in control provisions of Section 382 of the Internal Revenue Code. These
net operating losses which, if not utilized, expire in 2031. At June 30, 2011 the Company has a deferred tax asset, which
consists primarily of temporary differences relating to net operating losses. Deferred income taxes reflect the net tax effects
of operating loss and tax credit carryforwards and temporary differences between carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. In assessing the realization of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which temporary differences representing net future deductible amounts become deductible. ASC 740 requires that a valuation allowance
be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized.
A review
of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment
in which the company operates the length of carryback and carry forward periods, and expectations of future profits, etc.
The Company
believes that uncertainty exists with respect to future realization of the deferred tax assets and has established a valuation
allowance for the full amount as of June 30, 2011.
NOTE
12 - Benefit Contribution Plan
The Company
sponsors a 401(k) profit sharing plan that covers substantially all of its employees. The plan provides for a discretionary annual
contribution, and is allocated in proportion to compensation. In addition, each participant may elect to contribute to the Plan
by way of a salary deduction. An employee becomes fully vested in the Company’s contribution after 6 years. A participant
is fully vested in their own contributions. For the years ended June 30, 2011 and 2010, the Company made no discretionary contributions
to the Plan.
NOTE
13 - Net Capital Requirements
NETW,
a subsidiary of the Company, 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
June 30, 2011 and 2010, NETW’s net capital exceeded the requirement by approximately $65,211 and $94,237 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.
F-16
NETWORK
I FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR
THE YEARS ENDED JUNE 30, 2011AND 2010
NOTE
14 - Non-Controlling Interest in Subsidiaries
Network
1 Financial Securities, Inc. (“NETW”) exchanged substantially all its Common Stock in accordance with the reverse
merger. However, NETW’s Series A preferred stock remained outstanding. As of June
30, 2011nd 2010, NETW had 1,000,000 shares authorized, of 8% Series A preferred stock $1.00 par value, and 215,000 shares are
outstanding.
The Series
A preferred stock is redeemable at the option of the Company’s Board of Directors at 125% of the issuance price plus any
dividends earned but unpaid and after one year outstanding. The Series A preferred stock is non-voting and non-cumulative. Of
the 215,000 shares issued, 130,000 shares are owned by National Financial Services Group, Inc., an affiliated Company, whose officers
and shareholders’ are officers and shareholders of the Company. The preferred stock shareholders are entitled to a bonus
dividend at the discretion of the board of directors based on the profitability of the firms market making investment activities
minus certain deductions. No bonus dividends were declared for the years ended June 30, 2011 and 2010.
NOTE
15 –Warrants and Derivative Liability
The following
is additional information with respect to the Company’s warrants as of June 30, 2011:
WARRANTS OUTSTANDING AND EXERCISABLE
|
|
|
|
Number of
|
|
Weighted
|
|
|
|
|
|
Outstanding
|
|
Average
|
|
Weighted
|
|
|
|
Shares
|
|
Remaining
|
|
Average
|
|
Exercise
|
|
Underlying
|
|
Contractual
|
|
Exercise
|
|
Price
|
|
Warrants
|
|
Life
|
|
Price
|
|
$0.16
|
|
|
7,657,733
|
|
0.32
|
|
$
|
0.16
|
|
|
|
|
7,657,733
|
|
0.32
|
|
$
|
0.16
|
|
Effective
April 8, 2010, the Board of Directors of the Company amended the Warrant Agreement to extend the expiration date of the Warrants
by eighteen months, from April 23, 2010 until October 23, 2011.
Effective
March 4, 2011, the exercise price of these warrants was adjusted from $0.20 to $0.16 due to the exercise price adjustment provisions
in the warrant agreements. This adjustment was due to the issuance of common stock for services and sale of the common stock for
a stock price lower than the exercise price attributable to the warrants.
In
June 2008, the FASB issued new accounting guidance which requires entities to evaluate whether an equity-linked financial instrument
(or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement
provisions. Instruments not indexed to their own stock fail to meet the scope exception of ASC 815 “Derivative and Hedging”
and should be classified as a liability and marked-to-market. The statement is effective for fiscal years beginning after December 15,
2008 and is to be applied to outstanding instruments upon adoption with the cumulative effect of the change in accounting principle
recognized as an adjustment to the opening balance of retained earnings. The Company’s warrants issued in connection with
the IPO do not have fixed settlement provisions because their exercise prices, may be lowered if the Company issues securities
at lower prices in the future. The Company was required to include the reset provisions in order to protect warrant
holders from potential dilution associated with future financings. In accordance with the guidance, the warrants have
been re-characterized as a derivative liability.
F-17
NETWORK
I FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR
THE YEARS ENDED JUNE 30, 2011 AND 2010
The derivative
liability was valued using the Black-Scholes option valuation model and the following assumptions:
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
Warrants:
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.17
|
%
|
|
|
0.27
|
%
|
Expected volatility
|
|
|
42.68
|
%
|
|
|
85.77
|
%
|
Expected life (in years)
|
|
|
0.32
|
|
|
|
1.31
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
Fair value:
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
-
|
|
|
$
|
23,831
|
|
The risk-free
interest rate was based in rates established by the Federal Reserve. The Company’s expected volatility was based upon the
historical volatility for its common stock. The expected life of the warrants was determined by the expiration date of the warrants.
