UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q/A
(Amendment
No. 1)
(Mark
One)
☑
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For
the quarterly period ended September 30, 2011
OR
☐
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For
the transition period from _______ to _______
COMMISSION
FILE NUMBER: 001-14753
NETWORK
1 FINANCIAL GROUP, INC.
(Exact
Name of Registrant as specified in its charter)
Delaware
|
|
11-3423157
|
(State or other jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or organization)
|
|
Identification No.)
|
2
Bridge Avenue, 4
thFloor
Red
Bank, NJ 07701
(Address
of principal executive offices)
(732)
758-9001
(Registrant’s
telephone number)
Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days. YES ☑ NO ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☐ NO ☐
Indicate
by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
|
|
Accelerated
filer ☐
|
Non-accelerated filer ☐
|
|
Smaller reporting
company ☑
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO
☑
As of November
10, 2011, the Registrant had 48,635,057 shares of its Common Stock, $.001 par value, outstanding.
Explanatory Note
The purpose of this Amendment No. 1 to Network 1
Financial Group, Inc’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed with the
Securities and Exchange Commission on November 22, 2011 (the “Form 10-Q”), is to include the XBRL report.
NETWORK
1 FINANCIAL GROUP, INC.
FORM
10-Q
SEPTEMBER
30, 2011
TABLE
OF CONTENTS
|
|
|
|
Page
|
PART I – FINANCIAL INFORMATION
|
|
1
|
ITEM 1.
|
|
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
|
|
1
|
ITEM 2.
|
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
2
|
ITEM 3.
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
|
|
4
|
ITEM 4T.
|
|
CONTROLS AND PROCEDURES
|
|
4
|
|
PART II – OTHER INFORMATION
|
|
5
|
ITEM 1.
|
|
LEGAL PROCEEDINGS
|
|
5
|
ITEM 2.
|
|
UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
|
|
5
|
ITEM 3.
|
|
DEFAULTS UPON SENIOR SECURITIES
|
|
5
|
ITEM 4.
|
|
SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
|
|
5
|
ITEM 5.
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|
OTHER INFORMATION
|
|
5
|
ITEM 6.
|
|
EXHIBITS
|
|
5
|
|
SIGNATURES
|
|
6
|
PART
I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS (UNAUDITED)
Index
to Consolidated Financial Statements
Condensed Consolidated Statement of Financial
Condition
|
|
|
F–1
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations
|
|
|
F–2
|
|
|
|
|
|
|
Condensed Consolidated Statement of Equity
|
|
|
F–3
|
|
|
|
|
|
|
Condensed Consolidated Statement of Cash Flows
|
|
|
F–4
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|
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|
|
|
|
Notes to Condensed Consolidated Financial Statements
|
|
|
F–5
|
|
1
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
September
30, 2011 (unaudited) and June 30, 2011
|
|
SEPTEMBER
30,
|
|
|
JUNE
30,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
6,947
|
|
|
$
|
58,856
|
|
Commission Receivable from Clearing Firm
|
|
|
8,391
|
|
|
$
|
78,021
|
|
Notes Receivable - Related Party
|
|
|
55,631
|
|
|
|
59,002
|
|
Deposit with clearing organization
|
|
|
322,050
|
|
|
|
345,137
|
|
Due from Affiliates
|
|
|
9,180
|
|
|
|
45,482
|
|
Advances to Registered Representatives: net of reserve
|
|
|
|
|
|
|
|
|
for uncollectible accounts of $ $90,000 respectively.
|
|
|
76,058
|
|
|
|
70,231
|
|
Securities held for resale, at market
|
|
|
85,493
|
|
|
|
83,415
|
|
Property and Equipment, net.
