VBI Vaccines 10-Q 2011 Q3 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, 2011

OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                                       to            

Commission file number: 000-18188

___________________

PAULSON CAPITAL CORP.

(Exact name of registrant as specified in its charter)

Oregon	93-0589534
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
811 SW Naito Parkway, Portland, Oregon	97204
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code:  503-243-6000

___________________

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  [X]   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 (§ 229.405 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 [X]    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   [  ] (Do not check if a smaller reporting company)                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 [  ]  No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, no par value	5,767,985
(Class)	(Outstanding at November 10, 2011)

PAULSON CAPITAL CORP. AND SUBSIDIARIES

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION		Page
Item 1.	Financial Statements
	Consolidated Balance Sheets – September 30, 2011 and December 31, 2010 (unaudited)	3
	Consolidated Statements of Operations - Three and Nine Month Periods Ended September 30, 2011 and 2010 (unaudited)	4
	Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2011 and 2010 (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15
Item 4.	Controls and Procedures	15
PART II - OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 6.	Exhibits	16
Signatures		17

2

Paulson Capital Corp. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

	September 30, 2011		December 31, 2010
Assets
Cash	$	344,915	$	375,649
Receivable from clearing organization		6,105,384		8,076,637
Notes and other receivables, net of allowances for doubtful accounts of $100,000 for both periods		968,193		767,842
Income taxes receivable		6,724		126,451
Trading and investment securities owned, at fair value		6,494,629		8,648,123
Underwriter warrants, at fair value		1,068,000		1,122,000
Prepaid and deferred expenses		392,003		539,181
Furniture and equipment, at cost, net of accumulated depreciation and amortization of $926,177 and $918,443		52,203		25,398
Total Assets	$	15,432,051	$	19,681,281
Liabilities and Shareholders' Equity
Accounts payable and accrued liabilities	$	220,676	$	319,433
Payable to clearing organization		265,056		318,782
Compensation, employee benefits and payroll taxes		588,377		1,014,579
Trading securities sold, not yet purchased, at fair value		1,875		5,565
Income taxes payable - uncertain tax positions		-		144,075
Deferred revenue		267,855		382,650
Total Liabilities		1,343,839		2,185,084
Commitments and Contingencies		-		-
Shareholders' Equity
Preferred stock, no par value; 500,000 shares authorized; none issued		-		-
Common stock, no par value; 10,000,000 shares authorized; shares issued and outstanding: 5,767,985 and 5,769,985		2,163,941		2,164,401
Retained earnings		11,924,271		15,331,796
Total Shareholders' Equity		14,088,212		17,496,197
Total Liabilities and Shareholders' Equity	$	15,432,051	$	19,681,281

See accompanying Notes to Consolidated Financial Statements

3

Paulson Capital Corp. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2011			2010			2011			2010
Revenues
Commissions	$	3,486,974		$	3,815,600		$	11,796,990		$	12,119,251
Corporate Finance		77,984			31,951			255,672			2,879,383
Investment income (loss)		58,621			13,591			(153,889	)		(1,575,848	)
Trading loss		(392,830	)		(602,173	)		(1,529,357	)		(725,406	)
Interest and dividends		124,640			4,427			391,912			13,731
Other		45,140			38,640			136,602			121,502
		3,400,529			3,302,036			10,897,930			12,832,613
Expenses
Commissions and salaries		3,514,332			3,807,955			11,892,962			11,768,445
Underwriting expenses		1,051			1,825			11,701			254,548
Rent and utilities		143,655			141,790			429,364			424,743
Communication and quotation services		136,460			132,253			401,136			416,338
Professional fees		76,014			106,766			463,123			713,741
Travel and entertainment		30,129			56,385			91,542			128,872
Advertising and promotion		4,044			13,711			20,183			107,003
Settlement expense		(25,000	)		11,786			-			73,431
Bad debt expense		4,167			-			4,167			337
Depreciation and amortization		4,698			5,148			14,340			20,520
Licenses, taxes and insurance		109,973			122,264			349,162			238,860
Other		210,435			151,739			769,910			549,137
		4,209,958			4,551,622			14,447,590			14,695,975
Loss before income taxes		(809,429	)		(1,249,586	)		(3,549,660	)		(1,863,362	)
Income tax benefit:
Current		147,075			4,000			144,075			-
Deferred		-			-						-
		147,075			4,000			144,075			-
Net loss	$	(662,354	)	$	(1,245,586	)	$	(3,405,585	)	$	(1,863,362	)
Basic and diluted net loss per share		(0.11	)		(0.21	)		(0.59	)		(0.32	)
Shares used in basic and diluted per share calculations:		5,767,985			5,863,463			5,768,271			5,842,030