The expected dividend yield was based upon the fact that the Company has not historically paid dividends, and does not expect
to pay dividends in the future.
NOTE
16- Stockholders’ Equity
Common
Stock
In accordance
with the reverse merger, all references to Common Stock, share and per share amounts have been retroactively restated to reflect
the exchange ratio of 17.16 shares of ISSI’s Common Stock for 1 share of all of the classes of the acquirer's Common Stock
outstanding immediately prior to the merger as if the exchange had taken place as of the beginning of the earliest period presented.
On December
8, 2004, we filed a Certificate of Amendment to our Certificate of Incorporation increasing the total number of authorized shares
to 101,000,000, consisting of 100,000,000 shares of common stock and 1,000,000 shares of preferred stock.
On March 4,
2011, the Company sold 9,000,000 shares of its common stock to an Windex Capital LLC an unaffiliated investor for proceeds of
$360,000 before expenses associated with the placement. The Company also authorized the issuance of 900,000 common stock
shares to be distributed to the placement agent registered representative of Network 1 Financial Securities Inc.
On January
4, 2011, the Company authorized the issuance of 6,200,000 shares of its common stock as compensation to one of it’s officers
valued at $248,000. The value of the stock was based on the estimated market value of the companies stock at the close of business
on January 4, 2011 of $0.04.
On March
17, 2011 the Board authorized the issuance of 100,000 shares to Vincent LaBarbara a Board member for agreeing to join the Board.
Preferred
Stock
The Board
of Directors of the Company is authorized, without further action of the shareholders of the Company, to issue up to 1,000,000
shares of Preferred Stock in one or more classes or series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, and the number of shares
constituting any series or the designation of such series. As of June 30, 2011 and 2010, there were no shares of preferred
stock issued and outstanding.
F-18
NETWORK
I FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE
17 - Commitments and Contingencies
Litigation
The Company
may be involved in legal proceedings in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes
and amount of loss are not predictable with assurance. The Company currently is not involved in any legal proceedings in the ordinary
course of business
. In the event of a legal proceeding the Company will assess the exposure and make the appropriate reserve
calculation if necessary.
Enforcement
Actions
In April
2010, the Company entered into a settlement agreement with the NASD for monetary sanctions imposed on the Company. The monetary
sanctions amounted in the aggregate to $10,000. The term of the settlement agreement allowed the Company to follow an installment
arrangement. Principal terms of the arrangement required a down payment of 25%. The remaining balance is to be paid over a term
of 16 months. Interest is to be paid at a rate of approximately 6.25% per annum (See Note 10).
In September
2010, the Company entered into a settlement agreement with the NASD for monetary sanctions imposed on the Company. The monetary
sanctions amounted in the aggregate to $10,000. The term of the settlement agreement allowed the Company to follow an installment
arrangement. Principal terms of the arrangement required a down payment of 25%. The remaining balance is to be paid over a term
of 16 months. Interest is to be paid at a rate of approximately 6.25% per annum (See Note 10).
Regulatory
Approvals Required
As
a registered broker-dealer, we are subject to the SEC’s ongoing Uniform Net Capital Rule 15c3-1. This requires that we 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.
Lease
Commitments
The Company
leases its corporate office facility under an operating lease expiring in June 2012. Additional rent is payable for increases
in real estate taxes and operating expenses over base period amounts. Under the terms of the lease, the Company has the option
to cancel the lease provided a minimum of four months written notice is given to the landlord.
F-19
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
FOR
THE YEARS ENDED JUNE 30, 2011 AND 2010
Minimum
future annual rental payments are approximately as follows:
Year
Ending
|
|
Amount
|
|
|
|
|
|
2012
|
|
$
|
108,000
|
|
Total
|
|
$
|
108,000
|
|
The total
amount of rent payable under the leases is recognized on a straight line basis over the term of the leases. Rent expense for the
years ended June 30, 2011 and 2010 was approximately $108,000 and $121,200, respectively.
NOTE
18 – Fair Value Measurements
ASC 820
defines fair value as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes the following three levels of
inputs that may be used:
Level 1:
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities.
The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2:
Observable prices that are based on inputs not quoted on active markets but corroborated by market data.
Level 3:
Unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions.
The fair value hierarchy gives the lowest priority to Level 3 inputs.
The table
below summarizes the fair values of our financial assets that are measured on a recurring basis at fair value as of June
30, 2011:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Deposit with clearing
organization
|
|
$
|
69,757
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
69,757
|
|
Securities
held for resale
|
|
|
83,415
|
|
|
|
-
|
|
|
|
-
|
|
|
|
83,415
|
|
Total Assets
|
|
$
|
153,172
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
153,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
$
|
-
|
|
|
|
-
|
|
|
|
0
|
|
|
$
|
0
|
|
Total Liabilities
|
|
$
|
-
|
|
|
|
-
|
|
|
|
0
|
|
|
$
|
0
|
|
The table
below sets forth a summary of changes in the fair value of the Company’s Level 3 Financial Liabilities (derivative liabilities)
for the year ended June 30, 2011.