|
|
|
16,185
|
|
|
|
17,935
|
|
Other Assets
|
|
|
27,000
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS:
|
|
$
|
606,935
|
|
|
$
|
785,079
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Line of Credit
|
|
$
|
30,000
|
|
|
$
|
30,000
|
|
Notes Payable
|
|
|
11,183
|
|
|
|
4,088
|
|
Commissions Payable
|
|
|
29,520
|
|
|
|
78,943
|
|
Capital Leases payable
|
|
|
16,542
|
|
|
|
18,588
|
|
Accounts Payable, accrued expenses
and other liabilities
|
|
|
140,075
|
|
|
|
173,923
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
227,320
|
|
|
|
305,542
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
Common Stock, $.001 par value;
|
|
|
|
|
|
|
-
|
|
100,000,000 shares authorized; 56,560,057 and 55,560,057
issued and 48,635,057 and 47,635,057 outstanding, respectively
|
|
|
56,560
|
|
|
|
55,560
|
|
Additional Paid In Capital
|
|
|
2,059,888
|
|
|
|
2,022,888
|
|
Treasury Stock at cost; 7,925,000 shares
|
|
|
(5,129
|
)
|
|
|
(5,129
|
)
|
Accumulated deficit
|
|
|
(1,946,704
|
)
|
|
|
(1,808,782
|
)
|
Total stockholders equity
|
|
|
164,615
|
|
|
|
264,537
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
215,000
|
|
|
|
215,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL EQUITY
|
|
|
379,615
|
|
|
|
479,537
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
AND EQUITY
|
|
$
|
606,935
|
|
|
$
|
785,079
|
|
(the
accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
F-1
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE
MONTHS ENDED SEPTEMBER 30, 2011 and 2010
(unaudited)
|
|
SEPTEMBER
|
|
|
SEPTEMBER
|
|
|
|
2011
|
|
|
2010
|
|
Revenues:
|
|
|
|
|
|
|
Commissions
|
|
$
|
349,167
|
|
|
$
|
169,788
|
|
Net dealer inventory gains
|
|
|
9,122
|
|
|
|
146,288
|
|
Investment banking
|
|
|
3,000
|
|
|
|
99,063
|
|
Interest and Dividends
|
|
|
6,145
|
|
|
|
6,890
|
|
Transfer fees and clearing services
|
|
|
-
|
|
|
|
6,633
|
|
Investment advisory
|
|
|
74,949
|
|
|
|
107,777
|
|
Other
|
|
|
335
|
|
|
|
11,000
|
|
Total Revenue
|
|
|
442,718
|
|
|
|
547,439
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
169,045
|
|
|
|
87,386
|
|
Compensation and Related Expenses
|
|
|
176,323
|
|
|
|
253,486
|
|
Clearing Fees
|
|
|
48,331
|
|
|
|
47,229
|
|
Communications and data processing
|
|
|
28,716
|
|
|
|
33,285
|
|
Interest
|
|
|
587
|
|
|
|
3,398
|
|
Occupancy and related expenses
|
|
|
22,044
|
|
|
|
41,753
|
|
Office Expenses
|
|
|
37,693
|
|
|
|
49,022
|
|
Professional Fees
|
|
|
95,343
|
|
|
|
115,381
|
|
Depreciation
|
|
|
2,558
|
|
|
|
2,160
|
|
Total Operating Expenses
|
|
|
580,640
|
|
|
|
633,100
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(137,922
|
)
|
|
|
(85,663
|
)
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
|
|
Gain on change in derivative liability
|
|
|
-
|
|
|
|
10,084
|
|
Total Other Income
|
|
|
-
|
|
|
|
10,084
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(137,922
|
)
|
|
$
|
(75,579
|
)
|
|
|
|
|
|
|
|
|
|
Loss per common share (basic and diluted)
|
|
$
|
(0.003
|
)
|
|
$
|
(0.003
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
48,580,709
|
|
|
|
23,393,529
|
|
(the
accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
F-2
NETWORK
1 FINANCIAL GROUP, INC. and SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF EQUITY
For
the three months ended September 30, 2011
(Unaudited)
|
|
|
|
|
Additional
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Non-Controlling
|
|
|
|
|
|
|
Common Stock
|
|
|
paid-in-capital
|
|
|
Stock
|
|
|
Defecit
|
|
|
interest
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- June 30, 2011
|
|
|
55,560,057
|
|
|
$
|
55,560
|
|
|
$
|
2,022,888
|
|
|
$
|
(5,129
|
)
|
|
$
|
(1,808,782
|
)
|
|
$
|
215,000
|
|
|
$
|
479,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for
services
|
|
|
1,000,000
|
|
|
$
|
1,000
|
|
|
$
|
37,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(137,922
|
)
|
|
|
|
|
|
$
|