See accompanying Notes to Consolidated Financial Statements

4

Paulson Capital Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	For the Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(3,405,585	)	$	(1,863,362	)
Adjustments to reconcile net loss to net cash flows provided by operating activities:
Receipt of underwriter warrants		(122,000	)		(1,681,000	)
Unrealized depreciation/expiration of underwriter warrants		176,000			1,792,000
Unrealized depreciation of underwriter warrants - employee and independent contractor		-			(6,000	)
Depreciation and amortization		14,340			20,520
Loss on asset disposition		-			433
Change in assets and liabilities:
Receivables from/payable to clearing organization, net		1,917,527			(10,211	)
Notes and other receivables		(200,351	)		(505,647	)
Income taxes receivable		119,727			2,017,575
Trading and investment securities owned		2,153,494			(53,005	)
Prepaid and deferred expenses		147,178			311,622
Deferred revenue		(114,795	)		145,915
Accounts payable, accrued liabilities and compensation payables		(524,959	)		(7,477	)
Trading securities sold, not yet purchased		(3,690	)		307
Income taxes payable - uncertain tax positions		(144,075	)		8,000
Net cash provided by operating activities		12,811			169,670
Cash flows from investing activities:
Additions to furniture and equipment		(41,145	)		(5,901	)
Net cash used in investing activities		(41,145	)		(5,901	)
Cash flows from financing activities:
Proceeds from stock option exercise and related tax benefit		-			2,486
Payments to retire common stock		(2,400	)		(178,560	)
Net cash used in financing activities		(2,400	)		(176,074	)
Decrease in cash		(30,734	)		(12,305	)
Cash:
Beginning of period		375,649			245,292
End of period	$	344,915		$	232,987
Supplemental cash flow information:
Cash received during the period for income taxes, net	$	119,727		$	1,991,075

See accompanying Notes to Consolidated Financial Statements

5

PAULSON CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.  Basis of Presentation

The financial information for Paulson Capital Corp. and its wholly-owned subsidiaries, Paulson Investment Company and Paulson Capital Properties, LLC, included herein as of September 30, 2011 and December 31, 2010 and for the three- and nine-month periods ended September 30, 2011 and 2010 is unaudited; however, such information reflects all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2010 is derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Note 2.  Earnings Per Share

Since we were in a loss position, the number of shares used for our basic net loss per share and diluted net loss per share was the same for both periods presented. For the three- and nine-month periods ended September 30, 2011, we had 406,000 anti-dilutive stock options outstanding. For the three- and nine-month periods ended September 30, 2010, we had 448,800 anti-dilutive stock options outstanding.

Note 3.  Fair Value Measurements

Various inputs are used in determining the fair value of our assets and liabilities carried at fair value and are summarized into three broad categories:

● Level 1 – unadjusted quoted prices in active markets for identical securities;

● Level 2 – other significant observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.; and

● Level 3 – significant unobservable inputs, including our own assumptions in determining fair value.

The inputs or methodology used for valuing securities is not necessarily an indication of the risk associated with investing in those securities.

