Network 1 Financial (NTFL) 10-Q 2011 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

OR

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

For the transition period from _______ to _______

COMMISSION FILE NUMBER: 001-14753

NETWORK 1 FINANCIAL GROUP, INC.

(Exact Name of Registrant as specified in its charter)

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

2 Bridge Avenue, 4thFloor

Red Bank, NJ 07701

(Address of principal executive offices)

(732) 758-9001

(Registrant’s telephone number)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  YES þ 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  þ

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES ¨ NO þ

As of November 16, 2010, the Registrant had 32,435,057 shares of its Common Stock, $.001 par value, outstanding.

NETWORK 1 FINANCIAL GROUP, INC.

FORM 10-Q

SEPTEMBER 30, 2010

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.	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
Notes to Condensed Consolidated Financial Statements	F–5

1

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

September 30, 2010 (unaudited) and June 30, 2010

	SEPTEMBER 30,			JUNE 30,
	2010			2010
	(unaudited)
ASSETS
Cash	$	191,210		$	2,635
Commission Receivable from Clearing Firm		76,113		$	-
Notes Receivable Network 1 Financial Advisors, Inc.		74,582			90,212
Deposit with clearing organization		353,144			685,612
Due from Affiliates		43,034			42,764
Advances to Registered Representatives: net of reserve
for uncollectible accounts of $ 90,100 and $90,000 respectively.		69,881			76,286
Securities held for resale, at market		140,475			152,025
Property and Equipment, net.		1,719			3,878
Other Assets		27,150			28,433
TOTAL ASSETS:	$	977,308		$	1,081,845
LIABILITIES AND EQUITY
LIABILITIES
Line of Credit	$	55,000		$	55,000
Notes Payable		12,671			12,966
Due to Affiliates		4,383			2,413
Due to clearing organization		-			-
Commissions Payable		41,407			51,128
Securities Sold, but not yet purchased, at market (SSS)		11,933			-
Capital Leases payable		7,094			7,626
Warrant Liability		13,747			23,831
Accounts Payable, accrued expenses and other liabilities		222,667			223,484
Bank Overdraft		-			21,413
TOTAL LIABILITIES		368,903			397,861
Commitments and Contingencies
EQUITY
Common Stock, $.001 par value;					-
100,000,000  shares authorized; 40,360,057 issued and
32,435,057 outstanding		40,360			40,360
Additional Paid In Capital		1,430,088			1,430,088
Treasury Stock at cost; 7,925,000 shares		(5,129	)		(5,129	)
Accumulated deficit		(1,071,914	)		(996,335	)
Total stockholders equity		393,405			468,984
Non-controlling interest		215,000			215,000
TOTAL EQUITY		608,405			683,984
TOTAL LIABILITIES AND EQUITY	$	977,308		$	1,081,845

(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, 2010 and 2009

(unaudited)

	SEPTEMBER 30,			SEPTEMBER 30,
	2010			2009
Revenues:
Commissions	$	169,788		$	191,780
Net dealer inventory gains		146,288			40,405
Investment banking		99,063			121,485
Interest and Dividends		6,890			11,794
Transfer fees and clearing services		6,633			6,562
Investment advisory		107,775			68,188
Other		11,000			8,674
Total Revenue		547,437			448,888
Operating Expenses:
Commissions		87,386			265,012
Compensation and Related Expenses		253,486			183,164
Clearing Fees		47,229			56,519
Communications and data processing		33,285			25,391
Interest		3,398			5,589
Occupancy and related expenses		41,753			66,248
Office Expenses		49,022			48,740
Professional Fees		115,381			96,539
Depreciation		2,160			2,370
Total Operating Expenses		633,100			749,572
Loss from Operations		(85,663	)		(300,684	)
Other Income
Gain (loss) on change in derivative liability		10,084			(219,254	)
Total Other Income		10,084			(219,254	)
Net loss	$	(75,579	)	$	(519,938	)
Loss per common share (basic and diluted)	$	(0.002	)	$	(0.022	)
Weighted average common shares outstanding		40,360,057			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, 2010

