UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
|_| TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 000-51837
OPTIONABLE, INC.
(Name of registrant in its charter)
Delaware 52-2219407
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
465 Columbus Avenue, Valhalla, NY 10595
(Address of principal executive offices) (Zip Code)
Issuer's telephone Number: (914) 773-1100
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock: $.0001
Indicate by check mark whether the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [_] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [_] No [X]
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer [_] Accelerated filer [_]
Non-accelerated filer [_] 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]
The aggregate market value of the common stock held by non-affiliates of
the registrant, based upon the last sale price of the common stock reported on
the OTC-Bulletin Board on March 24, 2008 was $1,584,429.
The number of shares of registrant's common stock outstanding, as of
March 24, 2008 was 52,423,403.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business.........................................1
Item 1A. Risk Factors...................................................11
Item 2. Properties.....................................................18
Item 3. Legal Proceedings..............................................19
Item 4. Submission of Matters to a Vote of Security Holders............21
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.......21
Item 6. Selected Financial Data........................................23
Item 7. Management's Discussion and Analysis or Plan of Operation......24
Item 8. Financial Statements and Supplementary Data....................31
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................31
Item 9A. Controls and Procedures........................................31
Item 9B. Other Information..............................................32
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act..............32
Item 11. Executive Compensation.........................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters................................38
Item 13. Certain Relationship and Related Transactions..................39
Item 14. Principal Accountant Fees and Services.........................43
Item 15. Exhibits.......................................................44
SIGNATURES..................................................................48
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
We were 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 provider to brokerage firms, financial
institutions, energy traders, and hedge funds worldwide. A substantially portion
of all energy derivatives we have brokered in the past were natural gas
derivatives. We developed OPEX, which is an electronic brokerage platform
automating the energy derivatives between counterparties. We launched OPEX in
2006. We have not generated any revenues since the third quarter of 2007.
OVERVIEW OF RECENT DEVELOPMENTS
Stock and Warrant Purchase Agreement with NYMEX Holdings, Inc.
On April 10, 2007, we, Mark Nordlicht, our former Chairman of the Board, Kevin
Cassidy, our former Vice Chairman and Chief Executive Officer, Edward O'Connor,
our President, (together with Mr. Nordlicht and Mr. Cassidy, the "Founding
Stockholders"), and NYMEX Holdings, Inc. (the "Investor") entered into a
definitive stock and warrant purchase agreement (the "Stock and Warrant Purchase
Agreement").
Pursuant to the terms of the Stock and Warrant Purchase Agreement, Mr.
Nordlicht, Mr. Cassidy and Mr. O'Connor sold to the Investor, 7,000,000,
1,905,000 and 1,853,886 shares, respectively, of common stock of the Company.
This aggregate of 10,758,886 shares of common stock (the "Purchased Shares")
represented 19% of the then outstanding shares of common stock on a fully
diluted basis (without giving effect to the Warrant, as defined and discussed
below). The purchase price paid by the Investor for the Purchased Shares was
$2.69 per share. Additionally, pursuant to the Stock and Warrant Purchase
Agreement, we physically issued to the Investor the Warrant, as defined and
described below, in consideration of the Investor's agreement (i) to develop
with us a marketing plan, which plan will detail proposed expenditures by the
Investor and joint activities; (ii) subject to regulatory requirements, to
provide space for up to twenty of the our brokers on the Investor's trading
floor; and (iii) to host our electronic trading platform, OPEX, in the
Investor's data center and provide us with computer and networking hardware,
software, bandwidth and ancillary infrastructure and services reasonably
necessary to interconnect OPEX with the Investor's clearing system market
gateway to trading and clearing services. Additionally, we agreed to exclusively
clear all OTC products through the Investor's clearing system for a period of
ten years (provided that the Investor continues to offer clearance for a
particular product through its clearing system) in consideration for additional
fees to be paid by the Investor to us.
The warrant issued by us (the "Warrant") permits the Investor to purchase a
number of shares of common stock sufficient to increase the Investor's ownership
of the Company's common stock to an amount not to exceed 40% of the Company's
then outstanding common stock on a fully diluted basis, based on the assumption
that the Investor has retained ownership of the Purchased Shares and any shares
of common stock previously issued to the Investor upon a partial exercise of the
Warrant. The Warrant is exercisable at any time and from time to time prior to
October 10, 2008 at an exercise price per share equal to $4.30 (the "Exercise
Price"). The Warrant does not contain a cashless exercise feature. The Exercise
Price is subject to certain customary adjustments to protect against dilution.
In connection with the consummation of the transactions contemplated by the
Stock and Warrant Purchase Agreement , the Company, the Investor and the
Founding Stockholders also entered into an Investor Rights Agreement, also dated
April 10, 2007 (the "Investor Rights Agreement"), pursuant to which, for so long
as the Investor owns at least 5,379,443 shares of common stock:
1
(a) the Investor is entitled to designate one person (reasonably acceptable to
the Company) that we are required to nominate as a member of the our board of
directors (the "Investor Director");
(b) each of the Founding Stockholders are required to vote their shares in favor
of the election of the Investor's designee as one our directors;
(c) the Investor is required to vote its shares in favor of each individual
nominated for election as a member of our board of directors by our nominating
committee;
(d) subject to certain permitted threshold amounts, the consent of the Investor
Director (which may not be unreasonably withheld) is required before we may take
certain actions, including (1) issuances of shares of a class of stock ranking
senior to the common stock, (2) acquisitions of businesses or assets, (3) entry
into related party transactions, (4) the declaration or payment of dividends or
distributions on or with respect to, or the optionable redemption of, capital
stock or the issuance of debt and (5) entry into any business which is not
similar, ancillary or related to any of the businesses in which we are currently
engaged;
(e) each of the Founding Stockholders and the Investor have certain rights of
first refusal to purchase or subscribe for their pro rata percentage of shares
in certain subsequent sales by us of common stock and/or certain other
securities convertible into or exchangeable for common stock;
(f) each of the Founding Stockholders and the Investor have certain rights of
first refusal with respect to proposed sales of our common stock by the others;
and
(g) before they may accept any offer by an independent third party to acquire
fifty percent (50%) or more of the total voting power of our common stock, the
Founding Stockholders and we are required to provide notice of such offer to the
Investor and permit the Investor a period of 10 days to make its own offer.
The Investor Rights Agreement additionally requires the Investor to refrain from
purchasing any additional shares of our common stock, with certain limited
exceptions, until April 10, 2008.