Following are the disclosures related to our financial assets and (liabilities) (in thousands):

	September 30, 2011				December 31, 2010
	Fair Value			Input Level	Fair Value			Input Level
Trading and investment securities owned:
Corporate equities, marketable	$	3,185		Level 1	$	5,471		Level 1
Corporate equities, not readily marketable		3,197		Level 3		2,945		Level 3
Corporate options/warrants, marketable		113		Level 1		232		Level 1
Underwriter warrants		1,068		Level 3		1,122		Level 3
Trading securities sold, not yet purchased:
Corporate equities, marketable		(2	)	Level 1		(6	)	Level 1

6

Following is a summary of activity related to our Level 3 financial assets and liabilities (in thousands):

	Underwriter Warrants			Not Readily Marketable Investment Securities
Balance, December 31, 2010	$	1,122		$	2,945
Fair value of underwriter warrants received included as a component of corporate finance income		122			-
Investment in privately-held company		-			210
Net unrealized gain (loss), included as a component of investment loss related to securities held		(176	)		42
Balance, September 30, 2011	$	1,068		$	3,197

	Underwriter Warrants			Underwriter Warrants – Employee and Independent Contractor			Not Readily Marketable Investment Securities
Balance, December 31, 2009	$	1,290		$	(10	)	$	2,776
Fair value of underwriter warrants received included as a component of corporate finance income		1,681			-			-
Net unrealized gain (loss), included as a component of investment income (loss) related to securities held		(1,786	)		5			189
Underwriter warrants exercised or expired included as a component of investment income		(6	)		1			-
Balance, September 30, 2010	$	1,179		$	(4	)	$	2,965

Valuation of Marketable Trading and Investment Securities Owned

The fair value of marketable trading and investment securities owned is determined based on quoted market prices. Securities traded on a national exchange are stated at the last reported sales price on the day of valuation; other securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are stated at the last quoted bid price.

Valuation of Not Readily Marketable Investment Securities

Securities not readily marketable include investment securities (a) for which there is no market on a securities exchange or no independent publicly quoted market, (b) that cannot be publicly offered or sold unless registration has been effected under the Securities Act of 1933, or (c) that cannot be offered or sold because of other arrangements, restrictions or conditions applicable to the securities or to us. The fair value of not readily marketable securities is estimated by management using available information including the following: quoted market prices of similar securities (i.e., unrestricted shares of the same company); price of recent known trades of the same or similar securities; the cost of the security, if recently purchased, adjusted for changes in the financial condition of the issuer; all other information available from review of available documents related to the issuer or discussions with management of the issuer.

Valuation of Underwriter Warrants

We estimate the fair value of our underwriter warrants using the Black-Scholes Option Pricing Model. The warrants generally have a five-year expiration date and vest immediately. The warrants are generally subject to a restriction period of six months to one-year in which we cannot exercise the warrants. The Black-Scholes model requires us to use five inputs including: stock price, risk free rate, exercise price, time remaining on the warrant and price volatility. After stock price, the most influential factor in this model is price volatility, which we calculate for each company’s warrants based on each company’s own historical closing stock prices as well as an index of historical prices for comparable companies. When we initially receive a new underwriter warrant from an initial public offering, its calculated volatility factor is entirely based on the volatility of an index of comparable companies, since there is no price history for a new publicly traded company. As each underwriter warrant approaches its expiration date, its volatility factor is derived primarily from the historical prices of its underlying common stock. There is no assurance that we will ultimately be able to exercise any of our warrants in a way that will realize the value that we attribute to them in our financial statements based on this model.

7

Valuation of Trading Securities Sold, Not Yet Purchased

As a securities broker-dealer, we are engaged in various securities trading and brokerage activities as principal. In the normal course of business, we sometimes sell securities that we do not currently own and will therefore be obligated to purchase such securities at a future date. This obligation is recorded on our balance sheet at the fair value based on quoted market prices of the related securities and will result in a trading loss on the securities if the fair value increases and a trading gain if the fair value decreases between the balance sheet date and the purchase date.

There were no changes to our valuation methods or techniques during the nine-month periods of 2011 or 2010.