Balance at beginning of year
|
|
$
|
23,831
|
|
Change in fair value of derivative
liabilities
|
|
|
(23,831
|
)
|
Balance at end of year
|
|
$
|
0
|
|
NOTE
19 - Subsequent Event
On September
1, 2011, NETW entered into an AWC with FINRA, concerning NETW’s reporting short sales and capacity incorrectly. The
fine was for an aggregate of $12,500. NETW made one $3,125 payment to FINRA and will pay the balance at a rate of $500
per month until May, 2013.
F-20
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There
were no changes in accounting principles or disagreements with our auditors regarding applications of any accounting principles
during the year ended June 30, 2011
Item
9A. Controls and Procedures
We conducted
an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(f) under the Exchange Act) (the “Disclosure Controls”) as of the end of the period covered by
this Annual Report. The Disclosure Controls evaluation was done under the supervision and with the participation of management,
including our Principal Executive Officer (“PEO”) and Principal Accounting Officer (the “PAO,” and together
with the PEO, the “Certifying Officers”).
Attached
as exhibits to this Annual Report are certifications of the Certifying Officers, which are required in accordance with Rule 13a-14
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures”
section includes the information concerning the controls evaluation referred to in the certifications and it should be read in
conjunction with the certifications for a more complete understanding of the topics presented.
Disclosure
Controls and Procedures
The term
“disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e)) refers to the controls and other
procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files under
the Exchange Act is recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to
the issuer’s management, including its Certifying Officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosures.
We have
designed our disclosure controls and procedures to ensure that information required to be disclosed by us in the reports that
we file under the Exchange Act is recorded, processed, summarized and reported within time periods specified the SEC’s rules
and forms. We also have designed our disclosure controls and procedures to ensure that information required to be disclosed by
us in the reports that we file under the Exchange Act is accumulated and communicated to our management to allow timely decisions
regarding required disclosures. Based on management’s evaluation, we have determined that our disclosure controls and procedures
were not effective as a result of the material weakness described below.
This Annual
Report does not include an attestation report of our registered public accounting firm regarding internal controls over financial
reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary
rules of the SEC that permit us to provide only Management’s report in this Annual Report.
Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for the preparation of the Company’s financial statements and related information. Management uses its best
judgment to ensure that the financial statements present fairly, in all material aspects, the Company’s financial position
and results in conformity with Generally Accepted Accounting Principles (“GAAP”).
Internal
control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed
by, or under the supervision of, Certifying Officers and effected by our board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with GAAP.
Under
the supervision of management, we conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations
of the Treadway Commission published in 1992.
As a result
of this evaluation, we concluded that our internal control over financial reporting was not effective as of June 30, 2011 due
to the identification of a material weakness. A material weakness is a control deficiency or combination of control deficiencies
such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not
be prevented or detected on a timely basis.
10
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
Annual Report on Form 10-K, fairly present, in all material aspects, our financial condition, results of operations and cash flows
for the periods presented in accordance with GAAP.
The weakness,
identified by management, related to the lack of necessary accounting resources to ensure consistently complete and accurate
reporting of financial reporting. To mitigate the current limited resources and limited employees, we rely heavily on direct management
oversight of transactions. As we grow, we expect to increase our number of employees, which will enable us to implement adequate
segregation of duties within the internal control framework.
We believe
that for the reasons described above, after we hire additional qualified in-house personnel, we will be able to improve our disclosure
controls and procedures, remedy the material 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.
Changes
in Internal Controls over Financial Reporting
Other
than the identification of the material weakness described above, there have not been any other changes in our internal control
over financial reporting that occurred during the quarter ended June 30, 2011 that have materially affected or are reasonably
likely to affect our internal control over financial reporting.
Item
9B. Other Information
Not applicable.
11
PART
III
Item
10. Directors, Executive Officers and Corporate Governance.
The following
individuals serve as the directors, executive officers and key employees of the Company. All directors of the Company
and our operating subsidiary hold office until his successor shall have been duly elected and qualified, subject to his earlier
death, resignation or removal. The executive officers of the Company and our operating subsidiary are appointed by our board of
directors and hold office until their death, resignation or removal from office.
