UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 |
FORM 10-Q |
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended September 30, 2009. |
or |
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from ___________ to ___________ |
Commission File Number: 000-51837 |
OPTIONABLE, INC. (Exact Name of Registrant as Specified in Its Charter) |
Delaware | 52-2219407 | |
(State or Other Jurisdiction of Incorporation or | (IRS Employer Identification No.) | |
Organization) | ||
1230 Avenue of the Americas, Seventh Floor, New York, NY | 10020 | |
(Address of Principal Executive Offices) | (Zip Code) |
(914) 773-1100 |
(Registrant’s Telephone Number Including Area Code) |
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Accelerated Filer o | |
Non-accelerated Filer o | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
The number of outstanding shares of the registrant’s Common Stock as of November 13, 2009 is 48,328,328.
1
INDEX |
PART I: FINANCIAL INFORMATION | |||
ITEM 1: | FINANCIAL STATEMENTS (Unaudited) | ||
Consolidated Balance Sheets | 3 | ||
Consolidated Statements of Operations | 4 | ||
Consolidated Statements of Cash Flows | 5 | ||
Notes to the Consolidated Financial Statements | 6 | ||
ITEM 2: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS | 22 | |
ITEM 3: | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 27 | |
ITEM 4: | CONTROLS AND PROCEDURES | 27 | |
PART II: OTHER INFORMATION | |||
ITEM 1 | LEGAL PROCEEDINGS | 28 | |
ITEM 1A : | RISK FACTORS | 29 | |
ITEM 2 | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 29 | |
ITEM 3 | DEFAULTS UPON SENIOR SECURITIES | 29 | |
ITEM 4 | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 29 | |
ITEM 5 | OTHER INFORMATION | 29 | |
ITEM 6: | EXHIBITS | 29 | |
SIGNATURES | 30 |
2
OPTIONABLE, INC. |
CONSOLIDATED BALANCE SHEETS |
September 30, 2009 | December 31, 2008 | |||||||
ASSETS | (Unaudited) | (1) | ||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 3,958,302 | $ | 8,974,282 | ||||
Recoverable Income Taxes | 985,525 | 958,294 | ||||||
Notes Receivable, net of allowance for doubtful accounts of $80,000 at September 30, 2009 | - | - | ||||||
Prepaid Expenses | 1,167,868 | 1,269,827 | ||||||
Total current assets | 6,111,695 | 11,202,403 | ||||||
Total assets | $ | 6,111,695 | $ | 11,202,403 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 756,949 | $ | 420,590 | ||||
Due to stockholder | - | 97,907 | ||||||
Income Tax Payable | - | 83,555 | ||||||
Total current liabilities | 756,949 | 602,052 | ||||||
Due to stockholder, net of unamortized discount of $2,618,270 at December 31, 2008 | - | 2,426,240 | ||||||
Due to director, net of unamortized discount of $316,961 and $355,126 | ||||||||
at September 30, 2009 and December 31, 2008, respectively | 191,736 | 153,571 | ||||||
Total liabilities | 948,685 | 3,181,863 | ||||||
Stockholders' Equity: | ||||||||
Preferred Stock; $.0001 par value, 5,000,000 shares authorized, none issued | ||||||||
and outstanding | - | - | ||||||
Common stock; $.0001 par value, 100,000,000 shares authorized, | ||||||||
52,428,203 issued and 48,328,328 and 52,423,403 outstanding at September 30, 2009 | 5,242 | 5,242 | ||||||
and December 31, 2008, respectively | ||||||||
Additional paid-in capital | 162,783,753 | 162,766,096 | ||||||
Treasury stock at cost, 4,099,875 and 4,800 shares at September 30, 2009 | ||||||||
and December 31, 2008, respectively | (47,552 | ) | (2,506 | ) | ||||
Accumulated deficit | (157,578,433 | ) | (154,748,292 | ) | ||||
Total stockholders’ equity | 5,163,010 | 8,020,540 | ||||||
Total liabilities and stockholders’ equity | $ | 6,111,695 | $ | 11,202,403 |
(1) Derived from audited financial statements | ||||
See Notes to Unaudited Financial Statements.