Note 4. Repurchase of Common Stock

In February 2011, we repurchased 2,000 shares of our common stock for $2,400, or $1.20 per share, pursuant to our stock repurchase program previously approved by our Board of Directors, after which 69,011 shares remained available for repurchase. This repurchase plan does not have an expiration date.

Note 5. New Accounting Guidance

Management has reviewed the new accounting guidance and determined that there is not a material impact on our financial statements.

Note 6. Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.

Item 2.                      Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This report, including, without limitation, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains or incorporates both historical and “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify forward-looking statements. Any such forward-looking statements in this report reflect our current views with respect to future events and financial performance and are subject to a variety of factors that could cause our actual results to differ materially from historical results or from anticipated results expressed or implied by such forward-looking statements. Because of such factors, we cannot assure you that the results anticipated in this report will be realized. As noted elsewhere in this report, various aspects of our business are subject to extreme volatility, often as a result of factors beyond our ability to anticipate or control. In particular, factors, such as the condition of the securities markets, which are in turn based on popular perceptions of the health of the economy generally, can be expected to affect the volume of our business as well as the value of the securities maintained in our trading and investment accounts. Other factors that may affect our future financial condition or results of operations include the following:

● Aspects of our business are volatile and affected by factors beyond our control.

● Our ability to attract and retain customers may be affected by our reputation. 

● We are subject to extensive regulation that could result in investigations, fines or other penalties.

● We face intense competition in our industry. 

8

● Our future success depends on retaining existing management and hiring and assimilating new key employees, and our inability to attract or retain key personnel would materially harm our business and results of operations.

● We are subject to the risk of legal proceedings, which may result in significant losses to us that we cannot recover. Claimants in these proceedings may be customers, employees, investors or regulatory agencies, among others, seeking damages for mistakes, errors, negligence or acts of fraud by our employees.

● As a public company, we are subject to complex legal and accounting requirements that require us to incur substantial expense and expose us to risk of non-compliance.

● Our directors control approximately 60% of our common stock and may have interests differing from those of other stockholders.

OVERVIEW

Substantially all of our business consists of the securities brokerage and corporate finance activities of our wholly-owned subsidiary, Paulson Investment Company, Inc., which has operations in four principal categories, all of them in the financial services industry. These categories are: 

● securities brokerage activities for which we earn commission revenues;

● corporate finance revenues consisting principally of underwriting discounts and underwriter warrants;

● securities trading from which we record profit or loss, depending on trading results; and

● investment income resulting from earnings on, and increases or decreases in the value of, our investment portfolio. 

In addition, Paulson Capital Properties, LLC, a 100% owned subsidiary, was established for the purpose of purchasing, improving and remarketing underappreciated real estate. Through September 30, 2011, we had not purchased any real estate.

Because we operate in the financial services industry, our revenues and earnings are substantially affected by general conditions in financial markets. Further, past performance is not necessarily indicative of results to be expected in future periods. In our securities brokerage business, the amount of our revenues depends on levels of market activity requiring the services we provide. Our corporate finance activity, which consists of acting as the managing underwriter of initial and follow-on public offerings, private investments in public equity (“PIPEs”) and private placements for smaller companies, is similarly affected by the strength of the market for new equity offerings, which has historically experienced substantial cyclical fluctuation. During the first nine months of 2011, global IPO volume fell slightly to 280 offerings for proceeds of $116 billion compared to 305 IPO's for proceeds of $129 billion in the first nine months of 2010. The steepest declines occurred in the third quarter of 2011 as recent public market volatility, concerns about Europe and a heightened sense of economic uncertainly created some turbulence in the financial markets. In the third quarter, there were 59 IPO's globally for proceeds of $23 billion, which was down from the 125 global IPO's which raised $56 billion in the second quarter. In the U.S., there were 96 IPO's in the first nine months of 2011 for proceeds of $29.2 billion compared to 97 IPO's with proceeds totaling $14.6 billion in the first nine months of 2010. Although the near-term predictions for the U.S. economy remain weak, and the European debt crisis remains unsettled, the outlook for global IPO's is encouraging as the filing activity suggests a large number of private companies are interested in moving forward with the IPO process and are optimistic that conditions will improve. There are currently 336 companies in the global pipeline, which are targeting to raise $180 billion in gross proceeds. Although we attempt to match operating costs with activity levels, many of our expenses are either fixed or difficult to change on short notice. Accordingly, fluctuations in brokerage and corporate finance revenues tend to result in sharper fluctuations, on a percentage basis, in net income or loss.