Name
|
|
Age
|
|
Position
|
Richard W. Hunt
|
|
58
|
|
Vice-President and Chairman of the Board
|
Vincent LaBarbara(2)
|
|
49
|
|
Director
|
William R. Hunt, Jr.
|
|
57
|
|
Acting Chief Financial Officer, Secretary and Director
|
Damon Testaverde
|
|
63
|
|
President , CEO and Director
|
|
(1)
|
Member of the Audit Committee.
|
|
(2)
|
Member of the Compensation Committee.
|
|
(3)
|
Member of the Nominating and Corporate Governance Committee.
|
Richard
W. Hunt was appointed Chief Executive Officer, Vice-President and Chairman of the Board of Directors of the Company following
the consummation of the Reverse Merger on June 9, 2009 and served as CEO until January 4, 2011. He has more than 30 years of experience
in the securities business, general management, sales and marketing, regulatory compliance, and financial investments and currently
holds various license’s including general principal, municipal principal, and investment banking with FINRA. .Since March
1988, Mr. Hunt has served as Chief Executive Officer, Secretary and Chairman of the Board of Directors of NETW. Mr. Hunt is currently
a FINRA Registered Representative. Since May 1998, Mr. Hunt has served as a director of Network 1 Financial Assurance, Inc., which
acts as an agent providing life and health insurance products for certain clients on behalf of the Company, and since September
2000, he has served as director of Network 1 Financial Advisors, Inc., which provides advisory services and the in-house management
of the Company’s client accounts. Mr. Hunt also served as President of Network 1 Financial Advisors, Inc. between September
2000 and November 2008. Mr. Hunt received his BA in Liberal Arts, with emphasis in Business and Human Resources, from Trenton
State College, now known as The College of New Jersey.
Without
admitting or denying wrongdoing Mr. Hunt signed a consent agreement with FINRA in July 2007 resulting in the following: for a
period of 45 days during August and September 2007, Mr. Hunt was suspended from association with any FINRA (f/k/a NASD) member
in a principal capacity (Supervisor) but not as a registered representative and was fined $25,000, upon consenting to
such sanctions and the entry of findings in connection with charges that Mr. Hunt violated certain NASD Conduct rules for failure
to supervise.
Vincent
LaBarbara,
was appointed director in March 2011. He has more than 20 years of experience in general management, acquisitions,
and financial investments. Mr. LaBarbara currently serves as a Managing Director at Network 1 Financial Securities,
Inc since October 2010. Prior to his current position, Mr. LaBarbara served as President and Chief executive officer
of Skyebanc, Inc. a registered broker dealer specializing in private equity transactions from March 2005 to October 2010. In that
capacity, but not limited to, were Investment Banking, compliance, oversight of Operations and other business matters relating
to the day to day operations of a registered Broker Dealer.
Without
admitting or denying wrongdoing, Vincent LaBarbara signed a consent agreement with FINRA in May 2010 in order to resolve a supervisory
issue involving a branch manager of a broker/dealer that was not then, and is not now affiliated with either Network 1 Financial
Group, Inc or its subsidiary, Network 1 Financial Securities, Inc.
William
Hunt Jr
.
was appointed Acting Chief Financial Officer in March 2011 and was appointed Secretary of the Company
on January 4, 2011. He has more than 30 years of experience in the securities business, general management, regulatory compliance,
financial investments and currently holds various license’s including general principal, financial principal, options principal,
and investment banking with FINRA. He
was appointed President and a member of the Board of Directors of the
Company following the consummation of the Reverse Merger on June 9, 2009 and served in that capacity until January 4, 2011. Since
March 1988, Mr. Hunt has served as the President, Chief Operating Officer and a director of NETW. In 1993, he was also appointed
Chief Financial Officer of NETW. From September 2000 to November 2008, he served as Vice President of Network 1 Financial Advisors,
Inc, and in November 2008 he was appointed President. Since May 1998, he has served as Vice President and Chief Financial Officer
of Network 1 Financial Assurance, Inc. Mr. Hunt is currently a FINRA Registered Representative, and has an insurance and real
estate license in New Jersey. He received his BS in Business Administration from Trenton State College, now known as The College
of New Jersey.
Without
admitting or denying wrongdoing, William R Hunt, Jr. signed a consent and requalification agreement with FINRA in June 2004 while
Mr. Hunt was acting as Network 1 Financial Securities’ chief financial officer. This agreement arose out of an
accounting dispute regarding the method of calculating Network 1 Financial Securities’ net capital.
Damon
D. Testaverde
was appointed President and CEO on January 4, 2011. Mr. Testaverde has more than 35 years in the financial
industry; he has been involved in investment banking for more than 30 years. Mr. Testaverde has held senior management positions
of several broker dealers and currently holds various license’s including general principal, financial principal, municipal
principal, investment banking with FINRA. He was appointed Secretary and a member of the Board of Directors of the Company following
the consummation of the Reverse Merger on June 9, 2009 and served in that capacity until January 4, 2011. Since July 1994, Mr.
Testaverde has been the managing director of NETW. From May 1991 until June 1995, Mr. Testaverde served as President and Chief
Executive officer of TekInsight. From 1989 to March 1991, Mr. Testaverde served as the principal stockholder of R.H. Damon &
Company, Inc. a full service securities broker-dealer. From 1980 to 1986, he served in the capacity of President of S.D. Cohn
& Co., Inc., a full service securities broker-dealer. He is currently a FINRA Registered Representative. He received his B.A.
in Accounting from Pace University.
12
Between
September 2007 and January 2008, Mr. Testaverde was suspended from association with any FINRA (f/k/a NASD) member in any capacity,
and was fined $50,000, upon neither admitting nor denying such sanctions and the entry of findings, relating to charges that he
solicited one of NETW’s customers, who was a controlling shareholder of a company to sell shares in amounts that exceeded
the limits that a controlling shareholder could sell in public transactions, in violation of certain NASD Conduct Rules and Section
5 of the Securities Act of 1933, as amended.