The Company and the Investor also entered into a registration rights agreement,
dated April 10, 2007 (the "Registration Rights Agreement"), pursuant to which,
among other things, we have provided the Investor, subject to standard
exceptions, with (a) unlimited "piggyback" rights subject to standard
underwriter lock-up and cutback provisions and (b) the right to two demand
registrations for underwritten offerings or take downs off of a shelf
registration statement, provided that (i) a minimum of $5,000,000 of our common
stock is offered in such demand registration or take down and (ii) we will not
be obligated to effectuate more than one underwritten offering pursuant to a
demand registration by the Investor in any six-month period. In addition, if we
are eligible to register our securities on Form S-3 (or any successor form then
in effect), the Investor will be entitled to unlimited registrations on Form S-3
(or any successor form then in effect), including shelf registrations, provided
that (a) a minimum of $5,000,000 of common stock is offered in the S-3
registration and (b) we will not be obligated to effect more than two S-3
registrations in any twelve month period. An S-3 registration will not count as
a demand registration, unless such registration is for an underwritten offering
or an underwritten take down off of an existing, effective shelf registration
statement.
2
To date, we have not received any demands from the Investor pursuant to such
registration rights nor have we included their shares in a registration
statement.
As a condition to the Investor's obligation to consummate the transactions
contemplated by the Stock and Warrant Purchase Agreement, Mr. Nordlicht executed
an agreement, dated April 10, 2007 (the "Waiver"), waiving any obligation on the
part of the Company to make any prepayment of principal, or to begin paying
interest upon amounts due to Mr. Nordlicht, under the Loan Agreement between him
and the Company, dated March 2004, as a result of any exercise by the Investor
of the Warrant. Also as a condition to the Investor's obligation to consummate
the transactions contemplated by the Stock and Warrant Purchase Agreement, Mr.
Cassidy and the Company entered into an Amended and Restated Employment
Agreement and Mr. O'Connor entered into a Non-Competition Agreement, dated April
10, 2007, with the Company, pursuant to which Mr. O'Connor agreed not to
disclose or use the Company's confidential information and, for a period of nine
months following the termination of Mr. O'Connor's employment, not to compete
with the Company or solicit certain customers of the Company.
Pursuant to our final agreements with the Investor in April 2007, we physically
issued to the Investor warrants which will permit the Investor to purchase a
number of shares of common stock sufficient to increase its ownership to an
amount not to exceed 40% of our then outstanding common stock on a fully diluted
basis, based on the assumption that the Investor has retained ownership of the
Purchased Shares and any shares of common stock previously issued to the
Investor upon a partial exercise of the Warrant. The Warrant will be exercisable
from time to time for a period of 18 months from the closing date of the final
agreement at an exercise price per share equal to $4.30 (the "Exercise Price").
The Exercise Price will be subject to certain customary adjustments to protect
against dilution.
The number of warrants issued to NYMEX may increase or decrease from time to
time until October 2008, depending on whether we issue additional shares,
options, and warrants, repurchase treasury shares, or certain outstanding
options and warrants expire or become unexercisable. Because the number of
shares will vary from time to time, the fair value of the warrants issued
pursuant to our agreement and the related amortization may also vary from time
to time, until October 2008.
Following the occurrence of the events which are subject of the matters
discussed in Item 1 of Part II of this Report "Legal Proceedings," we have not
agreed with the Investor on the joint marketing and technology initiatives
discussed, above. Additionally, the Investor indicated in a Schedule 13D it
filed with the SEC on July 6, 2007, with respect to its holdings of equity
securities of the Company, that it was now re-considering its potential joint
marketing and technology initiatives with the Company. As a result, the Investor
and the Company have not developed the contemplated joint marketing and
technology initiatives.
The Company is considering the effect of the failure of the Investor to provide
the consideration for the Warrant upon the Company's obligations under the
Warrant.
Resignations and Suspension of Business Relationship with the Company by BMO
Financial Group
On May 1, 2007, Mark Nordlicht resigned as a member of the Company's Board and
Albert Helmig was designated as Chairman of the Board.
On May 8, 2007, BMO Financial Group ("BMO") issued a statement indicating that
BMO was suspending its business relationships with us, as well as all
derivatives trading through us, pending the results of an ongoing external
review of certain commodity trading losses incurred by BMO. BMO has accounted
for a significant portion of the Company's revenues. Since that time, BMO has
not explained its action to the Company and has not resumed its business
relationships with us.
3
On May 11, 2007, Albert Helmig was designated as our Executive Chairman of the
Board.
On May 12, 2007, Mr. Kevin Cassidy resigned as our Chief Executive Officer and
as a director.
On May 14, 2007, Benjamin Chesir, the Investor Director resigned as one of our
directors. The Investor has issued a statement that they do not have current
plans to fill the vacancy created by Mr. Chesir's resignation.
The statement issued by BMO, the related suspension of their business
relationship with us, the matters discussed in [Item 3 of Part I of this Report
"Legal Proceedings"] together with the combined succession of events since then
have had a significant adverse impact on our business, including current and,
likely, future results of operations and financial condition. Consequently, we
are formulating a revised strategy.
REVISED STRATEGY
We launched our electronic trading system, OPEX, in 2006 and we have continued
to enhance its features and functionalities during 2007. Users of OPEX can now
execute on the platform mostly energy-related derivative trades. A significant
portion of the contracts executable on OPEX are those offered by NYMEX, a US
exchange. However, we believe that OPEX features and functionalities can be
ported to other derivatives as well, such as credit default swaps,
interest-related derivatives, metals and other commodities. Additionally, we
believe that OPEX, with appropriate enhancements, may be able to execute
transactions offered by other exchanges as well.
The Company is revising its strategy to:
1) emphasize the marketing of its automated electronic trading platform
to end-users through indirect channels, such as through other
third-party brokers and other exchanges;
2) develop and enhance its automated trading platform to end-users other
than those in the energy derivatives markets;
3) provide software development services to third-party brokers and other
exchanges.
4) Considering whether it would be more advantageous to sell its
intangible assets, including the technology it has developed.
The Company anticipates that revenue-generating agreements under some elements
of its revised strategy would take the form of licensing, royalty-based
agreements and/or software development and maintenance agreements. We could also
enter in an arrangement in which we buy a stake in a brokerage firm, trading
firm, or technology company in exchange for our intangible assets. Depending on
the terms of such arrangements, we may have to consolidate the operations of
such firm or company, even if we hold a minority stake in it. We have not
entered into such arrangements to date and there can be no assurance that we
will be able to consumate any such agreements.
The Company believes that revenues from its traditional brokerage services will
be minimal under its existing structure. We have not generated any revenues
under our existing structure since the third quarter of 2007. While the Company
is not discontinuing its brokerage services, it may need to 1) acquire a stake
in the operations of a brokerage firm, or several brokerage firms, and hire
their personnel, to expand its current operations, or 2) form a consortium of
brokerage companies that would jointly use the electronic platform.