9

Our investment and trading income or loss is affected by changes in market valuation of securities generally and, in particular, by changes in valuation of the equity securities of microcap companies in which our investments and trading activities tend to be concentrated. Equity markets in general, and microcap equity markets in particular, have always experienced significant volatility and this volatility has, in recent years, been extreme. As a result, the value of our investment portfolio and securities held in connection with our trading and investment activities has experienced large quarterly fluctuations in income or loss, and our net worth has substantially increased or decreased as our securities holdings are marked to market.

A substantial portion of our corporate finance business consists of acting as managing underwriter of initial and follow-on public offerings for microcap and smallcap companies. As a part of our compensation for these activities, we typically receive warrants exercisable to purchase securities similar to those that we offer and sell to the public. The warrants generally have a five-year expiration date and are subject to a restricted period of six months to one-year during which we cannot exercise. The exercise price is typically 120% of the price at which the securities were initially sold to the public. Accordingly, unless there is at least a 20% increase in the price of these securities at some time more than six months and less than five years after the offering, the warrants will remain “under water” and will ultimately expire unexercised. We also receive warrants in connection with PIPEs, which have varying terms and conditions.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

We reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange Commission on March 10, 2011.

RESULTS OF OPERATIONS

Our revenues and operating results are influenced by fluctuations in the equity markets as well as general economic and market conditions, particularly conditions in the NASDAQ and over-the-counter markets, where our investment and trading positions and the underlying stock for the underwriter warrants are heavily concentrated. Significant fluctuations can occur in our revenues and operating results from one period to another. Our results of operations depend upon many factors, such as the number of companies that are seeking financing, the quality and financial condition of those companies, market conditions in general, the performance of our previous underwritings and interest in certain industries by investors. As a result, revenues and income derived from these activities may vary significantly from period to period. Our revenues include the following:

● Commissions, which represent amounts earned from our retail securities brokerage activities;

● Corporate finance revenues, which are a function of total proceeds from offerings done during the period, compensation per offering and the fair value of underwriter warrants received;

● Investment income (loss), which includes (i) the unrealized appreciation and depreciation of securities held based on quoted market prices, (ii) the unrealized appreciation and depreciation of securities held that are not readily marketable, based upon our estimate of their fair value, (iii) realized gains and losses on the sale of securities with quoted market prices and securities that are not readily marketable, (iv) income on the exercise of underwriter warrants, and (v) the unrealized appreciation and depreciation of underwriter warrants held; and

● Trading income (loss), which is the gain or loss from trading positions before commissions paid to the representatives in the trading department.

10

The following tables set forth the changes in our operating results in the three- and nine-month periods ended September 30, 2011 compared to the three- and nine-month periods ended September 30, 2010 (dollars in thousands):