3
OPTIONABLE, INC. |
CONSOLIDATED STATEMENTS OF OPERATIONS |
For the three-month period ended | For the nine-month period ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | $ | 527,785 | $ | 226,646 | $ | 2,803,433 | $ | 1,831,230 | ||||||||
Research and development | - | 98,660 | - | 559,105 | ||||||||||||
Total operating expenses | 527,785 | 325,306 | 2,803,433 | 2,390,335 | ||||||||||||
Operating loss | (527,785 | ) | (325,306 | ) | (2,803,433 | ) | (2,390,335 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest income | 3,944 | 42,070 | 38,635 | 198,758 | ||||||||||||
Interest expense to related parties | (13,103 | ) | (97,362 | ) | (141,879 | ) | (283,581 | ) | ||||||||
Total other expenses | (9,159 | ) | (55,292 | ) | (103,244 | ) | (84,823 | ) | ||||||||
Loss before income tax | (536,944 | ) | (380,598 | ) | (2,906,677 | ) | (2,475,158 | ) | ||||||||
Income tax benefit | 338,341 | 72,165 | 76,537 | 881,579 | ||||||||||||
Net loss | $ | (198,603 | ) | $ | (308,433 | ) | $ | (2,830,140 | ) | $ | (1,593,579 | ) | ||||
Basic earnings per common share | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.06 | ) | $ | (0.03 | ) | ||||
Diluted earnings per common share | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.06 | ) | $ | (0.03 | ) | ||||
Basic and diluted weighted average common | ||||||||||||||||
shares outstanding | 48,328,328 | 52,023,047 | 49,183,344 | 52,023,047 | ||||||||||||
See Notes to Unaudited Financial Statements.
4
OPTIONABLE, INC. |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
For the nine-month periods ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
(Unaudited) | (Unaudited) | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (2,830,140 | ) | $ | (1,593,579 | ) | ||
Adjustments to reconcile net loss to net cash used in | ||||||||
operating activities: | ||||||||
Depreciation | - | 161,806 | ||||||
Amortization of debt discount | 141,879 | 283,581 | ||||||
Provision for doubtful accounts | 80,000 | (625 | ) | |||||
Fair value of warrants and options | 17,657 | 17,055 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | - | 625 | ||||||
Incentives receivable from stockholder | - | (15,487 | ) | |||||
Due to shareholder | (97,907 | ) | - | |||||
Other current assets | 101,959 | 16,879 | ||||||
Other receivable | - | (262,742 | ) | |||||
Other assets | - | 19,900 | ||||||
Accounts payable and accrued expenses | 336,358 | (25,552 | ) | |||||
Income tax payable | (139,941 | ) | - | |||||
Recoverable income taxes | 29,155 | 783,908 | ||||||
Net cash used in operating activities | (2,360,980 | ) | (614,231 | ) | ||||
Cash flows used in investing activities: | ||||||||
Purchases of notes receivable | (80,000 | ) | - | |||||
Net cash used in investing activity | (80,000 | ) | - | |||||
Cash flows from financing activities: | ||||||||
Repurchase of shares of common stock | (45,046 | ) | - | |||||
Principal repayment of due to stockholder | (2,529,954 | ) | - | |||||
Net cash used in financing activities | (2,575,000 | ) | - | |||||
Net decrease in cash | (5,015,980 | ) | (614,231 | ) | ||||
Cash, beginning of period | 8,974,282 | 9,919,727 | ||||||
Cash, end of period | $ | 3,958,302 | $ | 9,305,496 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for taxes | $ | - | $ | - | ||||
Cash paid for interest | $ | - | $ | - | ||||
Disposition of property and equipment in connection with | ||||||||
cancellation of lease | $ | - | $ | 24,425 | ||||
See Notes to Unaudited Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1-Organization, Description of Business and Going Concern
The Company has not generated any revenues since the third quarter of 2007 as a result of the suspension of the business relationship by its largest customer and the succession of events since then. In addition, the matters discussed in Note 7 and Item 1 of Part II of this Report "Legal Proceedings" have had a significant adverse impact on its business and future results of operations and financial condition.
The Company is a defendant to three legal proceedings, one from the Commodities and Futures Trade Commission (“CFTC”), another from its largest shareholder, Chicago Mercantile Exchange/ New York Mercantile Exchange (“NYMEX”), and a third one from its former largest customer, Bank of Montreal (“BMO”). Also named in such lawsuits, among others, are: one of the Company’s current board members and former president, as well as the Company’s former chief executive officer. The Company’s former chairman is a defendant in the latter two proceedings. Additionally, the Company’s former chief executive officer and former president are defendants in a claim made by the Securities and Exchange Commission. Furthermore, the US Department of Justice has indicted the Company’s former chief executive officer.
Going Concern
The Company is unable to determine whether it will have sufficient funds to meet its obligations for at least the next twelve months. The combination of its anticipated legal costs to defend against current legal proceedings, the potential amounts the Company would have to pay if there are negative outcomes in one or more of such legal proceedings and the Company’s obligations under its indemnification obligations could exceed the Company’s resources. The legal proceedings also negatively impact the Company’s ability to enter into strategic transactions with other companies. The Company’s future depends on its ability to satisfactorily resolve the aforementioned legal issues and there is no assurance it will be able to do so. If the Company fails for any reason, it would not be able to continue as a going concern and could potentially be forced to seek relief through a filing under the US Bankruptcy Code.