4
GOING CONCERN
The Company believes it has enough funds to meet its obligations, based on its
internal projections, for at least the next twelve months. However, the Company
cannot guarantee that it will do so. If there are unforeseen expenses or
financial obligations which occur during that period, the Company may not be
able to meet such obligations. Additionally, if the Company acquires a brokerage
or trading firm or a technology company which could be instrumental in the
Company's long-term growth, this could hamper the Company's ability to continue
as going concern, both from a short-term or a long-term perspective, and the
Company would have to resort to financing, through either debt or equity
placements, for the funding of either such acquisitions or unforeseen expenses
or financial obligations. There can be no assurance that any such financing
would be available on acceptable terms, or at all.
INDUSTRY
The markets for energy commodities trading include trading in both physical
commodities contracts and derivative instruments -- instruments that derive
their value from an underlying energy commodity or index -- across a wide
variety of commodities, including crude oil, natural gas, electricity or power,
coal, chemicals, weather and emissions. Derivative instruments provide a means
to manage exposure to price risk, asset portfolio allocation, speculation or
arbitrage. Contracts for physical commodities allow counterparties to contract
for the delivery of the underlying physical asset.
Energy derivatives
Energy derivatives are characterized by its underlying commodity (e.g., natural
gas), the term of the contract, and the settlement, which can require physical
delivery or financial settlement. The energy derivatives with the most liquidity
are those with shorter settlement or expiration dates (less than three months).
Derivatives with longer settlement or expiration dates are also larger in dollar
volume and are not as liquid, requiring more extensive resources to find
potential counterparties. Accordingly, these derivatives tend to generate higher
brokerage transaction fees.
Energy-based commodities are actively traded.
Market Participants
Financial institutions, including bank brokerage houses and hedge funds as well
as eligible individual traders use energy derivatives market to weigh their risk
and rewards in: 1) a balanced portfolio asset allocation without investing in
the physical asset, and 2) speculate on the price movement of the commodity
prices or the related derivatives. Energy producers, distributors and large
consumers will use energy gas derivatives market to manage their exposure to
future price movements for certain quantity, time and delivery location, and
sometimes, with an expectation that the derivatives would ultimately provide a
financial gain.
5
Types of Energy Derivatives Markets
There are two types of energy derivative markets -- the futures market and the
over-the-counter ("OTC") market.
Futures Market
Most of the transactions on the energy futures market are made through an
exchange, such as New York Mercantile Exchange ("NYMEX") and Intercontinental
Exchange ("ICE").
The trading of energy futures is conducted either on an electronic platform or
on an open-outcry trading floor. Prices are established publicly either on a
screen or on the floor by participants posting bids, or buying indications, and
offers, or indications to sell. While the electronic platform provides more
transparency to market participants, the open-outcry trading floor provides a
better environment for exchange of ideas and solutions. However, it is
anticipated that the volume of transactions conducted in an open-outcry trading
floor will decrease in the
Futures and options are two derivatives available to trade on a futures market.
Futures consist of a contract to buy or sell a certain quantity of energy, for
example, during a specified month and are settled through either physical
delivery or cash settlement. Options consist of a right, but not an obligation,
to buy or sell a futures contract at a certain price.
OTC Market
Over-the-counter, or OTC, is a term used to describe trading activity that does
not take place on a regulated exchange.
Several derivatives are available for trade on the OTC market, such as forwards
and swaps, differentials and spreads and options.
Forwards are negotiated agreements between counterparties to deliver a specified
quantity of natural gas, on a specified date, and at a specified location.
Swaps are contracts between the holders of two different assets with differing
risk and performance profiles in which the risk or performance characteristics
are exchanged. Swaps may be settled against the future price of a single
commodity or against an index of commodity prices.
Spreads are the simultaneous purchase and sale of forward contracts for
different months, different commodities or different grades of the same
commodity.
Basis options are contracts that allow counterparties to swap the physical or
financial delivery of natural gas commodity between two different delivery
points.
Options traded on the OTC market, unlike those traded on the futures market, are
contracts that convey to the buyer the right, but not the obligation, to require
the seller to make or take delivery of a stated quantity of energy at a
specified price. Options may also be settled in cash, based on the difference
between the market price of, for example, natural gas and the price of the
commodity specified in the option.
6
Besides the types of derivatives traded on those markets, there are several
inherent differences between them. For example, the futures market is primarily
conducted through an open-outcry market, such as NYMEX, which imposes physical
limitations on the number of participants who can trade at the same time.
Accordingly, membership on such exchanges becomes a commodity of its own and may
require significant resources. The types of derivatives traded on the OTC market
are not standardized such as those used on the futures market. Therefore, when
one counterparty wants to enter into OTC derivatives transactions, the use of a
broker or a comprehensive electronic platform facilitates the search for another
counterparty.
However, there is a significant similarity between these energy derivatives
markets in that they lack transparency for the participants, unlike the equity
market. Counterparties to a natural gas derivative transaction are unaware of
all offers available on either market at any given time under current
conditions, unless it is executed on an electronic platform with sufficient
liquidity.
Trends
We believe that several factors will impact the natural gas and other energy
derivatives market in the future:
o Energy options as asset class: new market participants, such as hedge
funds, and institutional investors, such as pension plans, are taking
a greater interest in the returns afforded by natural gas derivatives
and the asset diversification opportunities it provides.
o Lesser credit risk using the OTC market: since 2002, natural gas
derivatives feature cleared OTC contracts. Cleared OTC contracts allow
participants to limit counterparty credit risk and lower the amount of
capital required to trade.
o Larger number of new entrants: both factors have increased the number
of market participants in the natural gas derivatives market which
improves its liquidity. While some recent large entrants, such as
Amaranth, have already exited the markets, an even larger amount of
new entrants in the last few years have contributed to an increase in
volume of energy contracts traded.
o Need for higher transparency in the energy derivatives market: the
natural gas derivatives market lacks transparency when compared to
other markets, such as the equity market. The participants, who are
enjoying such transparency in other markets, are requesting the same
level of transparency in the energy derivatives market without
obtaining it with the currently available solutions offered by brokers
or exchanges.
7
Current Solutions to Energy Derivatives Market
The current solutions offered to energy derivatives market vary widely.
Some brokerage firms offer only services for the futures market or the OTC
markets, but not both. This restricts the choice of market participants who
combine futures and swaps, for example, in their hedging or investment strategy
which are not traded on the same markets. If dealing with brokers who only offer
services on one of the markets, the market participants are forced to use more
than one broker, which creates further lack of market transparency,
inefficiencies in the use of resources as well as ineffectiveness in timely
trading.
Other brokerage firms offer services on both markets, but most do not have the
intent or the resources to address the current lack of transparency and
liquidity in the energy derivatives market by using an electronic platform, for
example.
While exchanges are used primarily for the futures market, they are also used
for clearing OTC trades. However, none of the larger exchanges provide
sufficient support for derivatives trading on the OTC market, such as options,
which reduces the liquidity of such market. Additionally, exchanges do not offer
brokerage services which facilitate the search for counterparties.