	Three Months Ended September 30,						Favorable (Unfavorable)			Percentage
	2011			2010			Change			Change
Revenues:
Commissions	$	3,487		$	3,815		$	(328	)		(8.6	)%
Corporate finance		78			32			46			143.8
Investment income		59			14			45			321.4
Trading loss		(393	)		(602	)		(209	)		(34.7	)
Interest and dividends		125			4			121			*
Other		45			39			6			15.4
Total revenues		3,401			3,302			99			3.0
Expenses:
Commissions and salaries		3,514			3,808			294			7.7
Underwriting expenses		1			2			1			50.0
Rent and utilities		144			142			(2	)		(1.4	)
Communication and quotation services		136			132			(4	)		(3.0	)
Professional fees		76			107			31			29.0
Travel and entertainment		30			56			26			46.4
Advertising and promotion		4			14			10			71.4
Settlement expense		(25	)		12			37			308.3
Bad debt expense		4			-			(4	)		(100.0	)
Depreciation and amortization		5			5			-			-
Licenses, taxes and insurance		110			122			12			9.8
Other		211			152			(59	)		(38.8	)
Total expenses		4,210			4,552			342			7.5
Loss before income taxes	$	(809	)	$	(1,250	)	$	441			35.3	%

*Not meaningful.

	Nine Months Ended September 30,						Favorable (Unfavorable)			Percentage
	2011			2010			Change			Change
Revenues:
Commissions	$	11,797		$	12,119		$	(322	)		(2.7	)%
Corporate finance		256			2,879			(2,623	)		(91.1	)
Investment loss		(154	)		(1,576	)		1,422			90.2
Trading loss		(1,529	)		(725	)		(804	)		(110.9	)
Interest and dividends		392			14			378			*
Other		136			122			14			11.5
Total revenues		10,898			12,833			(1,935	)		(15.1	)
Expenses:
Commissions and salaries		11,893			11,768			(125	)		(1.1	)
Underwriting expenses		12			255			243			95.3
Rent and utilities		429			425			(4	)		(0.9	)
Communication and quotation services		401			416			15			3.6
Professional fees		463			714			251			35.2
Travel and entertainment		92			129			37			28.7
Advertising and promotion		20			107			87			81.3
Settlement expense		-			73			73			100.0
Bad debt expense		5			-			(5	)		(100.0	)
Depreciation and amortization		14			21			7			33.3
Licenses, taxes and insurance		349			239			(110	)		(46.0	)
Other		770			549			(221	)		(40.3	)
Total expenses		14,448			14,696			248			1.7
Loss before income taxes	$	(3,550	)	$	(1,863	)	$	(1,687	)		(90.6	)%

_____________

*Not meaningful.

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Revenues

The improvement in the global economy during the first quarter of the year did not carry over into the second and third quarters, due to the debt crisis in Greece and Europe and slower growth in the United States. For the period from December 31, 2010 to September 30, 2011, the Dow Jones Industrial Average and the NASDAQ composite indices decreased 5.7% and 9.0%, respectively. During the third quarter, the Dow Jones Industrial Average decreased by 12.1% and the NASDAQ composite declined by 12.9%.

Commissions declined 8.6% during the third quarter ended September 30, 2011 compared to the third quarter of 2010, but declined only 2.7% for the nine-month period ended September 30, 2011 compared to the nine-month period ended September 30, 2010. The declines in commission revenue reflect the ongoing weaknesses in the U.S. markets and the heightened sense of overall economic uncertainty, combined with a decrease in our number of registered representatives. We had 98 registered representatives at September 30, 2011, compared to 104 at September 30, 2010.

Corporate finance income in the third quarter of 2011 was up by 143.8% from the third quarter in the prior year, and was down 91.1% for the first nine months of 2011 from the comparable nine-month period in 2010. During the third quarter, we completed a private placement for The Patron Company, Inc., which was our second completed placement for this client in 2011.

Investment loss included the following (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011		2010			2011			2010
Net unrealized appreciation (depreciation) related to underwriter warrants	$	44	$	3		$	(176	)	$	(1,792	)
Net unrealized appreciation (depreciation) of underwriter warrants – employee and independent contractor		-		8			-			6
Net unrealized appreciation of securities held based on quoted market prices or, for securities that are not readily marketable, our estimate of their fair value		15		34			22			214
Net realized gains on the sale of securities with quoted market prices and securities that are not readily marketable		-		(31	)		-			(4	)
	$	59	$	14		$	(154	)	$	(1,576	)

We did not exercise any underwriter warrants in the first three quarters of 2011 or 2010. Generally, when we exercise a warrant to obtain the underlying common stock, the common stock is subsequently sold in the near term and the related gain is reflected as a component of investment income.