Richard
W. Hunt and William R. Hunt, Jr. were officers of a private golf and country club that has sought protection under the bankruptcy
laws on April, 15, 2011.
Family
Relationships
William
R. Hunt, Jr. and Richard W. Hunt are brothers. There are no other family relationships between any of our directors or executive
officers.
Involvement
in Certain Legal Proceedings
Except
as set forth above, none of our directors, executive officers, promoters or control persons has been involved in any of the following
events during the past five years:
1.
|
any bankruptcy petition filed by or against any business of which
such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that
time;
|
2.
|
any conviction in a criminal proceeding or being subject to a
pending criminal proceeding (excluding traffic violations and other minor offences);
|
3.
|
being subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending
or otherwise limiting his involvement in any type of business, securities or banking activities; or
|
4.
|
being found by a court of competent jurisdiction (in a civil
action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or
state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
|
Meetings
of the Board
Our Board
of Directors met three (3) times in person during the fiscal year ended June 30, 2011. All directors serving at the time attended
the meeting.
Board
Committees
Our Board
of Directors has established a compensation committee (the “Compensation Committee”), an audit committee (the “Audit
Committee”), and a nominating and corporate governance committee (the “Nominating and Corporate Governance Committee”).
The
Compensation Committee.
The Compensation Committee consists of Vincent LaBarbara. The Compensation Committee determines
the salaries and bonuses of our executive officers.
The
Audit Committee.
Currently no members appointed
Nominating
and Corporate Governance Committee
. Currently no members appointed
13
The
Nominating Committee expects to identify nominees to serve as our directors primarily by accepting and considering the suggestions
and nominee recommendations made by directors, management and stockholders. The Nominating Committee has not established specific
minimum qualifications for recommended nominees. However, as a matter of practice, the Nominating Committee does evaluate recommended
nominees for directors based on their integrity, judgment, independence, financial and business acumen, relevant experience, and
their ability to represent and act on behalf of all stockholders, as well as the needs of the Board of Directors. In general,
the Nominating Committee would expect to re-nominate incumbent directors who express an interest in continuing to serve on the
Board of Directors.
The
Charter of the Nominating and Corporate Governance Committee can be found as Appendix E of the definitive proxy statement filed
with the SEC on August 28, 2006.
Code
of Business Conduct and Ethics
The Board
of Directors has also adopted a Code of Business Conduct and Ethics, which can be found in Appendix F of the Definitive Proxy
Statement filed by the Company with the SEC on August 28, 2006. The Code of Business Conduct and Ethics will be provided without
charge, upon written request to us at the following address: Network 1 Financial Group, Inc., 2 Bridge Avenue, 4th Floor Red
Bank, NJ 07701, Attention: Richard W. Hunt.
Section
16(a) Beneficial Ownership Reporting
Section
16(a) of the Exchange Act requires our executive officers and directors, and persons who own more than 10% of a registered class
of our equity securities, to file reports of ownership and changes in ownership with the SEC and NASDAQ. Officers, directors and
greater than 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
To the best of our knowledge, based solely on a review of such reports provided to us and written representations that no other
reports were required during, or with respect to, the year ended June 30, 2011, all Section 16(a) filing requirements applicable
to our executive officers, directors and greater than 10% beneficial owners have been satisfied.
Item
11. Executive Compensation.
Executive
Compensation
The following
table sets forth information concerning the compensation paid and awarded to those individuals serving as our officers following
the consummation of the Reverse Merger. It includes compensation paid at the end of the fiscal years ended June 30, 2011 and 2010
to (i) our Chief Executive Officer and former Chief Executive Officer and (ii) the two most highly compensated executive officers
(other than our Chief Executive Officer) of us and our subsidiaries whose total compensation exceeded $100,000 for these periods.
These individuals may be collectively referred to in this report as our “Named Executive Officers.”
14
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
qualified
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
Deferred
|
|
|
|
|
|
Name and Principal
|
|
Year
|
|
|
|
|
|
Stock
|
|
Option
|
|
Plan
|
|
Compensation
|
|
All Other
|
|
|
|
Position
|
|
Ended
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Earnings
|
|
Compensation
|
|
Total
|
|
|
|
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard W. Hunt
|
|
2011
|
|
119,600
|
|
10,746
|
(5)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
131,535
|
|
Chairman of the
Board and
|
|
2010
|
|
119,600
|
|
50,935
|
(5)
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
170,535
|
|
Vice-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Hunt
|
|
2011
|
|
119,600
|
|
10,745
|
(5)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
131,535
|
|
Acting CFO,
Director, Secretary
(2)(3)
|
|
2010
|
|
119,600
|
|
50,935
|
(5)
|
0
|
|
—
|
|
—
|
|
—
|
|
—
|
|
170,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Damon Testaverde
|
|
2011
|
|
—
|
|
171,540
|
(5)
|
248,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
419,540
|
|
President,
CEO and Director
(4)
|
|
2010
|
|
|
|
1,008,815
|
(5)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,008,815
|
|
(1)
|
Richard W. Hunt was appointed Chief Executive Officer and Vice-President
of the Company on June 9, 2009 in conjunction with the consummation of the Reverse Merger. He resigned as CEO on January 4,
2011
|
(2)
|
Represents fees paid to Richard W. Hunt and William R. Hunt,
Jr. for their services to NETW during the fiscal years ended June 30, 2011 and 2010 NETW does not have employment
agreements with any of its employees. The salary for Messrs. William and Richard Hunt consists of a base salary plus commissions,
which commissions have been waived by each of Messrs. William and Richard Hunt from time to time. The base salary for Messrs.