Other Elements of the Energy Derivatives Market
The energy derivatives market is also impacted by the following elements:
Trading volumes are driven primarily by the degree of volatility in the energy
derivatives market. However, if the volatility of the price of natural gas or
oil and their related derivatives is too high, some of the market participants
will wait that it declines before entering into transactions, which reduces
trading volumes.
Worldwide geopolitical conditions impact the perceived or real supply or demand
of a particular energy commodity.
Unexpected weather conditions, such as hurricanes in the Gulf Coast or milder or
colder weather in the Northeast United States, impact the perceived or real
supply or demand of a particular energy commodity. While hurricanes have
recently become more expected, their unpredictable strength and trajectory
increase the volatility of energy commodities market.
The delivery of energy commodities is generally seasonal. In parallel, the
trading volume of the energy derivatives market, which historically has been
higher during the winter and the summer, has been recently skewed by the larger
number of entrants in the market as well worldwide geopolitical events and
unexpected weather conditions.
Our Solutions
We understand that the participants in the energy derivatives market have
various investment needs, some of which may be as simple as trading speculative
futures, but most need a comprehensive electronic trading platform which allows
them to execute more sophisticated transactions.
8
We believe that OPEX significantly improves the liquidity and transparency of
natural gas and other energy derivatives market by increasing number of
participants in a market in which they receive real-time market data. Since our
launch of OPEX in 2006, an increasing number of OTC derivatives have been traded
directly by our clients on such platform. For the month of February 2007, trades
executed directly on OPEX by our clients constituted 17% of our volume of OTC
cleared contracts.
Those solutions can be applied to the trading of other energy derivatives as
well. Additionally, the combination of those services provide for larger choice
of investment opportunities for participants in the energy derivatives market.
Central to OPEX is the trade-matching engine, which is designed to facilitate
real-time trading of derivative products irrespective of a particular market.
Based on our experience in trading and brokering OTC swaps and options, we
devoted significant attention to the user experience and user-interface
ergonomics. In designing the system, we were cognizant of the way traders
currently execute their trades and how they could comfortably transition to an
electronic trading platform. The outcome is a graphical user interface that is
both simple and intuitive to use.
OPEX's trading platform (for which there are pending patents) was designed with
the aid of professional options traders to facilitate strategies that are
currently executed on the OTC, commodity and equity exchanges. The user can
customize the system to execute various options trading strategies.
HOW WE OPERATE
We no longer have revenue-generating operations since the third quarter of 2007.
Our management, and more specifically our President, is responsible for seeking
alternatives which would allow us to maximize our resources, which are our cash
and OPEX, while satisfying our financial obligations. While we are trying to
monetize the value of OPEX in pursuing strategic arrangements with suitable
takers pursuant to our revised strategy, there are no assurances that we will be
able to do so at acceptable terms.
We have three full-time employees and seven part-time and full-time consultants
which work on technical enhancements of OPEX.
We keep abreast of conditions in the energy trading market by receiving
information using a combination of technology, such as analytics software as
well as market data services, relevant business news from different wire
services and traditional broadcast.
CLIENT CONCENTRATION
One of our clients, Bank of Montreal, accounted for 24% of our revenues during
2007 and 2006. During May 2007, this client announced that it was suspending its
relationship with the Company and has not used the Company's services in
connection with any additional transactions since that time.
COMPETITION
The energy derivatives market has many competitors involved in the electronic
trading of energy options. Capital investment for entry into the market is
relatively low. OPEX competes with offerings from ICE and the Chicago Mercantile
Exchange' CME.
9
As the emerging market for electronic energy derivatives develops, more
competitors are likely to emerge.
We believe that the principal competitive factors in our market include:
o Access to a large number of users of an electronic trading system;
o Client service and support;
o service functionality, quality and performance of the electronic
trading system;
o ease of use, reliability and security of electronic trading system;
o establishing a significant sales force;
o ability to introduce new products to the market in a timely manner;
and
o pricing.
We currently differentiate from the competition by offering energy derivatives
on both the futures market and the OTC market on an electronic system. Our
electronic system is designed to offer a more comprehensive approach to trading
than the existing electronic platforms offer. However, our competitors have
significantly more resources than we do and a larger number of users.
EMPLOYEES
We currently have 3 full-time employees. We also have a consultant who serves as
the Chief Technology Officer, and a consultant who serves as our Chief Financial
Officer as well as five other software engineers who are consultants. The number
of employees that we intend to hire is dependent on our clients' needs and the
infrastructure required to support such needs. We believe that our relationship
with our employees and consultants is good considering the circumstances in
which we operate.
PATENTS, TRADEMARKS AND LICENSES
We have four patents pending at this time, most importantly those related to a
system and method for real-time trading over a computer network and a system and
method for trading selectable market transactions over a network
We have registered a trademark for "Optionable" and use OPEX as a service mark.
Although we have several patents pending which relate to our electronic trading
system, we do not solely depend on those patents to protect our intellectual
property. Furthermore, the benefit that would be afforded by those patents has
not been relied upon in our business plan, although we do feel that the patents
would benefit our position in the marketplace. We have taken various steps to
protect our intellectual property including non-disclosure agreements,
confidentiality agreements and other general precautions taken to keep the
information confidential.
RESEARCH AND DEVELOPMENT
We incurred approximately $1.1 million and $474,000 in expenses on research and
development during 2007 and 2006. Most of the key members of our research and
development team have been working on OPEX since 2004.
10
GOVERNMENT REGULATION
We have given notice to the Commodity Futures Trading Commission ("CFTC") of our
intention to operate the OPEX electronic trading platform as an Exempt
Commercial Market ("ECM"). ECM are subject to certain information access rules
established by the CFTC.
ITEM 1A. RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this report. Each of the following risks may materially and
adversely affect our business, results of operations and financial condition.
These risks may cause the market price of our common stock to decline, which may
cause you to lose all or a part of the money you paid to buy our common stock
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE MAY NOT BE ABLE TO CONTINUE TO OPERATE AS A GOING CONCERN
The Company believes it has enough funds to meet its obligations, based on its
internal projections, for at least the next twelve months. However, the Company
cannot guarantee that it will do so. If there are unforeseen expenses or
financial obligations which occur during that period, the Company may not be
able to meet such obligations. Additionally, if the Company acquires a brokerage
or trading firm or a technology company which could be instrumental in the
Company's long-term growth, this could hamper the Company's ability to continue
as going concern, both from a short-term or a long-term perspective, and the
Company would have to resort to financing, through either debt or equity
placements, for the funding of either such acquisitions or unforeseen expenses
or financial obligations. There can be no assurance that any such financing
would be available on acceptable terms, or at all.