Investment income (loss) is volatile from period to period due to the fact that it is driven by the fair value of the securities and underwriter warrants held. In addition, the performance of the securities in which we have a concentration can significantly affect our investment income from period to period.

Trading loss decreased to $393,000 in the third quarter of 2011 compared to $602,000 in the third quarter of 2010, but increased to $1.529 million in the first nine months of 2011 compared to $725,000 in the first nine months of 2010. The trading loss was negatively affected by the market value of certain securities in which we make a market. Our focus is on very small capitalization issues, especially those tied to our corporate finance clients.

Expenses

Total expenses decreased by $342,000 in the third quarter of 2011 compared to the third quarter of 2010 primarily due to lower commissions and salaries, professional fees, travel and entertainment, and settlement expense. For the nine-month period, expenses decreased by $248,000 compared to the same period in the prior year due to lower underwriting expenses, professional fees, travel and entertainment, advertising and promotion, and settlement expense. These decreases were partially offset by higher commissions and salaries, and insurance expenses.

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Commissions and salaries decreased $294,000 in the third quarter of 2011 compared to the third quarter of 2010. The decrease is consistent with the decline in commission revenue from those same periods.  Commission and salaries increased $125,000 in the first nine months of 2011 compared to the first nine months of 2010. The increase was primarily due to start-up costs for the Paulson Wealth Advisors division.

Underwriting expenses decreased by $1,000 in the third quarter of 2011 and by $243,000 in the first nine months of 2011 compared to the same periods of 2010.  The decrease for the first nine months of 2011 compared to 2010 is consistent with the change in the related corporate finance income.

Professional fees decreased by $31,000 and $251,000 and settlement expense fell by $37,000 and $73,000 in the three- and nine-month periods ended September 30, 2011 compared to the same periods of 2010, as a result of substantial legal fees related to the settlement of claims in fiscal 2010.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity include our cash and receivables from our clearing organization, offset by payables to our clearing organization.

In addition, our sources of liquidity include, to a certain extent, our trading positions, borrowings on those positions and profits realized upon the sale of the securities underlying underwriter warrants exercised. The liquidity of the market for many of our securities holdings, however, varies with trends in the stock market. Since many of the securities we hold are thinly traded, and we are, in many cases, a primary market maker in the issues held, any significant sales of our positions could adversely affect the liquidity of the issues held. In general, falling prices in NASDAQ and over-the-counter securities (which make up most of our trading positions) lead to decreased liquidity in the market for these issues, while rising prices in NASDAQ and over-the-counter issues tend to increase the liquidity of the market for these securities.

We believe our cash and receivables from our clearing organization at September 30, 2011 are sufficient to meet our cash and regulatory net capital needs for at least the next twelve-month period from September 30, 2011. Our liquidity could be negatively affected by protracted unfavorable market conditions.

As a securities broker-dealer, we are required by SEC regulations to meet certain liquidity and capital standards. We believe we were in compliance with these standards at September 30, 2011.

Following the lapse of restrictions upon issuance, capital available from the sale of the underlying securities of underwriter warrants exercised can fluctuate significantly from period to period as the value of the underlying securities fluctuates with overall market and individual company financial condition or performance. There is no public market for the underwriter warrants. The securities receivable upon exercise of the underwriter warrants cannot be resold unless the issuer has registered these securities with the SEC and with the states in which the securities will be sold unless exemptions are available. Any delay or other problem in the registration of these securities would have an adverse impact upon our ability to obtain funds from the exercise of the underwriter warrants and the resale of the underlying securities.