(Unaudited)

					Additional		Treasury			Accumulated			Non-Controlling
	Common Stock				paid-in-capital		Stock			Deficit			interest		Total
	Shares		Amount
Balance - June 30, 2010		40,360,057	$	40,360	$	1,430,088	$	(5,129	)	$	(996,335	)	$	215,000	$	683,984
Net Loss											(75,579	)				(75,579	)
Balance - September 30, 2010		40,360,057	$	40,360	$	1,430,088	$	(5,129	)	$	(1,071,914	)	$	215,000	$	608,405

(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, 2010 and 2009

(unaudited)

	September 30,			September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss attributable to common shareholders	$	(75,579	)	$	(519,938	)
Adjustments to reconcile net loss to net cash used in operating activities:		-
Depreciation		2,160			2,368
Gain on change in derivative liability		(10,084	)		219,254
Net income (loss) of non-controlling interest in subsidiaries					-
Changes in operating assets and liabilities
Due from clearing organization		332,468			(8,878	)
Securities held for resale, at market		11,550			19,291
Advances to/from registered representatives		6,405			10,372
Other assets		16,913			17,600
Securities sold, but not yet purchased, at market		11,933			8,936
Due to clearing organization		-			(17,477	)
Accounts Payable, accrued expenses & other Liabilities		(31,950	)		(79,342	)
Commission Receivable from Clearing Organization		(76,113	)		-
TOTAL ADJUSTMENTS		263,282			172,124
NET CASH PROVIDED BY (USED IN)  OPERATING ACTIVITIES		187,703			(347,814	)
CASH FLOWS FROM INVESTING ACTIVITIES		-			-
CASH  FLOWS FROM FINANCING ACTIVITIES
Advances to affiliated companies		1,970			(2,898	)
Advances from affiliated companies		(270	)		-
Proceeds from certificate of deposit		-			550,942
Repayment of Notes Payable		(295	)		(7,570	)
Repayment of line of credit		-			(35,000	)
Repayment of capital lease		(533	)		(1,596	)
Cash contributions from owner					-
NET CASH PROVIDED BY FINANCING ACTIVITIES		872			503,878
NET INCREASE IN CASH		188,575			156,064
CASH - Beginning of Period		2,635			91,882
CASH - End of Period	$	191,210		$	247,946
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during Quarter
Interest	$	3,398		$	5,589
Income Taxes	$	2,162		$	644

(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, 2010 AND 2009

(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 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, 2010 and 2009 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, 2010 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, 2010 are not necessarily indicative of the results to be expected for the pending full year ending June 30, 2011.

F-5

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(unaudited)

NOTE 2 - Summary of Significant Accounting Policies

Use of Estimates

The preparation of the 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.

Noncontrolling 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 Condensed Consolidated Statement of Financial Condition and Condensed 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.

F-6

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(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, 2010 AND 2009

(unaudited)

NOTE 3 - Recent Accounting Pronouncements

In February 2010, the FASB issued FASB ASU 2010-09, Subsequent Events, Amendments to Certain Recognition and Disclosure Requirements, which clarifies certain existing evaluation and disclosure requirements in ASC 855 related to subsequent events. FASB ASU 2010-09 requires SEC filers to evaluate subsequent events through the date in which the financial statements are issued and is effective immediately. The new guidance does not have an effect on the Company’s consolidated results of operations and financial condition.

In January 2010, the FASB issued FASB ASU 2010-06, “Improving Disclosures about Fair Value Measurements”, which clarifies certain existing disclosure requirements in ASC 820 as well as requires disclosures related to significant transfers between each level and additional information about Level 3 activity. FASB ASU 2010-06 begins phasing in the first fiscal period after December 15, 2009. The Company is currently assessing the impact on its consolidated results of operations and financial condition.

In June 2009, the FASB issued new accounting guidance which will change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. Under this guidance, determining whether a company is required to consolidate an entity will be based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. This guidance is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations. 

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future financial statements.