AS A RESULT OF THE APPARENT LOSS OF OUR MOST SIGNIFICANT CUSTOMER, A DECLINE IN
BUSINESS FROM OTHER BROKERAGE CUSTOMERS AND THE MUTUALLY AGREED DEPARTURES OF
FLOOR BROKERAGE PERSONNEL, WE ARE ATTEMPTING TO REVISE OUR STRATEGY. THERE CAN
BE NO ASSURANCE THAT THESE EFFORTS WILL BE SUCCESSFUL.
Several recent developments, including (i) the loss of our most significant
customer, Bank of Montreal, (ii) a decline in business from other brokerage
customers, and (iii) the mutually agreed departures of our floor brokerage
personnel, among other things, have adversely affected our ability to operate as
a brokerage services provider through traditional voice-brokerage and on the
floor of the NYMEX Holdings, Inc ("NYMEX"). In response, we are attempting to
revise our strategy to emphasize the marketing of OPEX to end-users through
indirect channels, such as through third-party brokers and other exchanges, and
the development and enhancement of OPEX for use by end-users in additional
markets (i.e., other then solely the energy derivatives markets). With our
reduced brokerage personnel, we will most likely need to acquire the operations
of a brokerage firm, or firms, if we are to expand our current level of
brokerage operations.
Historically, we engaged primarily in voice-brokerage and had only recently
introduced our OPEX platform. Although the initial results of OPEX were
promising, it had not yet reached full market acceptance in the energy
derivatives market. Our revised strategy will rely on continued and expanded
market acceptance of OPEX in the energy derivatives market and in additional
markets. There is no assurance that we will be able to effectively market OPEX
to end-users through indirect channels. There is also no assurance that we will
be able to develop the enhancements to OPEX necessary to make it suitable for
use by end-users in additional markets or, even if we do develop the necessary
enhancements, that end-users in those additional markets will accept OPEX.
There is no assurance that we will be able to identify potential acquisitions,
negotiate acquisitions on terms acceptable to us, or at all, or obtain the
necessary financing for any potential acquisitions that we may identify. If we
do make acquisitions or enter into joint ventures as part of our revised
strategy, such transactions will involve significant risks and challenges,
including risks that we may experience difficulty in the integration of the new
businesses, technologies and employees with our own, that the new businesses may
divert management's attention from other pressing matters and that we may not
realize a satisfactory return on any investment we may make in them.
11
OUR REVISED STRATEGY IS STILL IN THE EARLY STAGES OF DEVELOPMENT AND THERE IS NO
ASSURANCE THAT IT WILL BE SUCCESSFUL.
Our pricing model for OPEX services, under our revised strategy, is unproven and
revenues may prove to be less than anticipated, which may harm our gross
margins. The pricing model of our OPEX services will most likely change under
our revised strategy and may be lower than expected as a result of competitive
pricing pressures, promotional programs and clients who negotiate price
reductions in exchange for longer term purchase commitments, negotiated
licensing or royalty-based agreements, or otherwise. Our actual pricing model
for OPEX under our revised strategy will depend on the specific requirements of
the end-user or the third-party which will market OPEX, customer purchase
volumes, contracted sales and service support and other contractual agreements.
We expect to experience pricing pressure and anticipate that the average selling
prices and gross margins for our products may decrease over product life cycles.
OUR RELATIONSHIP WITH NYMEX HAS BEEN ADVERSELY AFFECTED BY RECENT DEVELOPMENTS
AND WE MAY NOT REALIZE THAT WE EXPECTED FROM THE STOCK AND WARRANT
PURCHASE AGREEMENT.
Our relationship with NYMEX has been adversely affected by recent developments
and we may not realize the benefits that we had expected from the Stock and
Warrant Purchase Agreement. In addition, the incentive revenues that we receive
from the Investor may decline.
We had expected to derive substantial benefits from the consideration which
NYMEX agreed to provide to us under the Stock and Warrant Purchase Agreement
dated April 10, 2007 (the "April 2007 Stock and Warrant Purchase Agreement"),
including the development of joint marketing plans and technology initiatives
and space for our brokers on NYMEX's trading floor. Following the occurrence of
certain of the events discussed above and discussed in Part I, Item 3 "Legal
Proceedings" of this Report, we have not agreed with the Investor on the joint
marketing and technology initiatives provided for in the Stock and Warrant
Purchase Agreement. Additionally, NYMEX has indicated in a Schedule 13D it filed
with the SEC on July 6, 2007, with respect to its holdings of our equity
securities that it is now re-considering its potential joint marketing and
technology initiatives with us. As a result, the contemplated joint marketing
and technology initiatives have not been developed.
If the Investor cannot agree with us on joint marketing and technology
initiatives with us, we will not realize the benefits that we had expected to
obtain under the April 2007 Stock and Warrant Purchase Agreement which would
have a materially adverse effect on our business. In addition, we receive
significant incentive revenues from NYMEX. If the deterioration in our
relationship with NYMEX were to lead to its refusal to continue those
incentives, it would have a materially adverse effect on our business.
UNDER THE INVESTOR RIGHTS AGREEMENT, THE CONSENT OF A DIRECTOR DESIGNATED BY THE
INVESTOR MAY BE REQUIRED BEFORE WE MAY TAKE CERTAIN ACTIONS, INCLUDING
ACQUISITIONS OF BUSINESSES OR ASSETS. THE FAILURE OF THE INVESTOR DESIGNEE TO
CONSENT TO CERTAIN ACTIONS COULD AFFECT OUR ABILITY TO DEVELOP AND IMPLEMENT OUR
REVISED STRATEGY.
Under the Investor Rights Agreement dated April 10, 2007 with NYMEX (the
Investor Rights Agreement"), the consent of a director designated by NYMEX may
be required before we may take certain actions, including acquisitions of
businesses or assets. Although the Investor's designee on our Board of Directors
has resigned and NYMEX has stated that it has no current plans to fill the
vacancy created by the resignation, if NYMEX were to elect to designate a
director pursuant to the Investor Rights Agreement, the failure of that designee
to consent to certain actions, such as a proposed acquisition of a brokerage
firm among others, could adversely impact our ability to develop and implement
our revised strategy.
12
A NUMBER OF OUR EXECUTIVE OFFICERS AND KEY EMPLOYEES HAVE RECENTLY DEPARTED. OUR
SUCCESS IN THE FUTURE WILL BE DEPENDENT UPON OUR ABILITY TO ATTRACT AND RETAIN
SKILLED REPLACEMENTS.
Mark Nordlicht, our former Chairman of the Board, Kevin Cassidy, our former Vice
Chairman of the Board and Chief Executive Officer, Albert Helmig, our former
Executive Chairman of the Board, and our brokerage personnel have recently
departed. We have not yet replaced the personnel who have resigned. Certain of
the departed employees, including and particularly Kevin Cassidy, have
accounted, in the past, for a significant amount of our revenues. If we are
unable to find suitable replacements for the departed employees our business
will be materially adversely affected.