At September 30, 2011, we owned 12 underwriter warrants from 9 issuers, all but 1 of which were exercisable. None of the warrants had an exercise price below the September 30, 2011 market price of the securities receivable upon exercise. There is little or no direct relationship between the intrinsic value of our underwriter warrants at the end of any given period and the fair value calculated using the Black-Scholes option pricing model. The prices of the securities underlying the underwriter warrants are very volatile, and substantial fluctuations in their fair value can be expected in the future.

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Cash provided by operating activities totaled $13,000 in the nine-month period ended September 30, 2011, primarily due to our net loss of $3.406 million offset by changes in our operating assets and liabilities as discussed in more detail below.

Our net receivable from our clearing organization totaled $5.8 million at September 30, 2011 and $7.8 million at December 31, 2010. Our net receivable from our clearing organization is affected by the results of the activity in our trading and investment accounts, as well as the timing of general corporate expenditures and cash flow requirements.

Notes and other receivables increased $200,000 to $968,000 at September 30, 2011 from $768,000 at December 31, 2010, primarily due to loans to our registered representatives.

Changes in our trading and investment securities owned are dependent on the purchase and sale of securities during the period, as well as changes in their fair values during the period.

A summary of activity related to the fair value of our underwriter warrants was as follows (in thousands):

Balance, December 31, 2010	$	1,122
Receipt of underwriter warrants		122
Net unrealized loss on value of warrants		(155	)
Warrants exercised or expired		(21	)
Balance, September 30, 2011	$	1,068

Deferred revenue of $268,000 at September 30, 2011 was related to amounts received from our clearing firm pursuant to a five-year agreement with two, one-year extensions, and is being amortized at the rate of $12,755 per month through June 2013.

In September 2001, our Board of Directors approved a stock repurchase program pursuant to which we are authorized to repurchase up to 600,000 shares of our common stock. In June 2008, our Board of Directors approved the repurchase of up to a total of an additional 200,000 shares of our common stock. We repurchased a total of 2,000 shares of our common stock during the first quarter of 2011 at an average price of $1.20 per share for a total of $2,400. Through September 30, 2011, 730,989 shares had been repurchased and, as of September 30, 2011, 69,011 shares remained available for repurchase. This repurchase program does not have an expiration date.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

NEW ACCOUNTING GUIDANCE

See Note 5 of Notes to Consolidated Financial Statements.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not required for Smaller Reporting Companies.

Item 4.  Controls and Procedures

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

We repurchased the following shares of our common stock during the first nine months of 2011:

	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plan		Maximum number of shares that may yet be purchased under the plan
January 1 to January 31		-		-		-		71,011
February 1 to February 28		2,000	$	1.20		2,000		69,011
March 1 to March 31		-		-		-		69,011
April 1 to April 30		-		-		-		69,011
May 1 to May 31		-		-		-		69,011
June 1 to June 30		-		-		-		69,011
July 1 to July 31		-		-		-		69,011
August 1 to August 30		-		-		-		69,011
September 1 to September 30		-		-		-		69,011
Total		2,000		1.20		2,000		69,011

A plan to repurchase up to a total of 600,000 shares of our common stock was approved by our Board of Directors in September 2001 and does not have an expiration date. In June 2008, our Board of Directors approved the repurchase of up to a total of an additional 200,000 shares of our common stock. This authorization does not have an expiration date.

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Item 6.  Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

31.1*	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1**	Certification of Principal Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2**	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
101.INS***		XBRL Instance
101.SCH***		XBRL Taxonomy Extension Schema
101.CAL***		XBRL Taxonomy Extension Calculation
101.DEF***		XBRL Taxonomy Extension Definition
101.LAB***		XBRL Taxonomy Extension Labels
101.PRE***		XBRL Taxonomy Extension Presentation

*	Filed herewith
**	Furnished herewith
***	XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

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 10, 2011	PAULSON CAPITAL CORP.
	By:	/s/ Chester L. F. Paulson
		Chester L. F. Paulson President and Chief Executive Officer Principal Executive Officer
	By:	/s/ Murray G. Smith
		Murray G. Smith Chief Financial Officer Principal Financial Officer

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