(137,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- September 30, 2011
|
|
|
56,560,057
|
|
|
$
|
56,560
|
|
|
$
|
2,059,888
|
|
|
$
|
(5,129
|
)
|
|
$
|
(1,946,704
|
)
|
|
$
|
215,000
|
|
|
$
|
379,615
|
|
(the
accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
F-3
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
For
the three months ended September 30, 2011 and 2010
(unaudited)
|
|
September
|
|
|
September
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net Loss attributable to common shareholders
|
|
$
|
(137,922
|
)
|
|
$
|
(75,579
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
-
|
|
Depreciation
|
|
|
2,558
|
|
|
|
2,160
|
|
Gain on change in derivative liability
|
|
|
-
|
|
|
|
(10,084
|
)
|
Stock based compensation
|
|
|
2,000
|
|
|
|
-
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Due from clearing organization
|
|
|
23,087
|
|
|
|
332,468
|
|
Securities held for resale, at market
|
|
|
(2,078
|
)
|
|
|
11,550
|
|
Advances to/from registered representatives
|
|
|
(55,250
|
)
|
|
|
6,405
|
|
Other assets
|
|
|
-
|
|
|
|
16,913
|
|
Securities sold, but not yet purchased, at market
|
|
|
-
|
|
|
|
11,933
|
|
Accounts Payable, accrued expenses & other Liabilities
|
|
|
2,153
|
|
|
|
(31,950
|
)
|
Commission Receivable from Clearing Organization
|
|
|
69,630
|
|
|
|
(76,113
|
)
|
TOTAL ADJUSTMENTS
|
|
|
42,100
|
|
|
|
263,282
|
|
|
|
|
|
|
|
|
|
|
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES
|
|
|
(95,822
|
)
|
|
|
187,703
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(808
|
)
|
|
|
-
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(808
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Advances to affiliated companies
|
|
|
36,302
|
|
|
|
1,970
|
|
Advances from affiliated companies
|
|
|
3,370
|
|
|
|
(270
|
)
|
Repayment of Notes Payable
|
|
|
7,095
|
|
|
|
(295
|
)
|
Repayment of capital lease
|
|
|
(2,046
|
)
|
|
|
(533
|
)
|
|
|
|
|
|
|
|
-
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
44,721
|
|
|
|
872
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH
|
|
|
(51,909
|
)
|
|
|
188,575
|
|
|
|
|
|
|
|
|
|
|
CASH - Beginning of Period
|
|
|
58,856
|
|
|
|
2,635
|
|
|
|
|
|
|
|
|
|
|
CASH - End of Period
|
|
$
|
6,947
|
|
|
$
|
191,210
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid during Quarter
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
571
|
|
|
$
|
3,398
|
|
Income Taxes
|
|
$
|
-
|
|
|
$
|
2,162
|
|
(the
accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
F-4
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(unaudited)
NOTE 1 –
Basis of Presentation (Reverse Merger and Corporate Structure)
Network
1 Financial Securities, Inc. (“NETW”) was organized as a Texas corporation on March 15, 1983 and is registered as
a broker-dealer with the Securities and Exchange Commission (the “SEC”), the State of Texas and various other states.
NETW is an introducing broker-dealer that clears all transactions with and for customers on a fully disclosed basis with a clearing
broker.
On June
9, 2009, NETW completed a merger transaction (the “Reverse Merger”) with International Smart Sourcing, Inc. (“ISSI”),
an inactive publicly registered shell corporation with no significant assets or operations. ISSI was incorporated in February
1998 in Delaware. As a result of the Reverse Merger, NETW became a wholly owned subsidiary of ISSI and the current
assets of NETW were merged with ISSI. NETW’s shareholders acquired control of ISSI.
Upon completion
of the Reverse Merger transaction, ISSI changed its name to Network 1 Financial Group, Inc. (the “Company”).
All references
to Common Stock, share and per share amounts have been retroactively restated to reflect the exchange ratio of 17.16 shares of
ISSI’s Common Stock for 1 share of the acquirer's Common Stock outstanding immediately prior to the Reverse Merger as if
the exchange had taken place as of the beginning of the earliest period presented.