Our performance and future operating results are substantially dependent on the
continued service and performance of Edward O'Connor. To the extent that the
services of Mr. O'Connor become unavailable, our business and prospects would be
adversely affected. Should we be required to do so, we do not know whether we
would be able to employ equally qualified persons to replace any of these
persons. Moreover, we do not currently maintain "key man" insurance on any of
our executive officers or other key employees and do not intend to obtain this
type of insurance in the near future. Additionally, we do not have written
agreements with most of our staff and, other than traditional compensation
packages and stock options we contemplate granting to our staff, we do not have
other means to ensure the retention of their services. If we are successful in
implementing and developing our revised strategy, we may require additional
managerial, administrative and support personnel. Competition for highly
qualified personnel is intense, and we can make no assurances that we can retain
our key employees or that we will be able to attract or retain qualified
personnel in the future. To the extent we have fewer financial resources
available to us than our competitors we may not be able to attract and retain a
sufficient number of qualified personnel. The loss of the services of any of our
management or other key employees and our inability to attract and retain other
necessary personnel could have a material adverse effect on our financial
condition, operating results, and cash flows.
WE ARE THE SUBJECT OF SEVERAL LEGAL PROCEEDINGS BROUGHT BY SHAREHOLDERS ALLEGING
VIOLATIONS OF FEDERAL SECURITIES LAWS BY US AND CERTAIN OF OUR FORMER AND
CURRENT DIRECTORS AND OFFICERS. WE ARE UNABLE TO PREDICT THE OUTCOME OF THESE
PROCEEDINGS AND CAN GIVE NO ASSURANCE THAT THE OUTCOME OF THESE PROCEEDINGS WILL
NOT HAVE A MATERIAL ADVERSE EFFECT ON US OR THAT OTHER PROCEEDINGS WILL NOT BE
INITIATED.
Since May 2007, we have been served as a defendant in a number of actions by
shareholders naming us and several of our current and former officers and
directors as defendants. These actions allege, among other things, violations of
the Securities and Exchange Act of 1934, the Securities Act of 1933 and Rule
10b-5, relating to alleged misstatements and omissions in public filings by the
Company and other allegedly fraudulent conduct, which the plaintiffs claim
deceived the market, inflated the price of the Company's common stock and caused
plaintiffs to suffer unspecified damages.
We are unable to predict the outcome of any of these proceedings at this time
and can give no assurance that the outcome of these proceedings will not have a
material adverse effect on us or that there will not be other proceedings
arising from these matters.
THE MEMBERS OF OUR MANAGEMENT TEAM AND OTHER EMPLOYEES HAVE BEEN AND WILL BE
REQUIRED TO DEVOTE A SIGNIFICANT AMOUNT OF TIME TO MATTERS RELATING TO
LITIGATION AND RESPONDING TO GOVERNMENTAL INQUIRIES.
Our management team and employees have devoted a significant amount of time to
matters relating to the shareholder litigation which was recently instituted
against us and to requests for documents and information received from the CFTC,
the SEC, the DOJ and the District Attorney's Office. In addition, our senior
management are named as defendants in most of the shareholder proceedings which
allege, among other things, federal securities law violations. Defending these
actions and responding to the government requests for documents and information
has required, and will continue to require, significant time and attention from
members of our current senior management team and our Board of Directors. If the
amount of time that our senior management team is able to devote to running our
ongoing business operations and developing and implementing our revised strategy
is significantly reduced as a result of these matters, it may have a material
adverse effect on our business.
13
WE HAVE INCURRED LOSSES IN THE PAST AND WE MAY INCUR LOSSES IN THE FUTURE, WHICH
MAY CAUSE US TO CURTAIL OUR OPERATIONS AND OUR DEVELOPMENT OF OPEX.
We incurred losses through fiscal 2004 and incurred losses again since the
second quarter of fiscal 2007. We may operate at a loss in the future and we
cannot assure you that we will be successful in maintaining positive cash flow
and profitable operations. Accordingly, our ability to operate under our revised
strategy and enhance and market OPEX may be hampered by negative cash flows and
liquidity problems in the future, and the value of our stock may decline as a
result. For example, in the past, we suspended the development and
implementation of OPEX for a year, in part because of our negative cash flow.
WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO PROTECT OUR PROPRIETARY INFORMATION
AND INTELLECTUAL PROPERTY, WHICH WE RELY ON TO MAINTAIN OUR COMPETITIVE
POSITION.
We rely on our proprietary information and intellectual property to maintain our
competitive position. We may not be able to protect a significant portion of our
proprietary information, such as our client lists, since we do not have
confidentiality agreements with some of our employees. Accordingly, we may not
be able to effectively prevent disclosure of our proprietary information and we
may not have an adequate remedy in the event of unauthorized disclosure of such
information. We cannot assure you that measures we take to protect our
proprietary information and intellectual property will be successful or that
third parties will not develop alternative solutions that do not infringe upon
our intellectual property.
We also have patent applications pending, which are intended to protect certain
of our proprietary technology relating to our planned OPEX business. We have
been cautious in seeking to obtain patent protection for our products, since
patents often provide only narrow protection that may not prevent competitors
from developing products that function in a manner similar to those covered by
our patents. In addition, some of the foreign countries in which we plan to sell
our OPEX system do not provide the same level of protection to intellectual
property as the laws of the United States.
POTENTIAL LIABILITY FOR INFRINGEMENT CLAIMS MIGHT DETER CLIENTS FROM USING OUR
OPEX SYSTEM.
We could be subject to intellectual property infringement claims by others.
Potential clients may be deterred from using our OPEX system for fear of
infringement claims. If, as a result, potential clients forego using our OPEX
system, demand for our services and applications could be reduced which would
harm our business. Claims against us, and any resulting litigation, should it
occur in regard to any of our services and applications, could subject us to
significant liability for damages including treble damages for willful
infringement. In addition, even if we prevail, litigation could be
time-consuming and expensive to defend and could result in the diversion of our
time and attention. Any claims from third parties may also result in limitations
on our ability to use the intellectual property subject to these claims. Claims
that we are infringing the intellectual property rights of third parties could
have a negative effect on our business, revenues, financial condition and
results of operations.
WE MAY RELY ON STRATEGIC RELATIONSHIPS TO PROMOTE OUR OPEX SYSTEM AND FOR ACCESS
TO LICENSED TECHNOLOGY; IF WE FAIL TO DEVELOP, MAINTAIN OR ENHANCE THESE
RELATIONSHIPS, OUR ABILITY TO SERVE OUR CLIENTS AND DEVELOP NEW FEATURES AND
FUNCTIONALITIES COULD BE HARMED.