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

The following table shows the market values of the Company's investment securities owned and securities sold, but not yet purchased as of September 30, 2010 and June 30, 2010, respectively:

	September 30, 2010				June 30, 2010
Securities:	Owned		Sold Short		Owned		Sold Short
	$	140,475	$	11,933	$	152,025	$	-

Securities sold, but not yet purchased commit the Company to deliver specified securities at predetermined prices. The transactions may result in market risk since, to satisfy the obligation, the Company must acquire the securities at market prices, which may exceed the values reflected in the consolidated statements of financial condition.

F-8

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(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”) for the fiscal year ended June 30, 2010, and amounts on deposit with Southwest and Legent Clearing LLC (“Legent”) for the three months ended September 30, 2010:

	September 30, 2010			June 30, 2010
Cash	$	210,057		$	442,033
Marketable securities		143,087			243,579
Total	$	353,144		$	685,612
Less: securities sold short		(11,933	)		-
Total due from clearing organization	$	341,211		$	685,612

The marketable securities are primarily comprised of corporate stocks. Marketable securities on deposit with Legent are reflected at fair value.  As of September 30, 2010, the Company maintains a deposit of $350,000 with Legent and $24,930 with Southwest.

For the three months ended September 30, 2010, the Company used the services of Southwest and 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 used the services of Southwest to clear its brokerage business for the three months ending September 30, 2009.  The Company incurred charges of approximately $23,387 with Southwest and $23,841 with Legent for the three months ending September 30, 2010 and $56,519 with Southwest for the three months ended September 30, 2009.

NOTE 6 - Related Party Transactions

As of September 30, 2010 and June 30, 2010, due from (to) affiliated companies consisted of the following:

	September 30,			June 30,
	2010			2010
Legends Property Development (a)	$	-		$	1,330
Network 1 Financial Advisors Inc.(b)	$	77,732		$	91,362
Network 1 Financial Assurance, Inc.	$	(1,383	)	$	400
National Financial Services Group (c)	$	39,884		$	39,884

(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.

(c) Represents amounts due 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, 2010 AND 2009

(unaudited)

NOTE 7 - Line of Credit – Bank

The Company’s bank line of credit is payable on demand. The maximum amount the Company could borrow is $100,000.  Indebtedness under the line of credit provides for interest at the bank’s prime rate, plus 1.0% (approximately 4.25% at September 30, 2010). As of September 30, 2010 and June 30, 2010, the amount outstanding under this credit facility was $55,000 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 8 - 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, 2010 and June 30, 2010, NETW’s net capital exceeded the requirement by approximately $109,217 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.

NOTE 9 - Warrants and Derivative Liability

The following is additional information with respect to the Company’s warrants as of September 30, 2009:

F-10

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(unaudited)

WARRANTS OUTSTANDING AND EXERCISABLE

		Number of		Weighted
		Outstanding		Average	Weighted
		Shares		Remaining	Average
Exercise		Underlying		Contractual	Exercise
Price		Warrants		Life	Price
$	0.20		7,657,733	1.06 years	$	0.20
			7,657,733	1.06 years	$	0.20

Note: The warrants’ expiration date is April 23, 2010.

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 recharacterized as a derivative liability.

The derivative liability was valued using the Black-Scholes option valuation model and the following assumptions:

	September 30, 2010			June 30, 2010
Warrants:
Risk Free interest rate		0.4	%		0.6	%
Expected volatility		83.94	%		103	%
Expected life (in years)		1.06			0.93
Expected dividend yield		0	%		0	%
Fair value Warrants:	$	13,747		$	23,831

F-11

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(unaudited)

NOTE 10 – Notes Payable

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

	September 30, 2010		June 30, 2010
Note payable to FINRA in monthly installments of $500 per month including interest at a rate of 6.25% through January 2012	$	7,500	$	-
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		5,171		7,000
Total notes payable	$	12,671	$	12,996

NOTE 11- 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, 2010, 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	$	143,087		-		-	$	143,087
Securities owned, at market values		140,475		-		-		140,475
Total Assets	$	283,562		-		-	$	283,562
Derivative liabilities	$	-		-		13,747	$	13,747
Total Liabilities	$	-		-		13,747	$	13,747