The accompanying
unaudited condensed consolidated financial statements present on a consolidated basis the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying
unaudited condensed consolidated financial statements for the three month periods ended September 30, 2011 and 2010 have been
prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-Q and
Regulation S-X. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments)
which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain
information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted pursuant to such rules and regulations. The Company believes
that the disclosures provided are adequate to make the information presented not misleading. These financial statements should
be read in conjunction with the audited financial statements and explanatory notes for the year ended June 30, 2011 as disclosed
in the Company's 10-K for that year as filed with the SEC, as it may be amended.
The results
of the three months ended September 30, 2011 are not necessarily indicative of the results to be expected for the pending full
year ending June 30, 2012.
F-5
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(unaudited)
NOTE 2 -
Summary of Significant Accounting Policies
Use of
Estimates
The preparation
of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue
Recognition
Customer
security transactions and the related commission income and expense are recorded as of the trade date. Investment banking
revenues include gains, losses, and fees, net of syndicate expenses, arising from securities offerings in which the Company acts
as an underwriter or agent. Investment banking revenues also include fees earned from providing financial advisory services. Investment
banking management fees are recorded on the offering date, sales concessions on the settlement date, and underwriting fees at
the time the underwriting is completed and the income is reasonably determinable. Customers who are financing their transaction
on margin are charged interest. The Company’s margin requirements are in accordance with the terms and conditions mandated
by its clearing firm. The interest is billed on the average daily balance of the margin account.
Net dealer
inventory gains result from securities transactions entered into for the account and risk of the Company. Net dealer inventory
gains are recorded on a trade date basis. Investment advisory fees are account management fees for high net worth clients based
on the amount of the assets under management. These fees are billed quarterly and recognized at such time that the service is
performed and collection is probable.
The Company
generally acts as an agent in executing customer orders to buy or sell listed and over-the-counter securities in which it does
not make a market, and charges commissions based on the services the Company provides to its customers. In executing customer
orders to buy or sell a security in which the Company makes a market, the Company may sell to, or purchase from, customers at
a price that is substantially equal to the current inter-dealer market price plus or minus a mark-up or mark-down. The Company
may also act as agent and execute a customer's purchase or sale order with another broker-dealer market-maker at the best inter-dealer
market price available and charge a commission. Mark-ups, mark-downs and commissions are generally priced competitively based
on the services it provides to its customers. In each instance the commission charges, mark-ups or mark-downs, are in compliance
with guidelines established by 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.
F-6
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2011AND 2010
(unaudited)
Fair
Value of Financial Instruments
FASB requires
that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statement of financial
position for current assets and current liabilities qualifying as financial instruments approximate fair value because of their
short maturities.
In April
2009, the FASB issued provisions that require that companies also disclose the fair value of financial instruments during interim
reporting periods similar to those that are currently provided annually. These pronouncements are effective for interim reporting
periods ending after June 15, 2009.
On July
1, 2008, the Company adopted the provisions of Accounting Standard Codification (“ASC”) Topic 820, which defines fair
value for accounting purposes, establishes a framework for measuring fair value and expands disclosure requirements regarding
fair value measurements. The Company’s adoption of ASC 820 did not have a material impact on its condensed consolidated
financial statements. Fair value is defined as an exit price, which is the price that would be received upon sale of
an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The
degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing
observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value
can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment
in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less
price observability and are generally measured at fair value using valuation methods that require more judgment. These
valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency
of the asset, liability or market and the nature of the asset or liability. The Company has categorized its financial
assets and liabilities measured at fair value into a three level hierarchy in accordance with ASC 820.
Reclassifications
Certain
reclassifications have been made in prior year’s financial statements to conform to classifications used in the current
year.