Due to the evolving nature of our industry, we may need to develop relationships
to adapt to changing technologies and standards and to work with newly emerging
companies with whom we do not have pre-existing relationships. For example, it
may be important to our clients that OPEX integrates seamlessly with the
technology used by certain exchanges. While we did have a technology-sharing
relationship with NYMEX, we do not believe that it will become fruitful under
the current circumstances. We do not have one with other exchanges to ensure
such seamless meshing of our respective technologies as they now exist or as
they may be enhanced in the future. We cannot be certain that we will be
successful in maintaining or developing new relationships, technological or
otherwise, or that such relationships will view them as significant to their own
business or that they will continue their commitment to us in the future. If we
are unable to maintain or enhance these relationships, we may have difficulty
strengthening our technology development and increasing the adoption of our OPEX
system.
14
IF WE FAIL TO ENHANCE OUR OPEX SYSTEM BY INTRODUCING NEW FEATURES AND
FUNCTIONALITIES IN A TIMELY MANNER TO MEET CHANGING CLIENT REQUIREMENTS AND
EMERGING INDUSTRY TRENDS OR STANDARDS, OUR ABILITY TO GROW OUR BUSINESS WILL
SUFFER.
The market for electronic trading systems is characterized by rapidly changing
technologies and short product life cycles. These market characteristics are
heightened by the emerging nature of the Internet and the continuing trend of
companies from many industries to offer Internet-based applications and
services. The widespread adoption of the Internet, networking, electronic option
trading, or telecommunications technologies or other technological changes could
require us to incur substantial expenditures to modify or adapt our operating
practices or infrastructure. Our future success will depend in large part upon
our ability to:
o identify and respond to emerging technological trends in the market;
o enhance our products by adding innovative features that differentiate services
and applications from those of our competitors;
o acquire and license leading technologies;
o bring new services and applications to market and scale our business on a
timely basis at competitive prices; and
o respond effectively to new technological changes or new product announcements
by others.
We will not be competitive unless we introduce new features and functionalities
to our OPEX system that meet evolving industry standards and client needs. In
the future, we may not be able to address effectively the compatibility and
interoperability issues that arise as a result of technological changes and
evolving industry standards. The technical innovations required for us to remain
competitive are inherently complex, require long development schedules and are
dependent in some cases on sole source suppliers. We will be required to
continue to invest in research and development in order to attempt to maintain
and enhance our existing technologies and products, but we may not have the
funds available to do so. Even if we have sufficient funds, these investments
may not serve the needs of clients or be compatible with changing technological
requirements or standards. Most development expenses must be incurred before the
technical feasibility or commercial viability of new or enhanced services and
applications can be ascertained. Revenue from future services and applications
or enhancements to services and applications may not be sufficient to recover
the associated development costs.
THE TECHNOLOGY UNDERLYING OUR OPEX SYSTEM IS COMPLEX AND MAY CONTAIN UNKNOWN
DEFECTS THAT COULD HARM OUR REPUTATION, RESULT IN PRODUCT LIABILITY OR DECREASE
MARKET ACCEPTANCE OF OUR SERVICES AND APPLICATIONS.
The technologies underlying financial services and applications are complex and
include software that is internally developed. Software products using these
technologies may contain errors or defects, particularly when first introduced
or when new versions or enhancements are released. We may not discover software
defects that affect our current or new services and applications or enhancements
until after they are sold. Furthermore, because our services and applications
are designed to work in conjunction with various platforms and applications, we
are susceptible to errors or defects in third-party applications that can result
in a lower quality product for our clients. Because our clients depend on us for
digital media management, any interruptions could:
15
o damage our reputation;
o cause our clients to initiate product liability suits against us;
o increase our product development resources;
o cause us to lose revenues; and
o delay market acceptance of our products.
WE RELY HEAVILY ON THE SERVICES OF OUR OVERSEAS TECHNICAL STAFF AND CONSULTANTS
WHICH MAY DELAY OR JEOPARDIZE THE DEVELOPMENT AND ENHANCEMENT OF OPEX
We rely heavily on the services of our technical staff and consultants. Our
technical employees are not presently employed on a full time basis. With the
exception of our chief technology officer and our quality assurance team , all
our technical staff, including our software engineers is located overseas. If we
are unable to maintain our relationship with these individuals and if we have to
replace them with individuals with similar capabilities, this could delay or
jeopardize the development and the enhancement of OPEX.
WE FACE INTENSE AND INCREASING COMPETITION IN THE ELECTRONIC ENERGY DERIVATIVES
MARKET. IF WE DO NOT COMPETE EFFECTIVELY OR IF WE EXPERIENCE REDUCED MARKET
SHARE FROM INCREASED COMPETITION, OUR BUSINESS WILL BE HARMED.
There are several other well-financed companies who do or may compete with OPEX.
Some of the features of OPEX compete with some of ICE's offerings and the
Chicago Mercantile Exchange's CME.
Substantially all of our competitors have more capital, longer operating
histories, greater brand recognition, larger client bases and significantly
greater financial, technical and marketing resources than we do. These
competitors may also engage in more extensive development of their technologies,
adopt more aggressive pricing policies and establish more comprehensive
marketing and advertising campaigns than we can. Our competitors may develop
products and service offerings that we do not offer or that are more
sophisticated or more cost effective than our own. For these and other reasons,
our competitors' products and services may achieve greater acceptance in the
marketplace than our own, limiting our ability to gain market share and client
loyalty and to generate sufficient revenues to achieve a profitable level of
operations. Our failure to adequately address any of the above factors could
harm our business and operating results.
WE RELY HEAVILY ON ENERGY DERIVATIVES.
While our plan is to leverage success of energy options and expand into other
markets while maintaining our status as an "exempt commercial market", the
success of this plan is subject to market forces outside of our control. At
present, substantially all of our contracts available on OPEX are enrgy-related.
If there should be a significant slowdown in the energy derivatives market, it
would have a significant negative impact on us.
WE COULD BECOME SUBJECT TO INCREASED GOVERNMENTAL AND ORGANIZATIONAL REGULATION.
OPEX qualifies as an "exempt commercial market" under the rules of the CFTC.
Although an ECM may be required to provide certain trade volume and pricing
information to the CFTC, an ECM is not required to register with the CFTC.