6
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Principles of consolidation
The accompanying consolidated financial statements include the results of operations of Opex International, Inc. and Hydra Commodity Services, Inc. for the three and nine-month periods ended September 30, 2009 and 2008. All material intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and the footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2009.
7
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2- Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Concentration of Credit Risks
The Company is subject to concentrations of credit risk primarily from cash and cash equivalents.
The Company's cash and cash equivalents accounts are held at financial institutions and are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000 between January 2007 and October 2008 and $250,000 for interest-bearing accounts and an unlimited amount for noninterest-bearing accounts after October 2008. During the three and nine-month periods ended September 30, 2009 and 2008, the Company has reached bank balances exceeding the FDIC insurance limit. While the Company periodically evaluates the credit quality of the financial institutions in which it holds deposits, it cannot completely alleviate the risk associated with the sudden failure of such financial institutions. The Company’s cash and cash equivalents held at financial institutions exceeding the FDIC insurance limit amounted to $ 2.0 million and $7.3 million at September 30, 2009 and December 31, 2008, respectively.
Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted Financial Accounting Statement Board (“FASB”) Accounting Standard Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” , for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
8
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2- Summary of Significant Accounting Policies-continued
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1: | Observable inputs such as quoted market prices in active markets for identical assets or liabilities | |
Level 2: | Observable market-based inputs or unobservable inputs that are corroborated by market data | |
Level 3: | Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions. |
The Company did not have any Level 2 or Level 3 assets or liabilities as of September 30, 2009 and December 31, 2008, with the exception of its due to shareholder and due to director. The carrying amount of the due to director at September 30, 2009 and December 31, 2008 and due to shareholder at December 31, 2008, approximate their respective fair value based on the rate at which the Company was able to settle its due to shareholder in February 2009.
Cash and cash equivalents include money market securities that are considered to be highly liquid and easily tradable as of September 30, 2009 and December 31, 2008, respectively. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy.
In addition, ASC 825-10-25, “Fair Value Option,” was effective for January 1, 2008. ASC 825-10-25 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value options for any of its qualifying financial instruments.
9
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2- Summary of Significant Accounting Policies-continued
Income Taxes
Income taxes are accounted for in accordance with ASC 740 “ Income Taxes”. ASC 740 requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company's assets and liabilities result in a deferred tax asset, ASC 740 requires an evaluation of the probability of being able to realize the future benefits indicated by such assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some or all deferred tax assets will not be realized. Penalties and interest on underpayment of taxes are reflected in the Company’s effective tax rate.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management include, but are not limited to, the realization of receivables and share-based payments. Actual results will differ from these estimates.
Basic and Diluted Earnings per Share
Basic earnings per share are calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of common shares and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise of stock options and warrants (calculated using the modified-treasury stock method). The outstanding options amounted to 1,233,000 and 983,000 at September 30, 2009 and 2008, respectively. The outstanding warrants amounted to 100,000 and 18,526,000 at September 30, 2009 and 2008, respectively. The options and warrants outstanding at September 30, 2009 and 2008, respectively, have been excluded from the computation of diluted earnings per share due to their antidilutive effect.
10
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2- Summary of Significant Accounting Policies-continued
Stock Compensation
Under ASC 718- Compensation-Stock Compensation, companies are required to measure the costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In March 2005, the SEC issued SAB 107. SAB 107 expresses views of the staff regarding the interaction between ASC 718 and certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment arrangements for public companies. Compensation cost is measured on the date of grant as its fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant.
Contingencies
The outcomes of legal proceedings and claims brought against the Company are subject to significant uncertainty. FASB ASC 450-20-25-2 “Contingencies- Loss Contingencies-Recognition”, requires that an estimated loss from a loss contingency such as a legal proceeding or claim should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred.
In determining whether a loss should be accrued the Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. While the Company believes that it will continue to incur losses from such legal proceedings, it is unable to make a reasonable estimate of the amount of loss.
Recent Accounting Pronouncements
During 2009, FASB has issued a number of updates to its accounting standards codification, none of which are expected to significantly impact the Company’s presentation or accounting treatment for a particular event or transactions.
11
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3- Prepaid expenses
Prepaid expenses primarily consists of retainers paid to certain law firms which represent the Company and certain former directors and officers and a current director in connection with legal proceedings which are described in Note 7- Litigation and contingencies.
Note 4- Notes receivable
The Company purchased five notes receivable aggregating $80,000 from its former chief technology officer and an affiliate. The notes can be either redeemed in cash or in kind for services performed, at the Company’s option. The notes can be redeemed in cash by January 2010 or within a year from issuance if redeemed in-kind.
The Company has not received payment on the first four notes, has extended their maturity to January 2010 and believes that it is unlikely that it will collect on the remaining notes and has provided for an allowance for doubtful accounts on all the notes at September 30, 2009.