F-7
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(unaudited)
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 September 30, 2011 and June 30, 2011,
respectively:
|
September 30, 2011
|
|
|
|
June 30, 2011
|
|
|
|
|
|
|
|
|
|
$
|
85,493
|
|
|
$
|
83,415
|
|
|
|
|
|
|
|
|
|
F-8
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(unaudited)
NOTE 5 -
Due from Clearing Organization
The following
represents amounts on deposit in the Company’s clearing broker inventory account with Southwest Securities, Inc. (“Southwest”)and
Legent Clearing LLC (“Legent”) for the fiscal year ended June 30, 2011, and for the three months ended
September 30, 2011:
|
|
September
30, 2011
|
|
|
June
30, 2011
|
|
|
|
Southwest
|
|
|
Legent
|
|
|
Total
|
|
|
Southwest
|
|
|
Legent
|
|
|
Total
|
|
Cash
|
|
$
|
14,495
|
|
|
$
|
254,960
|
|
|
$
|
275,380
|
|
$
|
14,495
|
|
$
|
260,885
|
|
$
|
275,380
|
|
Marketable securities, net of fair
value adjustments
|
|
|
0
|
|
|
|
52,595
|
|
|
|
52,595
|
|
|
-
|
|
|
69,757
|
|
|
69,757
|
|
|
|
$
|
14,495
|
|
|
$
|
307,555
|
|
|
$
|
322,050
|
|
$
|
14,495
|
|
$
|
330,642
|
|
$
|
345,137
|
|
The marketable
securities are primarily comprised of corporate stocks. Marketable securities on deposit with Legent are reflected at fair value.
As of September 30, 2011, the Company is required to maintain a clearing deficit of $100,000 with Legent.
For the
three months ended September 30, 2011, the Company used the services of Legent to clear its brokerage business. Southwest
ceased clearing the Company’s brokerage business on August 13, 2010 and Legent commenced clearing on August 16, 2010. The
Company incurred charges of approximately $49,320 for the three months ended September 30, 2011 and approximately $23,387
with Southwest and $23,841 with Legent for the three months ending September 30, 2010
NOTE 6 -
Related Party Transactions
As of September
30, 2011 and June 30, 2011, due from (to) affiliated companies consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Network 1 Financial Advisors Inc.(b)
|
|
$
|
55,781
|
|
|
$
|
67,362
|
|
|
|
|
|
|
|
|
|
|
Network 1 Financial Assurance,
Inc. (a) (b)
|
|
$
|
146
|
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
National Financial Services Group
(c)
|
|
$
|
8,884
|
|
|
$
|
37,189
|
|
|
(a)
|
Represents expenses paid on behalf of an affiliated
company whose directors are officers and shareholders of the Company.
|
|
(b)
|
Represents amounts due in the form of a promissory note from an
affiliated company whose officers and shareholders are officers and shareholders of the Company.
|
F-9
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(unaudited)
NOTE 7 -
Capital Lease Obligation
The Company
has equipment under a capital leases expiring in August 2012 and September 2015. The assets and liabilities under the capital
lease are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets
are included in property and equipment and is amortized over the estimated life of the assets. The interest rate under the lease
is 6.60% and 6.89% and is imputed based on the lessor’s implicit rate of return. The Capital lease is payable in monthly
installments of $532 and $210, including interest through August 2012 and September 2015.
Amortization
of assets held under the capital lease is included in depreciation expense.
At September
30, 2011, annual minimum future lease payments under the capital lease are as follows:
June 30,
|
|
Amount
|
|
|
|
|
|
2012
|
|
$
|
7,391
|
|
2013
|
|
|
2,517
|
|
2014
|
|
|
2,517
|
|
2015
|
|
|
2,517
|
|
2016
|
|
|
1,600
|
|
|
|
|
|
|
Total minimum lease
payments
|
|
$
|
16,542
|
|
NOTE 8 -
Line of Credit – Bank
The Company’s
bank line of credit is payable on demand. The maximum amount the Company could borrow is $100,000. Indebtedness under
the line of credit provides for interest at the bank’s prime rate, plus 1.0% (approximately 4.25% at September 30, 2011).
As of September 30, 2011 and June 30, 2011, the amount outstanding under this credit facility was $30,000.
Indebtedness
under the credit agreement is collateralized by substantially all of the assets of the Company and an officers’ personal
guarantee.