F-12

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, 2010 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, 2010, we had a decrease in our investment banking fees but an increase in our investment advisory consulting fees.  In the same period, we had a decrease in commission income but an increase in trading profits. The decrease in investment banking fees was attributable to a reduction in the number of completed private placements offset by the increase in our investment advisory consulting fees, which increase was due to a greater number of companies seeking our services. The decrease in commissions earned in NETW’s daily transaction business was due primarily to a reduction in activity from NETW’s retail clients. The increase in trading profits was due to increased market volatility. Overall, we experienced a decrease in losses in the quarter ended September 30, 2010 compared to the same period in the prior year.

We had a loss from operations of approximately $85,663 for the quarter ended September 30, 2010, which represents a decrease of $215,021 over our net loss of $300,684 in the same period in the prior year.  This decrease was primarily due to decreased operating expenses, which consisted of lower investment banking commissions and a reduction in costs associated with being a public company, offset by an increase in professional fees. 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, 2010.  There were no significant changes in critical accounting estimates.

Results of Operations

For the three months ended September 30, 2010 and 2009

For the three months ended September 30, 2010 and 2009, we generated $547,437 and $448,888 of consolidated revenue, respectively. The increase in revenue of $98,549 in the quarter ended September 30, 2010 represents a 22% increase in revenue over the corresponding period in 2009 and is due to an increase in dealer inventory gains or trading profits and an increase in investment advisory fees. The increase in inventory gains or trading profits was due primarily to increased market volatility.  The increase in investment advisory fees is primarily due to an increase in fees earned in our advisory business to companies and individuals.

We reported an operating loss of $85,663 in the three months ended September 30, 2009 compared to a loss of $300,684 for the corresponding period in the prior year, which represents a decrease of $215,021.  The decrease in operating loss was due to a decrease in commissions payable and an increase in compensation and related expenses, as well as a reduction in costs associated with being a public company, offset by an increase in professional fees.

Our consolidated operating expenses were $633,100 and $749,572 for the quarters ended September 30, 2010 and 2009, respectively, representing a decrease of $116,472 or 15.5% from the prior period, and represents 116% and 167% of revenue, respectively.  The decrease in our expenses in 2010 is primarily due to a reduction of costs associated with being a public company and a decrease in commissions paid to our brokers, offset by an increase in professional fees.

Interest expense was $3,398 and $5,589 for the quarters ended September 30, 2010 and 2009, respectively, a decrease of $2,191 or 39.2%. The decrease was due to a reduction in interest rates and a reduction in debt financing.

Our consolidated loss was $75,579 and $519,938 for the three months ended September 30, 2010 and 2009, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Our primary source of liquidity is cash generated from operations and from short-term financing arrangements. We had $191,210 in cash and as of September 30, 2010.

We generated cash flow from operations of $187,703 for the three months ended September 30, 2010 comprised primarily of cash proceeds from the liquidation of deposits held at Southwest.  Cash flows provided by financing activities for the three months ended September 30, 2010 were $872.

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

3

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

Off Balance Sheet Arrangements

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

Inflation

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

Recent Accounting Pronouncements

See Note 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, 2010 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

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. 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

None.

ITEM 6. EXHIBITS

Exhibits:

31.1	Rule 13a – 14(a)/15d – 14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2	Rule 13a – 14(a)/15d – 14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

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.

	NETWORK 1 FINANCIAL GROUP, INC.
November 22, 2010	/s/ Richard W. Hunt
Date	Richard W. Hunt
	Chief Executive Officer, Vice-President and Chairman
	Principal Executive Officer
November 22, 2010	/s/ Michael Rakusin
Date	Michael Rakusin
	Chief Financial Officer
	Principal Financial Officer

6

EXHIBIT INDEX

Exhibit	Description
31.1	Rule 13a – 14(a)/15d – 14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2	Rule 13a – 14(a)/15d – 14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002