12
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5-Due to Related Parties
The terms and amounts of due to related parties at September 30, 2009 and December 31, 2008 are as follows:
Due to Stockholder and former Chairman of the Board, non-interest bearing, unsecured, payable by March 12, 2014, if the Company obtains additional equity or debt financing of at least $1,000,000 following the private placement which closed in September 2004 ("Capital Raise"), the Company will repay its former Chairman of the Board up to 39.33% of the Capital Raise, up to $2,810,877, with the remaining balance and accrued interest of 4.68% from the date of the Capital Raise due on March 12, 2014:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
$ | - | $ | 5,044,510 | |||||
Discount, using initial implied rate of 12% | - | (2,618,270 | ) | |||||
$ | - | $ | 2,426,240 |
13
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5-Due to Related Parties-continued
Due to Director and former President, non-interest bearing, unsecured, payable by March 12, 2014, if the Company obtains additional equity or debt financing of at least $1,000,000 following a Capital Raise, the Company will repay its Director up to 5.3% of the Capital Raise, up to $381,250, with the remaining balance and accrued interest of 4.68% from the date of the Capital Raise due on March 12, 2014:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
$ | 508,697 | $ | 508,697 | |||||
Discount, using initial implied rate of 12% | (316,961 | ) | (355,126 | ) | ||||
$ | 191,736 | $ | 153,571 |
During April 2005, the Company modified the terms of its due to related parties. The modified terms provide that, in the event of a Capital Raise, among other things, the annual interest rate accrued after such event is reduced from 12% to 4.68%. Additionally, the modified terms provide that the Company may make principal repayments towards the due to a stockholder and former Chairman of the Board and the due to Director amounting to approximately 25% of its cash flows from operating cash flows less capital expenditures. During April 2006, the Company modified the terms of its due to related parties to allow the Company to make principal repayments at its discretion.
The amortization of the discount on the due to related parties amounted to approximately $142,000 and $284,000 during the nine-month periods ended September 30, 2009 and 2008, respectively.
During the nine-month period ended September 30, 2009, the Company satisfied its obligations under the due to Stockholder and former Chairman of the Board by paying him $2,575,000, including the repurchase of 4,095,075 shares of the Company’s common stock, valued at approximately $45,000 based on the closing price of the Company’s stock on the date of repurchase.
14
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5-Due to Related Parties-continued
At December 31, 2008, the Company owed approximately $98,000 to a Stockholder for certain legal fees incurred and paid by such Stockholder for matters discussed in Note 7 of the financial statements. As of September 30, 2009, the Company satisfied its obligation to the Stockholder.
Note 6- Stockholders' Equity
Stock Compensation Plan
During November 2004, the Company adopted the 2004 Stock Option Plan ("2004 Plan"). The 2004 Plan allows for the grant of both incentive stock options and nonstatutory stock options. The 2004 Plan may be administered, interpreted and constructed by the Board of Directors or a compensation committee. The maximum number of shares of common stock which may be issued pursuant to options granted under the 2004 Plan may not exceed 7,500,000 shares. The options outstanding vest over periods of up to twenty-four months.
The amortization of share-based payment was recorded in selling, general, and administrative expenses during such periods.
The Company granted 500,000 options during the nine-month period ended September 30, 2009.
The fair value of the options granted during the nine-month period ended September 30, 2009 is based on the Black Scholes Model using the following assumptions:
Exercise price: | $0.016-0.025 |
Market price at date of grant: | $0.016-0.025 |
Volatility: | 104.5% |
Expected dividend rate: | 0% |
Expected terms: | 3.3 years |
Risk-free interest rate: | 1.22-1.44% |
15
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6- Stockholders' Equity-continued
The following activity occurred under our plan:
Nine-month periods ended September 30, | ||||
2009 | 2008 | |||
Weighted-average grant-date fair value of options granted | $0.015 | N/A | ||
Fair value of options recognized as expense: | $17,657 | $17,055 |
The total compensation cost related to nonvested options not yet recognized amounted to approximately $5,000 at September 30, 2009 and the Company expects that it will be recognized over the following weighted-average period of 16 months.
If any options granted under the 2004 Plan expire or terminate without having been exercised or cease to be exercisable, such options will be available again under the 2004 Plan. All employees of the Company and its subsidiaries, if any, are eligible to receive incentive stock options and nonstatutory stock options. Non-employee directors and outside consultants who provided bona-fide services not in connection with the offer or sale of securities in a capital raising transaction are eligible to receive nonstatutory stock options. Incentive stock options may not be granted below the fair market value of the Company's common stock at the time of grant or, if to an individual who beneficially owns more than 10% of the total combined voting power of all stock classes of the Company or a subsidiary, the option price may not be less than 110% of the fair value of the common stock at the time of grant. The expiration date of an incentive stock option may not be longer than ten years from the date of grant. Option holders, or their representatives, may exercise their vested options up to three months after their employment termination or one year after their death or permanent and total disability. The 2004 Plan provides for adjustments upon changes in capitalization.