NOTE 9 –
Notes Payable
Notes payable
include settlement agreements entered into with the FINRA in September 2011, September 2010 and May 2010, for monetary sanctions
imposed against the Company. As of September 30, 2011 and June 30, 2011, notes payable consists of the following:
|
|
September 30,
2011
|
|
|
June 30,
2011
|
|
Note payable to FINRA in monthly installments
of $500 per month including interest at a rate of 6.25% through January 2012
|
|
$
|
1,808
|
|
|
$
|
3,264
|
|
|
|
|
|
|
|
|
|
|
Note payable to FINRA in monthly installments of $ 500 per month
including interest at a rate of 6.25% through May 2013
|
|
|
9,375
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
Note payable to FINRA in monthly
installments of $500 per month including interest at a rate of 6.25% through August 2011
|
|
|
-0-
|
|
|
|
824
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
11,183
|
|
|
$
|
4,088
|
|
NOTE 10
-
Net Capital Requirements
NETW is
a registered broker-dealer and is subject to the SEC’s Uniform Net Capital Rule 15c3-1. This requires that NETW maintain
minimum net capital of $100,000 and also requires that the ratio of aggregate indebtedness, as defined, to net capital, shall
not exceed 15 to 1.
As of September
30, 2011 and June 30, 2011, NETW’s net capital exceeded the requirement by approximately $37,316 and $65,212 , respectively.
Advances,
dividend payments and other equity withdrawals are restricted by the regulations of the SEC, and other regulatory agencies are
subject to certain notification and other provisions of the net capital rules of the SEC. NETW qualifies under the exemptive provisions
of Rule 15c3-3 as NETW does not carry security accounts for customers or perform custodial functions related to customer securities.
NOTE 11
–
Capital Stock.
We are authorized
to issue 100,000,000 shares of common stock with a par value of $.001 per share.
On July
6, 2011 we issued an aggregate of 900,000 shares of common stock for previously accrued services valued at $36,000 based on the
value of the stock at the time of issuance.
On July
6, 2011 the Company issued 100,000 shares of $0.001 par value Company common stock to a Company director. The services
were valued at $2,000 based on the value of the stock at the time of issuance.
NOTE 12
-
Warrants
The following
is additional information with respect to the Company’s warrants as of September 30, 2011:
F-10
NETWORK
1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(unaudited)
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
|
|
0.07 years
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,657,733
|
|
0.07
years
|
|
$
|
0.16
|
|
Note: The
warrants’ expiration date is October 23, 2011.
NOTE 13-
Fair Value Measurements
The financial
assets of the Company measured at fair value on a recurring basis are cash, due from clearing organization, marketable securities,
derivatives and debt. The Company’s cash equivalents, due from clearing organization and marketable securities
are generally classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices,
broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The Company’s
long-term investments, derivative liabilities and debt are classified within Level 3 of the fair value hierarchy because they
are valued using unobservable inputs, due to the fact that observable inputs are not available, or situations which there is little,
if any, market activity for the asset or liability at the measurement date.
|
•
|
Level 1: Unadjusted quoted prices in active markets
that are accessible at the measurement date for identical unrestricted assets or liabilities;
|
|
•
|
Level 2: Quoted prices in markets that are not active or inputs
which are observable, either directly or indirectly , for substantially the full term of the asset or liability; or
|
|
•
|
Level 3: Prices or valuation techniques that require inputs that
are both significant to the fair value measurement and are unobservable.
|
The following
table sets forth the Company’s short and long term investments as of September 30, 2011, which are measured at fair value
on a recurring basis by level within the fair value hierarchy. As required by ASC 820 (formerly SFAS No. 157), these
are classified based on the lowest level of input that is significant to the fair value measurement:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Due from clearing organization
|
|
$
|
52,595
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
52,595
|
|
Securities owned, at market values
|
|
|
85,493
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85,493
|
|
Total Assets
|
|
$
|
138,088
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
138,088
|
|
NOTE 14
–
Subsequent Events
On October
28, 2011 the firm sold 4.350,000 shares of its common stock to an affiliated person, for gross proceeds of $87,000.
F-11
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Some of
the statements contained in this Quarterly Report on Form 10-Q, which are not purely historical, are forward-looking statements,
including, but not limited to, statements regarding the Company's objectives, expectations, hopes, beliefs, intentions or strategies
regarding the future. In some cases, you can identify forward-looking statements by the use of the words "may," "will,"
"should," "expects," "plans," "intends," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of those terms or
other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable,
our actual results could differ materially from those disclosed in these statements due to various risk factors and uncertainties
affecting our business. We caution you not to place undue reliance on these forward-looking statements. We do not assume responsibility
for the accuracy and completeness of the forward-looking statements and we do not intend to update any of the forward-looking
statements after the date of this report to conform them to actual results. You should read the following discussion in conjunction
with our financial statements and related notes included elsewhere in this report. For a more complete understanding of our industry,
the drivers of our business and our current period results, you should read the following Management's Discussion and Analysis
of Financial Condition and Results of Operation in conjunction with the audited financial statements and notes thereto set forth
in our Annual Report on Form 10-K for the year ended June 30, 2011 and our other filings with the SEC.