William and Richard Hunt was determined by looking at comparable salaries for individuals holding similar titles at other
brokerage firms of similar size. The commission portion allows them to increase their salary based on actual production, which
NETW’s management believes is standard in the industry.
|
(3)
|
William R. Hunt, Jr. was appointed President of the Company on
June 9, 2009 in conjunction with the consummation of the Reverse Merger. He resigned as President on January 4, 2011 and was
appointed Secretary on January 4, 2011. He was appointed as Acting Principal Accounting Officer in March 2011.
|
(4)
|
Mr. Testaverde was appointed Secretary of the Company on June
9, 2009 in conjunction with the consummation of the Reverse Merger. He resigned as Secretary on January 4, 2011 and was appointed
President and CEO on January 4, 2011 Represents fees paid for Mr. Testaverde’s services to NETW during the fiscal years
ended June 30, 2011 and 2010
|
(5)
|
Represents, commission payments.
|
|
Employment
Contracts
We do
not have employment agreements with any of our employees.
Compensation
of Directors
All of
our directors, regardless of whether they are also employees of our Company, receive $500 a month for serving on the Board of
Directors as well as reimbursement of reasonable expenses incurred in attending meetings, which has been waived by the members.
DIRECTOR
COMPENSATION
No fees
were paid to any of our directors for the fiscal year ended June 30, 2011.
15
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The following
table sets forth as of October 10, 2011 certain information regarding the beneficial ownership of Common Stock by (i) each
person or “group” (as that term is defined in Section 13(d)(3) of the Exchange Act) known by the Company to be the
beneficial owner of more than 5% of the common stock, (ii) each of our executive officers, (iii) each director and nominee and
(iv) all directors and executive officers as a group. Except as otherwise indicated, we believe, based on information furnished
by such persons, that each person listed below has sole voting and investment power over the shares of common stock shown as beneficially
owned, subject to community property laws, where applicable. Beneficial ownership is determined under the rules of the SEC and
includes any shares which the person has the right to acquire within 60 days after October 10, 2011 through the exercise of any
stock option or other right.
Name and address of beneficial owner
|
|
Amount and nature of
Beneficial ownership
|
|
|
Percent of class of
Common Stock
(1)
|
|
Horace T. Ardinger, Jr.
|
|
|
11,077,351
|
(2)
|
|
|
20.66
|
%
|
9040 Governors Row
|
|
|
|
|
|
|
|
|
Dallas, TX 75356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windex Capital LLC
|
|
|
|
|
|
|
|
|
Suite 3-15-1603, New World Center
|
|
|
9,000,000
|
|
|
|
18.50
|
%
|
Chongwen District
|
|
|
|
|
|
|
|
|
Beijing 100062, PR China
|
|
|
,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Officers
(3)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vincent
LaBarbara*
Director
|
|
|
300,000
|
|
|
|
0.62
|
%
|
|
|
|
|
|
|
|
|
|
Damon
Testaverde
President.
CEO and Director
|
|
|
9,523,653
|
(4)
|
|
|
19.26
|
%
|
|
|
|
|
|
|
|
|
|
William
R. Hunt, Jr.
Secretary,
COO and Director
|
|
|
9,363,213
|
(5)
|
|
|
19.11
|
%
|
|
|
|
|
|
|
|
|
|
Richard
W. Hunt
Vice-President
and Chairman
|
|
|
9,284,933
|
(6)
|
|
|
18.98
|
%
|
|
|
|
|
|
|
|
|
|
Directors and Officers as a group (4
persons)
|
|
|
27,492,212
|
(7)
|
|
|
55.51
|
%
|
*Less
than one percent.
(1)
|
Based on 48,635,057 shares of common stock outstanding as
of October 10, 2011.
|
(2)
|
Includes 965,000 warrants with an exercise price of approximately
$0.80 to purchase a total of 4,979,400 shares of common stock which expire on October 23, 2011. Also includes 5,668,920
shares of common stock held by H.T. Ardinger & Sons, Inc., a Texas corporation, of which Mr. Ardinger has sole voting
and dispositive control. Also includes 429,031 shares which Mr. Ardinger received in conjunction with the Reverse Merger as
a result of his ownership of NETW shares. Does not include 317,500 shares owned by Mr. Ardinger’s wife, to which he
disclaims beneficial ownership.
|
(3)
|
The address of each officer and director is c/o Network 1 Financial
Group, Inc., 2 Bridge Avenue, 4th floor, Red Bank, NJ 07701.
|
(4)
|
Includes 53,452 warrants with an exercise price of approximately
$0.80 to purchase of total of 275,278 shares of common stock which expire October 23, 2011. Such warrants are owned by
Network 1 Financial Securities, Inc., over which Mr. Testaverde shares control with Mr. William Hunt and Mr. Richard Hunt.