The Company's policy is to issue shares pursuant to the exercise of stock options from its available authorized but unissued shares of common stock. It does not issue shares pursuant to the exercise of stock options from its treasury shares.
16
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7- Litigation and Contingencies
Regulatory Matters
Commodity Futures Trading Commission v. Cassidy et al.
On November 18, 2008, the Commodity Futures Trading Commission (“CFTC”) filed a complaint in the United States District Court for the Southern District of New York, against the Company; former employees of the Company, including its former Chief Executive Officer, Kevin Cassidy, and its former President (currently a Director), Edward O’Connor; and two former employees of BMO, David Lee and Robert Moore. The CFTC claims that the Company is liable for violations of Section 4c(b) of the Commodity Exchange Act (“CEA”) and CFTC Regulations 33.10(a),(b) and (c). The CFTC seeks a permanent injunction restraining and enjoining the Company and other defendants from directly or indirectly violating these provisions. The CFTC further seeks an order directing the Company and other defendants to pay civil monetary penalties, in an undetermined amount. On March 20, 2009, the Company and certain other of the defendants filed motions to dismiss the CFTC complaint. The court heard arguments on the motions on October 22, 2009, but it has not announced a decision. The Company is unable to predict the outcome of this matter.
17
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7- Litigation and Contingencies-continued
CMEG NYMEX Inc. v. Optionable, Inc. et. al.
On April 10, 2009, NYMEX filed a complaint against the Company, several past and present officers and directors ( one of whom is a current director), and other defendants in the United States District Court for the Southern District of New York. The complaint claims that defendants are liable for securities and common-law fraud, negligent misrepresentation, and breach of warranty in connection with an April 2007 transaction in which several individual who were officers and directors of the Company at the time sold shares in it to NYMEX and the Company issued NYMEX warrants for the purchase of additional shares. The complaint seeks rescission, compensatory damages of at least $28.5 million, and punitive damages of $28.5 million. On June 15, 2009, the Company filed a motion to dismiss the complaint. NYMEX responded to that motion on September 18, 2009, and the motion is still pending. The court will hear arguments on November 24, 2009. The Company is unable to predict the outcome of this matter.
Bank of Montreal v. Optionable, Inc. et al.
On August 28, 2009, the Bank of Montreal (“BMO”) filed a complaint against Optionable and other defendants in the United States District Court for the Southern District of New York. The other defendants include former employees Scott Connor and Ryan Woodgate, former chief executive officer Kevin Cassidy, former chairman Mark Nordlicht, and former president Edward O’Connor, (and currently a Director) of the Company, as well as MF Global Inc. and two of its current or former employees. The complaint claims that the Company is liable for fraud, negligent misrepresentation, breach of fiduciary duty, and breach of contract. It demands compensatory and punitive damages in an undetermined amount, and it demands indemnification from the Company for certain of BMO’s trading losses and attorneys’ fees. The Company’s response to the complaint is due on November 30, 2009. The Company is unable to predict the outcome of this litigation.
18
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7- Litigation and Contingencies-continued
Claim from the Company’s former Chief Executive Officer
On October 15, 2007, and as subsequently reiterated, the Company received a letter from the Company's former Chief Executive Officer in which he states, among other things, that the Company is in breach of certain obligations pursuant to an Amended and Restated Employment Agreement, dated April 10, 2007, and the Company should:
1) continue to pay him his base salary, amounting to $25,000 per month for fiscal 2007, $325,000 for fiscal 2008, and $350,000 for fiscal 2009;
2) continue to pay him a cash consideration equal to 5% of the Company's revenues and a stock consideration equal to 2% of the Company's revenues. The aggregate value of the unpaid consideration based on the Company's revenues amounted to approximately $289,000 at September 30, 2007; and
3) continue to provide to him health, welfare, and pension plan benefits as well as the payment of an annual premium for his life insurance through October 2009.
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OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7- Litigation and Contingencies-continued
While the Company intends to vigorously defend these matters, there exists the possibility of adverse outcomes that the Company cannot determine. These matters are subject to inherent uncertainties and management's view of these matters may change in the future.
Note 8-Income Taxes
The components of the benefit (provision) for income taxes are as follows:
September 30, 2009 | September 30, 2008 | ||||||
Current and deferred: | |||||||
Federal | $ | (76,537 | ) | $ | 881,579 | ||
State | (- | ) | (- | ) | |||
Total benefit (provision) for income taxes | $ | (76,537 | ) | $ | 881,579 |
A reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows:
Nine-month period ended September 30, | ||||||||||
2009 | 2008 | |||||||||
Federal statutory taxes | (35.0 | %) | (35.0 | )% | ||||||
State income taxes, net of federal tax benefit | (5.7 | ) | (5.7 | ) | ||||||
Utilization of state net operating loss | 5.7 | - | ||||||||
Permanent differences (taxable gain on extinguishment of due to Stockholder in 2009) | 32.3 | 5.1 | ||||||||
(2.7 | )% | (35.6 | )% |
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OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8-Income Taxes-continued
The recoverable income tax amounting to approximately $1.0 million is recoverable primarily from applications for carryback refund from the Company’s 2006 federal tax returns.