OVERVIEW
On June
9, 2009, the Company (then known as "International Smart Sourcing, Inc." or "ISSI") closed certain transactions
contemplated in a certain Stock Purchase Agreement dated as of March 26, 2009 (the "Agreement") which we entered into
with Network 1 Financial Securities, Inc., a privately held Texas corporation ("NETW"), and certain former shareholders
of NETW. At the closing, we acquired 1,250,528 shares, or approximately 97.55%, of common stock of NETW outstanding on such date
(the "Reverse Merger"). In accordance with the terms of the Agreement, we issued 21,460,622 shares of our common stock
to the former shareholders of NETW, in exchange for the acquisition, by the Company, of approximately 97.55% of the outstanding
common shares of NETW.
As of the
closing date, the former shareholders of NETW held approximately 66% of the issued and outstanding common shares of the Company.
The issuance of the 21,460,622 common shares to the former shareholders of NETW was deemed to be a reverse acquisition for accounting
purposes, by ISSI of NETW, as NETW will control the post-merged company. Accordingly, NETW, the accounting acquirer entity, is
regarded as the predecessor entity as of June 9, 2009.
Upon the
completion of the Reverse Merger, we became the ultimate parent company of NETW and we changed our name from "International
Smart Sourcing, Inc." to "Network 1 Financial Group, Inc." ("NETW Group," the "Company," "we,"
"us," or "our").
During the
quarter ended September 30, 2011, we had a decrease in our investment banking fees and a decrease in our
investment advisory consulting fees. In the same period, we had an increase in commission income but a decrease in
trading profits. The decrease in investment banking fees was attributable to a reduction in the number of completed private placements
and a decrease in our investment advisory consulting fees, which was due to a lesser number
of companies seeking our services. The increase in commissions earned in NETW's daily transaction business was due primarily to
a increase in activity from NETW's retail clients. The decrease in trading profits was due to increased market volatility. Overall,
we experienced a increase in losses in the quarter ended September 30, 2011 compared to the same period in the prior year.
We had a
loss from operations of approximately $137,922 for the quarter ended September 30, 2011, which represents an increase of $52,259
over our net loss of $85,663 in the same period in the prior year. This increase was primarily due to decreased revenues which
consisted of lower investment banking commissions, a decrease in net dealer inventory gains, investment advisory fees offset by
a reduction in operating expenses in occupancy, office expenses, professional fees and compensation and related expenses. Management
continues to seek income stabilization from consulting and investment banking fees as well as by reducing its exposure to market
positions. Management believes that in order to expand its marketing and recruitment of experienced registered representatives
it will need to seek additional sources of funding.
2
Critical
Accounting Policies and Estimates
Our discussion
and analysis of financial condition and results of operations are based upon the condensed consolidated financial statements,
which have been prepared in accordance with generally accepted accounting principles as recognized in the United States of America.
The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptions that management believes to be reasonable under the circumstances. Actual results
may differ from these estimates under different assumptions or conditions. For a complete description of accounting policies,
see Note 2 to our financial statements included in our Form 10-K for the year ended June 30, 2011. There were no significant changes
in critical accounting estimates.
Results
of Operations
For the
three months ended September 30, 2011 and 2010, we generated $442,718 and $547,439 of consolidated revenue, respectively. The
decrease in revenue of $104,721 in the quarter ended September 30, 2011 represents a 19% decrease in revenue over the corresponding
period in 2010 and is due to a decrease in dealer inventory gains or trading profits and a decrease in investment advisory fees.
The decrease in inventory gains or trading profits was due primarily to increased market volatility. The decrease in investment
advisory fees is primarily due to a decrease in fees earned in our advisory business to companies and individuals.
