VBI Vaccines 10-Q 2012 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2012

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	5,766,985
(Class)	(Outstanding at May 14, 2012)

PAULSON CAPITAL CORP. AND SUBSIDIARIES

FORM 10-Q

INDEX

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets – March 31, 2012 and December 31, 2011 (unaudited)	2
	Consolidated Statements of Operations - Three Months Ended March 31, 2012 and 2011 (unaudited)	3
	Consolidated Statements of Cash Flows - Three Months Ended March 31, 2012 and 2011 (unaudited)	4
	Notes to Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4.	Controls and Procedures	14
PART II - OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 6.	Exhibits	15
Signatures		16

1

Paulson Capital Corp. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

	March 31, 2012		December 31, 2011
Assets
Cash	$	288,971	$	292,002
Receivable from clearing organization		4,849,645		5,511,538
Notes and other receivables, net of allowances for doubtful accounts of $387,853 for both periods		658,970		607,454
Income taxes receivable		28,090		10,835
Trading and investment securities owned, at fair value		9,108,215		7,708,868
Underwriter warrants, at fair value		1,652,000		1,395,000
Prepaid and deferred expenses		369,650		543,987
Furniture and equipment, at cost, net of accumulated depreciation and amortization of $932,471 and $930,199		45,442		48,755
Total Assets	$	17,000,983	$	16,118,439
Liabilities and Shareholders' Equity
Accounts payable and accrued liabilities	$	308,960	$	136,839
Payable to clearing organization		124,431		366,588
Compensation, employee benefits and payroll taxes		595,435		658,940
Dividends payable		288,349		-
Trading securities sold, not yet purchased, at fair value		10		356,705
Deferred revenue		191,325		229,590
Total Liabilities		1,508,510		1,748,662
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: 5,766,985 and 5,767,985		2,163,711		2,163,941
Retained earnings		13,328,762		12,205,836
Total Shareholders' Equity		15,492,473		14,369,777
Total Liabilities and Shareholders' Equity	$	17,000,983	$	16,118,439

See accompanying Notes to Consolidated Financial Statements

2

Paulson Capital Corp. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	For the Three Months Ended March 31,
	2012		2011
Revenues
Commissions	$	3,206,138	$	4,394,030
Corporate Finance		22,794		69,137
Investment income (loss)		249,511		(102,682	)
Trading income		1,968,921		385,409
Interest and dividends		121,406		131,375
Other		40,890		44,698
		5,609,660		4,921,967
Expenses
Commissions and salaries		3,209,272		4,359,624
Underwriting expenses		37,189		10,214
Rent and utilities		155,384		141,338
Communication and quotation services		128,694		130,608
Professional fees		256,259		209,323
Travel and entertainment		37,600		29,922
Clearing expenses		79,054		104,652
Depreciation and amortization		4,113		4,482
Licenses, taxes and insurance		125,297		129,411
Other		164,504		182,603
		4,197,366		5,302,177
Income (loss) before income taxes		1,412,294		(380,210	)
Income tax expense (benefit):
Current		-		1,000
Deferred		-		-
		-		1,000
Net income (loss)	$	1,412,294	$	(381,210	)
Basic and diluted net income (loss) per share		0.24		(0.07	)
Shares used in basic and diluted per share calculations:		5,767,897		5,768,852