Also includes 12,500 shares of common stock owned by Mr. Testaverde’s wife, Patricia. Also includes 5,000 shares of
common stock owned by R. H. Damon, Inc., a corporation over which Mr. Testaverde exercises voting and investment control.
Also includes 104,000 warrants with an exercise price of approximately $0.80 to purchase 535,600 shares of common stock which
expire on October 23, 2011.
|
16
(5)
|
Includes 53,452 warrants with an exercise price of approximately
$0.80 to purchase of total of 275,278 shares of common stock which expire October 23, 2011. Such warrants are owned by Network
1 Financial Securities, Inc., over which Mr. Hunt shares control with Mr. Testaverde and Mr. Richard Hunt. Also includes 429,031
shares of common stock received in conjunction with the Reverse Merger by Network 1 Financial Advisors, Inc., a corporation
over which William Hunt shares voting and investment control with Richard Hunt. Also includes 15,200 warrants with an exercise
price of approximately $0.80 to purchase a total of 78,280 shares of common stock which expire October 23, 2011.
|
(6)
|
Includes 53,452 warrants with an exercise price of approximately
$0.80 to purchase of total of 275,278 shares of common stock which expire October 23, 2011. Such warrants are owned by Network
1 Financial Securities, Inc., over which Mr. Hunt shares control with Mr. Testaverde and Mr. William Hunt. Also includes 429,031
shares of common stock received in conjunction with the Reverse Merger by Network 1 Financial Advisors, Inc., a corporation
over which Richard Hunt shares voting and investment control with William Hunt.
|
(7)
|
Includes 53,452 warrants owned by Network 1 Financial Securities,
Inc. with an exercise price of approximately $0.80 to purchase a total of 275,278 shares of common stock and which expire
on October 23, 2011. Also includes 104,000 warrants with an exercise price of approximately $0.80 to purchase 535,600 shares
of common stock and which expire October 23, 2011. Also includes 15,200 warrants with an exercise price of approximately $0.80
to purchase a total of 78,280 shares of common stock which expire October 23, 2011.
|
Changes
in Control
There
are no arrangements known to us that may, at a subsequent date, result in a change of control of the Company.
Item
13. Certain Relationships and Related Transactions, and Director Independence.
The Company
has entered into the following separate agreements with affiliated companies that define the relationship with the Company post-Reverse
Merger:
1.
|
The agreement with Network 1 Financial Assurance, Inc
.
provides for the reimbursement of certain overhead expenses and the sharing of commissions generated by variable annuity sales
referred or placed by NETW. This agreement is not exclusive and NETW is in a position to obtain more favorable terms from
third parties should they become available.
|
2.
|
The agreement with Network 1 Financial Advisors, Inc
.
provides for the reimbursement of certain overhead expenses and the payment of investment advisory fees to NETW stemming from
accounts referred by registered representatives of NETW to Network 1 Financial Advisors, Inc. This agreement is not exclusive
and NETW is in a position to obtain more favorable terms from third parties should they become available.
|
3.
|
The agreement with Network 1 Financial Advisors, Inc. (“Advisors”),
Network 1 Financial Assurance, Inc. (“Assurance”) and NETW
is an agreement to abstain from certain
voting rights to prohibit the current principals of NETW (as continuing post-Reverse Merger) from voting on certain matters.
This will prohibit the current principals of NETW (should they elect to continue as executives post-Reverse Merger) from voting
on matters related to fee arrangements for any ongoing activities with Advisors and Assurance.
|
On November
18, 2008, the Company loaned to and received a promissory note in the amount of $100,000 from Network 1 Financial Advisors Inc.
The effective interest rate for the note is 6% per annum. The note matured on November 18, 2009 which was extended to November
18, 2011.
There
were no other related party transactions for the fiscal year ended June 30, 2011.
Director
Independence
Our determination
of independence of directors is made by using the definition of “independent director” contained under Rule 4200(a)(15)
of the Rules of the Financial Industry Regulatory Authority. Our Board of Directors has determined that Richard Hunt, Vincent
LaBarbara, William R. Hunt, Jr. and Damon Testaverde are not “independent” under this rule by virtue of their positions
as corporate and executive officers of our Company.
17
Item
14. Principal Accountant Fees and Services.
|
|
Fees
|
|
Fee Category
|
|
2011
|
|
|
2010
|
|
Audit Fees
|
|
$
|
48,015
|
|
|
$
|
42,500
|
|
Audit-Related Fees
|
|
|
–
|
|
|
|
—
|
|
Tax Fees
|
|
|
5,000
|
|
|
|
5,000
|
|
All Other Fees
|
|
|
2,700
|
|
|
|
2,700
|
|
Total Fees
|
|
$
|
55,715
|
|
|
$
|
50,200
|
|
Audit
Fees
RBSM LLP
(“RBSM”) was engaged to audit our financial statements for the fiscal years ended June 30, 2011 and 2010. RBSM
billed us an aggregate of approximately $55,715 and $50,200 in fees for professional services during the fiscal year
ended June 30, 2011 and 2010, respectively.