The Company has net operating losses of approximately $2.7 million for both federal and state tax purposes.
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Optionable, Inc. (“the “Company”) was formed in Delaware in February 2000. Between April 2001 and July 2007, a substantial portion of our revenues were generated from providing energy derivative brokerage services to brokerage firms, financial institutions, energy traders, and hedge funds worldwide. A substantial portion of all energy derivatives we brokered in the past were natural gas derivatives.
A significant portion of our revenues through the third quarter of 2007 was derived from our business relationship with BMO Financial Group ("BMO"). We have not generated any revenues since the third quarter of 2007 as a result of the suspension of the business relationship with us by BMO together with the combined succession of events since then. In addition, the matters discussed in Item 1 of Part II of this Report "Legal Proceedings" have had a significant adverse impact on our business, including current and, likely, future results of operations and financial condition. Our management continues to seek out possible business transactions and new business relationships.
The Company is a defendant to three legal proceedings, one from the Commodities and Futures Trade Commission (“CFTC”), another from its largest shareholder, NYMEX, and a third one from its former largest customer, BMO. Also named in such lawsuits, among others, are: one of the Company’s current board members and former president, as well as the Company’s former chief executive officer. The Company’s former chairman is a defendant in the latter two proceedings. Additionally, the Company’s former chief executive officer and former president ( who is a current board member) are defendants in a claim made by the Securities and Exchange Commission. Furthermore, the US Department of Justice has indicted the Company’s former chief executive officer.
Going Concern
The Company is unable to determine whether it will have sufficient funds to meet its obligations for at least the next twelve months. The combination of its anticipated legal costs to defend against current legal proceedings, the potential amounts the Company would have to pay if there are negative outcomes in one or more of such legal proceedings and the Company’s obligations under its indemnification obligations could exceed the Company’s resources. The legal proceedings also negatively impact the Company’s ability to enter into strategic transactions with other companies. The Company’s future depends on its ability to satisfactorily resolve the aforementioned legal issues and there is no assurance it will be able to do so. If the Company fails for any reason, it would not be able to continue as a going concern and could potentially be forced to seek relief through a filing under the US Bankruptcy Code.
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Three and Nine-Month Periods Ended September 30, 2009 and 2008
Results of Operations |
(Unaudited) |
For the three-month | Increase/ | Increase/ | For the nine-month | Increase/ | Increase/ | |||||||||||||||||||||||||||
period ended | (Decrease) | (Decrease) | period ended | (Decrease) | (Decrease) | |||||||||||||||||||||||||||
September 30, | in $ 2009 | in % 2009 | September 30, | in $ 2009 | in % 2009 | |||||||||||||||||||||||||||
2009 | 2008 | vs 2008 | vs 2008 | 2009 | 2008 | vs 2008 | vs 2008 | |||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Selling, general and administrative | 527,785 | 226,646 | 301,139 | 132.9 | % | 2,803,433 | 1,831,230 | 972,203 | 53.1 | % | ||||||||||||||||||||||
Research and development | - | 98,660 | (98,660 | ) | -100.0 | % | - | 559,105 | (559,105 | ) | -100.0 | % | ||||||||||||||||||||
Total operating expenses | 527,785 | 325,306 | 202,479 | 62.2 | % | 2,803,433 | 2,390,335 | 413,098 | 17.3 | % | ||||||||||||||||||||||
Operating loss | (527,785 | ) | (325,306 | ) | 202,479 | 62.2 | % | (2,803,433 | ) | (2,390,335 | ) | 413,098 | 17.3 | % | ||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||||
Interest income | 3,944 | 42,070 | (38,126 | ) | -90.6 | % | 38,635 | 198,758 | (160,123 | ) | -80.6 | % | ||||||||||||||||||||
Interest expense-related parties | (13,103 | ) | (97,362 | ) | (84,259 | ) | -86.5 | % | (141,879 | ) | (283,581 | ) | (141,702 | ) | -50.0 | % | ||||||||||||||||
(9,159 | ) | (55,292 | ) | (46,133 | ) | 88.4 | % | (103,244 | ) | (84,823 | ) | 18,421 | 21.7 | % | ||||||||||||||||||
Net loss before income tax | (536,944 | ) | (380,598 | ) | (156,346 | ) | 41.1 | % | (2,906,677 | ) | (2,475,158 | ) | 431,519 | 17.4 | % | |||||||||||||||||
Income tax benefit | 338,341 | 72,165 | 266,176 | NM | 76,537 | 881,579 | (805,042 | ) | (91.3 | )% | ||||||||||||||||||||||
Net loss | $ | (198,603 | ) | $ | (308,433 | ) | $ | (109,830 | ) | - | $ | (2,830,140 | ) | $ | (1,593,579 | ) | $ | 1,236,561 | 77.6 | % | ||||||||||||
NM: Not meaningful |
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Selling, general, and administrative expenses
Selling, general, and administrative expenses consists primarily of legal fees, incurred in connection with the Company’s attention to matters described in Part II, Item 1- Legal Proceedings or to handle certain matters which occur during the course of our operations, and compensation of personnel supporting our operations.