See accompanying Notes to Consolidated Financial Statements

3

Paulson Capital Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	For the Three Months Ended March 31,
	2012			2011
Cash flows from operating activities:
Net income (loss)	$	1,412,294		$	(381,210	)
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
Receipt of underwriter warrants		-			(7,000	)
Unrealized  (appreciation) depreciation/expiration of underwriter warrants		(257,000	)		89,000
Depreciation and amortization		4,113			4,482
Change in assets and liabilities:
Receivables from/payable to clearing organization, net		419,737			419,199
Notes and other receivables		(51,516	)		(196,926	)
Income taxes receivable		(17,255	)		(4,506	)
Trading and investment securities owned		(1,399,347	)		(163,001	)
Prepaid and deferred expenses		174,337			141,231
Deferred revenue		(38,265	)		(38,266	)
Accounts payable, accrued liabilities and compensation payables		108,616			145,298
Trading securities sold, not yet purchased		(356,695	)		(5,565	)
Income taxes payable - uncertain tax positions		-			1,000
Net cash provided by (used in) operating activities		(981	)		3,736
Cash flows from investing activities:
Additions to furniture and equipment		(800	)		(31,746	)
Cash flows from financing activities:
Payments to retire common stock		(1,250	)		(2,400	)
Decrease in cash		(3,031	)		(30,410	)
Cash:
Beginning of period		292,002			375,649
End of period	$	288,971		$	345,239
Supplemental cash flow information:
Cash paid during the period for income taxes, net	$	17,255		$	4,505

See accompanying Notes to Consolidated Financial Statements

4

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 March 31, 2012 and December 31, 2011 and for the three-month periods ended March 31, 2012 and 2011 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, 2011 is derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011. 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, 2011. 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

The number of shares used for our basic net income (loss) per share and diluted net income (loss) per share was the same for both periods presented. For the three-month period ended March 31, 2012, we had 391,000 anti-dilutive stock options outstanding. For the three-month period ended March 31, 2011, we had 411,000 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):

	March 31, 2012			December 31, 2011
	Fair Value		Input Level	Fair Value		Input Level
Trading and investment securities owned:
Corporate equities, marketable	$	5,129	Level 1	$	3,763	Level 1
Corporate equities, not readily marketable		3,857	Level 3		3,857	Level 3
Corporate options/warrants, marketable		122	Level 1		89	Level 1
Underwriter warrants		1,652	Level 3		1,395	Level 3
Trading securities sold, not yet purchased:
Corporate equities, marketable		-	Level 1		357	Level 1

5

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, 2011	$	1,395	$	3,857
Fair value of underwriter warrants received included as a component of corporate finance income		-		-
Investment in privately-held company		-		-
Net unrealized gain (loss), included as a component of investment loss related to securities held		257		-
Balance, March 31, 2012	$	1,652	$	3,857

	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		7			-
Investment in privately-held company		-			100
Net unrealized gain (loss), included as a component of investment income (loss) related to securities held		(89	)		-
Balance, March 31, 2011	$	1,040		$	3,045

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.

6

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 first quarter of 2012 or 2011.

Note 4. Stockholders' Equity

Repurchase of Common Stock

In the first quarter of 2012, we repurchased 1,000 shares of our common stock for $1,250, or $1.25 per share, pursuant to our stock repurchase program previously approved by our Board of Directors, after which 68,011 shares remain available for repurchase. This repurchase plan does not have an expiration date.

In the first quarter of 2011, we repurchased 2,000 shares of our common stock for $2,400, or $1.20 per share.

Common Share Dividends

In March 2012, the Board of Directors approved a special cash dividend of $0.05 per common share payable April 16, 2012 to shareholders of record April 4, 2012. Dividends payable in the amount of $288,349 were recorded in the first quarter of 2012.

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.

Note 7. Subsequent Events

In the first quarter of 2012, the Company announced that it had reached an agreement with JHS Capital Advisors, LLC (JHS) to sell substantially all of its retail brokerage operations, including many of its branch and non-branch offices as well as registered personnel (employees and independent contractors), to JHS. The sale closed on April 16, 2012. Under the agreement, the Company is to be paid approximately $1,653,247 net of certain deductions for compensation expenses. $1,107,741 was received at closing, and the balance is to be paid over three installments on July 16, 2012, October 15, 2012 and January 11, 2013. The final purchase price is subject to recalculation after six months based upon the aggregate gross dealer commissions for the twelve-month period ended at that time.