We reported
an operating loss of $137,922 in the three months ended September 30, 2011 compared to a loss of $85,663 for the corresponding
period in the prior year, which represents an increase of $52,259. The increase in operating loss was due to an increase in commissions
payable and an increase in clearing fees, as well as a reduction in compensation and related expenses, occupancy and relates expenses,
office expense, and professional fees..
Our consolidated
operating expenses were $580,640 and $633,100 for the quarters ended September 30, 2011 and 2010, respectively, representing a
decrease of $52,460 or 8% from the prior period, and represents 131% and 116% of revenue, respectively. The decrease in our expenses
in 2011 was primarily due to a reduction of compensation and related expenses, occupancy and related expenses, office expenses,
and professional fees offset by an increase in commission paid to register representatives...
Interest
expense was $587 and $3,398 for the quarters ended September 30, 2011 and 2010, respectively, a decrease of $2,811 or 83%. The
decrease was due to a reduction in interest rates and a reduction in debt financing.
Our consolidated
loss was $137,922 and $85,663 for the three months ended September 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 $6,947 in cash and as
of September 30, 2011.
We generated
negative cash flow from operations of $95,822 for the three months ended September 30, 2011 comprised primarily of cash proceeds
from the receivables from Legent Clearing LLC. Cash flows provided by financing activities for the three months
ended September 30, 2011 were $44,721
3
Our business
has experienced difficulty in closing investment banking private placements due to volatile market conditions subsequent to September
30, 2011. Accordingly, we are experiencing liquidity and cash flow problems.
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.
Additional
financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing
mechanisms. However, the trading price of our common stock and the downturn in the U.S. stock and debt markets could make it more
difficult to obtain financing through the issuance of equity or debt securities. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges
senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable
terms, we will have to curtail our operations. The firm is currently reviewing its options due to its liquidity problems.
Off
Balance Sheet Arrangements
We do not
have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary
course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These
transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United
States.
Inflation
We believe
that inflation has not had a material effect on our operations to date.
Recent
Accounting Pronouncements
See Note 2
of the Unaudited Condensed Consolidated Financial Statements for a full description of new accounting pronouncements, including
the respective expected dates of adoption and effects on results of operations and financial condition.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM
4. CONTROLS AND PROCEDURES
(a) Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation
of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial
Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Company’s
Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were
not effective as of September 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.
To address
the material weakness described below, we performed additional analysis and performed other procedures to ensure our financial
statements were prepared in accordance with GAAP. Accordingly, management believes that the financial statements included in this
Quarterly Report on Form 10-Q, fairly present, in all material aspects, our financial condition, results of operations and cash
flows for the periods presented in accordance with GAAP.
The weakness,
identified by management, related to the lack of necessary accounting resources to ensure consistently complete and accurate
reporting of financial reporting. To mitigate the current limited resources and limited 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 weakness 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.
4
(b) Changes
in internal control over financial reporting
There were
no changes in the Company’s internal control over financial reporting in the Company’s first fiscal quarter of the
fiscal year ending June 30, 2011 covered by this Quarterly Report on Form 10-Q, that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
We are not
party to any material legal proceedings, nor to our knowledge, are there any proceedings threatened against us.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October
28, 2011 the firm sold 4.350,000 shares of its common stock to an affiliated person, for gross proceeds of $87,000
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We have
not submitted any matters to a vote of security holders during the three-month period covered by this quarterly report.
ITEM
5. OTHER INFORMATION
On October
23, 2011 the company did not extent the outstanding warrants and were allowed to expire
ITEM
6. EXHIBITS
Exhibits:
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31.1
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Rule 13a – 14(a)/15d – 14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes Oxley Act of 2002
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31.2
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Rule 13a – 14(a)/15d – 14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes Oxley Act of 2002
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32.1
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Certification of the Chief Executive Officer pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
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32.2
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Certification of the Chief Financial Officer pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
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5
SIGNATURES
Pursuant
to the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
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NETWORK 1 FINANCIAL GROUP,
INC.
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July 5, 2012
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/s/ Damon D Testaverde
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Date
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Damon D Testaverde
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Chief Executive Officer, President
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July 5, 2012
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/s/ William R. Hunt, Jr.
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Date
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William R. Hunt, Jr.
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Interim Chief Financial Officer
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Interim Principal Financial Officer
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6
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