Audit
Related Fees
We did
not incur any audit-related fees for the fiscal years ended June 30, 2011 and 2010.
Tax
Fees
We engaged
RBSM to prepare our tax returns for fiscal years ending June 30, 2011 and 2010.
All
Other Fees
We engaged
RBSM for other services, primarily related to AML audit services, for the fiscal years ending June 30, 2011 and 2010.
18
Item
15. Exhibits and Financial Statement Schedules.
Financial
Statement Schedules
Not applicable.
Exhibits
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
3.1
|
|
Certificate of Incorporation of International Plastic Technologies,
Inc. dated March 4, 1998 (Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form SB-2
(Registration Statement No. 333-48701, filed with the SEC on March 26, 1998)).
|
|
|
|
3.2
|
|
Amendment to the Certificate of Incorporation of International
Plastic Technologies, Inc., dated December 7, 1998, changing the Company’s name to “International Smart Sourcing,
Inc.” (Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form SB-2/A (Registration
Statement No. 333-48701, filed with the SEC on January 6, 1999)).
|
|
|
|
3.3
|
|
Amendment to the Certificate of Incorporation of International
Smart Sourcing, Inc., dated June 26, 2000, changing the Company’s name to “CHINAB2BSOURCING.COM, INC.” (Incorporated
by reference to Exhibit 3.3 to the Quarterly Report on Form 10-QSB filed with the SEC on August 15, 2000).
|
|
|
|
3.4
|
|
Amendment to the Certificate of Incorporation of International
Smart Sourcing, Inc., dated June 9, 2009, changing the Company’s name to “Network 1 Financial Group, Inc. (Incorporated
by reference to Exhibit 3.4 to the Annual Report on Form 10-K filed with the SEC on October 13, 2010).
|
|
|
|
3.5
|
|
By-Laws of International Plastic Technologies, Inc. (Incorporated
by reference to Exhibit 3.2 to the Company’s Registration Statement on Form SB-2 (Registration Statement 333-48701,
filed with the SEC on March 26, 1998)).
|
|
|
|
3.6
|
|
Amendment of the By-Laws of International Smart Sourcing, Inc.
dated as of October 14, 2004 (Incorporated by reference to Exhibit B to the Definitive Information Statement on Schedule 14C
filed with the SEC on November 15, 2004).
|
|
|
|
4.1
|
|
Form of Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 to the Company’s Registration Statement on Form SB-2/A (Registration Statement No. 333-48701, filed with
the SEC on June 4, 1998)).
|
19
4.2
|
|
Form of Warrant Certificate (Incorporated
by reference to Exhibit 4.2 to the Company’s Registration Statement on Form SB-2/A (Registration Statement No. 333-48701,
filed with the SEC on June 4, 1998)).
|
|
|
|
4.3
|
|
Form of Warrant Agreement between the Company and Continental
Stock Transfer and Trust Company (Incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on
Form SB-2/A (Registration Statement No. 333-48701, filed with the SEC on June 4, 1998)).
|
|
|
|
4.4
|
|
Amendment No. 1 to the Warrant Agreement between the Company
and Continental Stock and Trust Company effective as of April 12, 2005 (Incorporated by reference to Exhibit 99.1 to the Current
Report on Form 8-K filed with the SEC on April 20, 2005).
|
|
|
|
4.5
|
|
Amendment No. 2 to the Warrant Agreement between the Company
and Continental Stock and Trust Company effective as of December 4, 2006 (Incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed with the SEC on December 5, 2006).
|
|
|
|
21
|
|
List of Subsidiaries (Incorporated by reference to Exhibit 21
to the Current Report on Form 8-K, filed with the SEC on June 15, 2009).
|
|
|
|
31.1
|
|
Rule 13a– 4(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 Chief Executive Officer pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
|
* Filed
herewith.
20
SIGNATURES
In accordance
with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report
on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
|
NETWORK 1 FINANCIAL GROUP,
INC.
|
|
|
Date: October 21, 2011
|
/s/ Damon Testaverde
|
|
Damon Testaverde
|
|
President, CEO
|
In accordance
with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Damon Testaverde
|
|
Chief Executive Officer, President and Director
|
|
October 21, 2011
|
Damon Testaverde
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Vincent LaBarbara
|
|
Director
|
|
|
Vincent LaBarbara
|
|
|
|
|
|
|
|
|
|
/s/ William R. Hunt,
Jr.
|
|
Secretary and Director
|
|
|
William R. Hunt, Jr.
|
|
(Interim Principal Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Richard W. Hunt
|
|
Vice President and Chairman
|
|
|
Richard W, hunt
|
|
|
|
|
21
Network 1 Financial (CE) (USOTC:NTFL)
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