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:

7

· 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. 

· 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 and executive officers control approximately 47% of our common stock and may have interests differing from those of other stockholders.

· The acquisition, integration or divestiture of businesses by us may not produce the desired financial or operating results.

OVERVIEW

Substantially all of our business has historically consisted 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 March 31, 2012, 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 quarter of 2012, global IPO volume decreased significantly, particularly in Asia. Total global IPO's declined by 52% and proceeds fell by 66% to $12.5 billion compared to the first quarter of 2011. In the United States, the number of IPO's increased, but the total proceeds declined sharply. There were 42 IPO's in the first quarter of 2012 with proceeds of $5.9 billion compared to 32 IPO's with proceeds of $13.4 billion in the first quarter of 2011. The outlook for the remainder of 2012 is encouraging, especially in the United States where as of March 31, 2012, 196 companies had filed IPO’s with the SEC seeking to raise approximately $50 billion. 

8

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.

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, 2011, which was filed with the Securities and Exchange Commission on March 8, 2012.

SALE OF RETAIL BROKERAGE OPERATIONS

In February 2012, the Company announced it had reached an agreement with JHS Capital Advisors, LLC (JHS) of Tampa, Florida to sell substantially all of its retail brokerage operations, including many of its branch and non-branch offices as well as registered personnel (employees and independent contractors), to JHS. Under the transaction, Paulson advisors will become registered representatives of JHS and, through JHS, will continue to use RBC Correspondent Services, a division of RBC Capital Markets, LLC, for custody of client assets and securities, trade execution and portfolio reporting.

The sale closed on April 16, 2012. Under the agreement, the Company is to be paid approximately $1,653,247 net of certain deductions for compensation expenses. $1,107,741 was received at closing, and the balance is to be paid over three installments on July 16, 2012, October 15, 2012 and January 11, 2013. The final purchase price is subject to recalculation after six months based upon the aggregate gross dealer commissions for the twelve month period ended at that time. The agreement also requires twelve directors, officers and employees of the Company to enter into non-solicitation and non-competition agreements pursuant to which they are prohibited from soliciting employees and registered representatives of JHS for two years from the closing date and, subject to a limited exception, engaging in the retail brokerage business for one year from the closing date.

9

The Company will continue to operate independently as a broker/dealer focused on its core competencies in boutique investment banking activities, and will continue as a public company trading under the symbol "PLCC" on the NASDAQ Exchange.

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.

The following tables set forth the changes in our operating results in the three-month period ended March 31, 2012 compared to the three-month period ended March 31, 2011 (dollars in thousands):

	Three Months Ended March 31,					Favorable (Unfavorable)			Percentage
	2012		2011			Change			Change
Revenues:
Commissions	$	3,206	$	4,394		$	(1,188	)		(27.0	)%
Corporate finance		23		69			(46	)		(66.7	)
Investment income (loss)		250		(103	)		353			342.7
Trading income		1,969		386			1,583			410.1
Interest and dividends		121		131			(10	)		(7.6	)
Other		41		45			(4	)		(8.9	)
Total revenues		5,610		4,922			688			14.0
Expenses:
Commissions and salaries		3,209		4,360			1,151			26.4
Underwriting expenses		37		10			(27	)		(270.0	)
Rent and utilities		156		141			(15	)		(10.6	)
Communication and quotation services		129		131			2			1.5
Professional fees		256		209			(47	)		(22.5	)
Travel and entertainment		38		30			(8	)		(26.7	)
Clearing expenses		79		105			26			24,8
Depreciation and amortization		4		4			-			-
Licenses, taxes and insurance		125		129			4			3.1
Other		165		183			18			9.8
Total expenses		4,198		5,302			1,104			20.8
Income (loss) before income taxes	$	1,412	$	(380	)	$	1,792			471.6	%

10

Revenues

The markets in the United States had a very strong first quarter of 2012, with the Dow Jones Industrial Average rising 8.1% and the NASDAQ composite index rising 18.7%. Investor confidence was supported by improved economic numbers and less market turmoil internationally, particularly in Europe. This has led to expectations for improved corporate earnings, particularly from technology companies.