· | Higher legal fees incurred in connection with an increased number of litigations handled during 2009 as well as legal fees incurred in connection with our annual meeting of stockholders in March 2009 and the satisfaction of our obligations to Mark Nordlicht, a stockholder and our former Chairman of the Board, which occurred in February 2009. |
As a result of the matters discussed above and in Item 1 of Part II of this Report, we believe that our legal fees for 2009 will continue to constitute a large share of our selling, general, and administrative expenses.
Research and development
Research and development expenses consist primarily of compensation of personnel and consultants associated with the development and testing of our automated electronic trading system. The decrease in research and development expenses during the three-month and nine-month periods ended September 30, 2009 when compared to the prior year periods is primarily due to the following:
· | We suspended our OPEX development efforts in November 2008. |
Interest income consists primarily of interest earned on interest-bearing cash and cash equivalents. The decrease in interest income during the three-month and nine-month periods ended September 30, 2009 when compared to the prior year period is primarily due to a decrease in interest rate we earned as well as a lower weighted average interest-bearing cash balance.
Interest expense to related parties
Interest expense to related parties consists of interest charges associated with amounts due to related parties, including Mark Nordlicht, our former Chairman of the Board and Edward O’Connor, our former President and current Director. The decrease in interest expense to related parties during the three-month and nine-month periods ended September 30, 2009 is primarily due to a loss on extinguishment of debt to Mark Nordlicht of approximately $35,000 which was recognized as interest expense during February 2009. No such loss occurred during the comparable prior year period.
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Income tax
Income tax benefit/expense consists of federal and state current and deferred income tax or benefit based on our net income. The decrease in income tax benefit during the three and nine- month periods ended September 30, 2009 when compared to the income tax benefits expense we incurred during the comparable prior year periods is primarily due to a tax gain of $2.5 million we incurred on the satisfaction of the due to Mark Nordlicht, offset by taxable losses resulting from our expenses.
LIQUIDITY AND CAPITAL RESOURCES
Our cash balance as of September 30, 2009 amounts to approximately $4.0 million.
During the nine-month period ended September 30, 2009, we used cash from operating activities of approximately $2.4 million, primarily resulting from:
· | net loss of approximately $2.8 million, adjusted for the amortization of debt discount of approximately $140,000 and an increase in allowance for bad debt of $80,000; and |
· | a decrease in income tax payable of approximately $140,000 resulting from the current pre-tax loss offset by a taxable gain of $2.5 million resulting from the satisfaction of our obligations to Mark Nordlicht, a stockholder and our former Chairman of the Board; |
During the nine-month period ended September 30, 2009, we used cash in investing activities, resulting from purchases of five notes receivable aggregating $80,000;
During the nine-month period ended September 30, 2009, we satisfied our obligations of approximately $5.0 million to Mark Nordlicht, and repurchased 4,095,075 shares of our common stock for a consideration aggregating $2,575,000.
During the nine-month period ended September 30, 2008, we used cash from operating activities of approximately $301,000, primarily resulting from:
· | net loss of approximately $1.6 million, adjusted for the amortization of debt discount and depreciation of approximately $284,000 and $162,000, respectively; |
· | a decrease in prepaid income taxes assets resulting from the reimbursement during the nine-month period ended September 30, 2008 of the 2007 federal estimated tax payments /income tax payable offset by the current year tax benefits resulting from operating losses; and |
· | an increase in other receivable of approximately $260,000 representing insurance proceeds receivable from our insurance carrier for legal fees incurred in connection with certain legal matters disclosed in Item 1 of Part II of this report. |
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A summary of significant accounting policies is included in Note 2 of unaudited financial statements included in this Quarterly Report. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition. Our financial statements and accompanying notes are prepared in accordance with U.S. GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Critical accounting policies for us include the following:
Contingencies
The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. FASB ASC 450-20-25-2 “Contingencies- Loss Contingencies-Recognition”, requires that an estimated loss from a loss contingency such as a legal proceeding or claim should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred.
In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations.