Commissions declined 27% during the first quarter ended March 31, 2012 compared to the first quarter of 2011, which was largely due to fewer registered representatives generating commissions in the current period. We had 67 registered representatives at March 31, 2012, compared to 98 at March 31, 2011.

Corporate finance income in the first quarter of 2012 was down 66.7% from the first quarter of 2011.  The Company participated in no private placements in the first quarter of 2012, while underwriting discounts from a private placement were earned in the prior year's quarter.

Investment gain (loss) included the following (in thousands):

	Three Months Ended March 31,
	2012			2011
Net unrealized appreciation (depreciation) related to underwriter warrants	$	257		$	(89	)
Net unrealized appreciation (depreciation) of securities held based on quoted market prices or, for securities that are not readily marketable, our estimate of their fair value		(7	)		(14	)
	$	250		$	(103	)

We did not exercise any underwriter warrants in the first quarter of 2012 or 2011. 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 income increased by 410% to $1.969 million in the first quarter of 2012 compared to $385,000 in the first quarter of 2011. The trading income was positively 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 $1.104 million in the first quarter of 2012 compared to the first quarter of 2011 primarily due to lower commission and salaries and other expenses, which were partially offset by higher underwriting, rent and utilities, and professional fees.

Commissions and salaries decreased $1.151 million in the first quarter of 2012 compared to the first quarter of 2011. The decrease was due to fewer registered representatives with the Company in the current quarter.

Underwriting expenses increased by $27,000 in the first quarter of 2012 compared to the first quarter of 2011. Expenses vary due to the timing and level of investment banking activity.

Professional fees increased by $47,000 in the first quarter of 2012 compared to the same quarter in 2011. The increase was due to fees incurred as a result of the agreement with JHS to sell the Company's retail brokerage operations, which closed subsequent to the end of the quarter.

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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 March 31, 2012 are sufficient to meet our cash and regulatory net capital needs for at least the next twelve-month period from March 31, 2012. 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 March 31, 2012.

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 March 31, 2012, we owned 11 underwriter warrants from 8 issuers, all but 1 of which were exercisable. None of the warrants had an exercise price below the March 31, 2012 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.

Cash used by operating activities totaled $1,000 in the first quarter ended March 31, 2012. Our net income of $1.412 million was offset by changes in our operating assets and liabilities as discussed in more detail below.

Our net receivable from our clearing organization totaled $4.7 million at March 31, 2012 and $5.1 million at December 31, 2011. 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 $52,000 to $659,000 at March 31, 2012 from $607,000 at December 31, 2011, primarily due to a new loan to a third party, offset by scheduled repayments.

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.

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

Balance, December 31, 2011	$	1,395
Receipt of underwriter warrants		-
Net unrealized gain on value of warrants		257
Warrants exercised or expired		-
Balance, March 31, 2012	$	1,652

Deferred revenue of $191,000 at March 31, 2012 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 1,000 shares of our common stock during the first quarter of 2012 at an average price of $1.25 per share for a total of $1,250. Through March 31, 2012, a total of 731,989 shares had been repurchased and 68,011 shares remained available for repurchase under the program. This repurchase program does not have an expiration date.

In March 2012, the Board of Directors approved a special cash dividend of $0.05 per common share payable April 16, 2012 to shareholders of record April 4, 2012. The ex-dividend date was April 2, 2012.

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 three months of 2012:

	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		-		-		-		69,011
February 1 to February 29		-		-		-		69,011
March 1 to March 31		1,000	$	1.25		1,000		68,011
Total		1,000		1.25		1,000		68,011

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 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.

	PAULSON CAPITAL CORP.
Date:   May 14, 2012	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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