Recent Accounting Pronouncements
During 2009, FASB has issued a number of updates to its accounting standards codification, none of which are expected to significantly impact the Company’s presentation or accounting treatment for a particular event or transactions.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
n/a |
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2009, our Chief Executive Officer and President and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and President and our Chief Financial Officer concluded that, as of September 30, 2009, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to our Chief Executive Officer and President and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2009, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART 2 OTHER INFORMATION
Commodity Futures Trading Commission v. Cassidy et al.
On November 18, 2008, the Commodity Futures Trading Commission (“CFTC”) filed a complaint in the United States District Court for the Southern District of New York, against the Company; former employees of the Company, including its former Chief Executive Officer, Kevin Cassidy, and its former President (currently a Director), Edward O’Connor; and two former employees of BMO, David Lee and Robert Moore. The CFTC claims that the Company is liable for violations of Section 4c(b) of the Commodity Exchange Act (“CEA”) and CFTC Regulations 33.10(a),(b) and (c). The CFTC seeks a permanent injunction restraining and enjoining the Company and other defendants from directly or indirectly violating these provisions. The CFTC further seeks an order directing the Company and other defendants to pay civil monetary penalties, in an undetermined amount. On March 20, 2009, the Company and certain other of the defendants filed motions to dismiss the CFTC complaint. The court heard arguments on the motions on October 22, 2009, but it has not announced a decision. The Company is unable to predict the outcome of this matter.
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CMEG NYMEX Inc. v. Optionable, Inc. et. al.
On April 10, 2009, NYMEX filed a complaint against the Company, several officers and directors ( one of whom is a current director), and other defendants in the United States District Court for the Southern District of New York. The complaint claims that defendants are liable for securities and common-law fraud, negligent misrepresentation, and breach of warranty in connection with an April 2007 transaction in which several individuals who were officers and directors of the Company at the time sold shares in it to NYMEX and the Company issued NYMEX warrants for the purchase of additional shares. The complaint seeks rescission, compensatory damages of at least $28.5 million, and punitive damages of $28.5 million. On June 15, 2009, the Company filed a motion to dismiss the complaint. NYMEX responded to that motion on September 18, 2009, and the motion is still pending. The court will hear arguments on November 24, 2009. The Company is unable to predict the outcome of this matter.
Bank of Montreal v. Optionable, Inc. et al.
On August 28, 2009, the Bank of Montreal (“BMO”) filed a complaint against Optionable and other defendants in the United States District Court for the Southern District of New York. The other defendants include former employees Scott Connor and Ryan Woodgate, former chief executive officer Kevin Cassidy, former chairman Mark Nordlicht, and former president Edward O’Connor, (and currently a Director) of the Company, as well as MF Global Inc. and two of its current or former employees. The complaint claims that the Company is liable for fraud, negligent misrepresentation, breach of fiduciary duty, and breach of contract. It demands compensatory and punitive damages in an undetermined amount, and it demands indemnification from the Company for certain of BMO’s trading losses and attorneys’ fees. The Company’s response to the complaint is due on November 30, 2009. The Company is unable to predict the outcome of this litigation.
ITEM 1A. RISK FACTORS
Other than with respect to the risk factor provided below, there have been no material changes to the Risk Factors described in our 2008 Annual Report on Form 10-K.
RISKS RELATED TO OUR BUSINESS
WE MAY NOT BE ABLE TO CONTINUE TO OPERATE AS A GOING CONCERN
The Company is unable to determine whether it will have sufficient funds to meet its obligations for at least the next twelve months. The combination of our anticipated legal costs to defend against the current legal proceedings described under the heading “Legal Proceedings” in Item 1 of Part II of this Report, the potential settlements the Company would have to pay assuming there are negative outcomes to such legal proceedings, and the Company’s indemnification obligations may exceed the Company’s resources, and therefore the Company may not be able to meet such obligations which would have a material adverse effect on the Company’s ability to continue as a going concern. The Company’s future depends on its ability to satisfactorily resolve these legal issues, although there can be no assurance that we will be able to achieve a satisfactory resolution. While the Company is considering several alternatives, these legal proceedings also negatively impact our ability to enter into strategic transactions with other companies, and there can be no assurance that we will be able to enter into or complete any such transaction. If the Company fails for any reason to satisfactorily resolve these issues, it would not be able to continue as a going concern and the Company could potentially be forced to seek relief through a filing under the US Bankruptcy Code.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934* | |
31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934* | |
32.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350* | |
32.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350* |
* Filed herewith
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
November 16, 2009
Optionable, Inc. | |||
By: | /s/ Thomas Burchill | ||
Thomas Burchill Chief Executive Officer and President (Principal Executive Officer) | |||
By: | /s/ Marc Andre-Boisseau | ||
Marc Andre-Boisseau Chief Financial Officer (Principal Financial Officer) |
30