However, if we were to no longer qualify for the exemption from registration,
either because of changes in law or the scope of our business, our businesses
would become subject to extensive regulation at both the federal and state
levels. In addition, self-regulatory organizations, such as NYMEX and the
National Futures Association, require compliance with their extensive rules and
regulations. Among other things, these regulatory authorities impose
restrictions on sales methods, trading practices, use and safekeeping of client
funds and securities, record keeping and the conduct of principals and
employees. The extensive regulatory framework applicable to the commodities
brokerage industry, the purpose of which is to protect clients and the integrity
of the commodities markets, would impose significant compliance burdens and
attendant costs on us. The regulatory bodies that administer these rules do not
attempt to protect the interests of our stockholders as such, but rather the
public and markets generally. Failure to comply with any of the laws, rules or
regulations of any independent, state or federal regulatory authority to which
we become subject could result in a fine, injunction, suspension or expulsion
from the industry, which could materially and adversely impact us. Furthermore,
amendments to existing state or federal statutes, rules and regulations or the
adoption of new statutes, rules and regulations could require us to alter our
methods of operation at costs which could be substantial.
16
OUR MAJORITY STOCKHOLDERS WILL BE ABLE TO TAKE STOCKHOLDER ACTIONS WITHOUT
GIVING PRIOR NOTICE TO ANY OF YOU. YOU MAY, THEREFORE, BE UNABLE TO TAKE
PREEMPTIVE MEASURES THAT YOU BELIEVE ARE NECESSARY TO PROTECT YOUR INVESTMENT IN
THE COMPANY.
The majority stockholders are able to take stockholder actions in conformance
with Section 228 of the Delaware General Corporation Law and our Certificate of
Incorporation, which permits them to take any action which is required to, or
may, be taken at an annual or special meeting of the stockholders, without prior
notice and without a vote of our stockholders. Instead of a vote, stockholder
actions can be authorized by the written consents to such actions, signed by the
holders of the number of shares which would have been required to be voted in
favor of such action at a duly called stockholders meeting. We would not be
required to give prior notice to all stockholders of actions taken pursuant to
the written consents of the majority stockholders and our obligations are
limited to giving notice at least 20 calendar days prior to the earliest date on
which the corporate action so authorized may be taken.
IF WE FAIL TO REMAIN CURRENT IN OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies trading on the Over-The-Counter Bulletin Board, such as we
are seeking to become, must be reporting issuers under Section 12 of the
Securities Exchange Act of 1934, as amended, and must be current in their
reports under Section 13, in order to maintain price quotation privileges on the
OTC Bulletin Board. If we fail to remain current on our reporting requirements,
we could be removed from the OTC Bulletin Board. As a result, the market
liquidity for our securities could be severely adversely affected by limiting
the ability of broker-dealers to sell our securities and the ability of
stockholders to sell their securities in the secondary market. In addition, we
may be unable to get re-listed on the OTC Bulletin Board, which may have an
adverse material effect on our Company.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
17
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
THE EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS MAY HAVE A DILUTIVE EFFECT ON
THE PRICE OF OUR COMMON STOCK.
To the extent that outstanding stock options and warrants are
exercised, dilution to our stockholders will occur. Moreover, the terms upon
which we will be able to obtain additional equity capital may be adversely
affected, since the holders of the outstanding options and warrants can be
expected to exercise them at a time when we would, in all likelihood, be able to
obtain any needed capital on terms more favorable to us than the exercise terms
provided by the outstanding options and warrants.
ITEM 2. DESCRIPTION OF PROPERTY
Our headquarters are located in Valhalla, New York since January 2007. The
offices consist of approximately 5,500 square feet. We moved from a smaller
office located in Briarcliff Manor, NY.
Our new 10-year lease provides for payments of a monthly base rent of $9,953,
increasing gradually to up to $11,684. The first 6 months of occupancy are free.
We believe our space is adequate for our current and foreseeable future
operations. We may seek another smaller property commensurate with the current
size of our operations.
18
ITEM 3. LEGAL PROCEEDINGS
On May 11, 2007, two lawsuits, captioned Alexander Fleiss v. Optionable Inc.,
Mark Nordlicht, Kevin Cassidy, Edward J. O'Connor, Albert Helmig and Marc-Andre
Boisseau, 07 CV 3753 (LAK) ("Fleiss") and Robert Rastocky v. Optionable, Inc.,
Kevin Cassidy and Edward O'Connor, 07 CV 3755 (CLB), were filed in the United
States District Court for the Southern District of New York. Subsequently, five
additional lawsuits were filed in the United States District Court for the
Southern District of New York as follows: one on May 16, 2007, Jagdish Patel v.
Optionable Inc., Kevin Cassidy, and Edward J. O'Connor, 07 CV 3845 (LAK)
("Patel"); two on May 17, 2007, Peters v. Optionable, Inc., Mark Nordlicht,
Kevin P. Cassidy, Edward J. O'Connor, Albert Helmig, and Marc-Andre Boisseau, 07
CV 3877 (LAK) ("Peters"); and Manowitz v. Optionable Inc., Kevin Cassidy, Edward
J. O'Conner, and Mark Nordlicht, 07 CV 3884 (UA) ("Manowitz"); one on May 24,
2007, Glaubach v. Optionable Inc., Kevin Cassidy, Mark Nordlicht, Edward J.
O'Connor, Albert Helmig, and Marc-Andre Boisseau; 07 CV 4085 (LAK) ("Glaubach");
and one on June 22, 2007, Bock v. Optionable Inc., Kevin Cassidy, Mark
Nordlicht, Edward J. O'Connor, Albert Helmig, and Marc-Andre Boisseau, 07 CV
5948 (LAK) ("Bock"). Each of the lawsuits names the Company as a defendant and
some of the lawsuits name as defendants all or certain of the directors and
officers of the Company during the time period referenced. The directors and
officers of the Company named as defendants include Mark Nordlicht, the former
Chairman of the Board of Directors of the Company; Kevin Cassidy, the former
Chief Executive Officer and Vice-Chairman of the Board of Directors of the
Company; Edward J. O'Connor, the President of the Company and member of the
Board of Directors; Albert Helmig, a member of the Board of Directors during the
relevant time period; and Marc-Andre Boisseau, the Chief Financial Officer of
the Company. By Order dated May 24, 2007, Rastocky was voluntarily dismissed.
19
By Orders dated June 20, 2007 and July 3, 2007, Fleiss, Patel, Peters,
Manowitz and Glaubach were consolidated under In re Optionable Securities
Litigation, 07 CV 3753 (LAK). . By Order November 20, 2007, Judge Kaplan granted
the motion of KLD Investment Management, LLC to serve as Lead Plaintiff and
approved its choice of counsel, Kahn Gauthier Swick, LLC.
On January 17, 2008, Lead Plaintiff filed a Consolidated Amended Class
Action Complaint ("Complaint.") The Complaint seeks unspecified damages arising
from alleged violations of the federal securities laws, including the Securities
Exchange Act of 1934, 15 U.S.C. ss. 78a et seq., (the "Exchange Act"), and Rule
10b-5 under the Exchange Act, 17 C.F.R. ss. 240.10b-5. The Complaint alleges,
among other things, that during the class period of January 22, 2007 to May 14,
2007, defendants failed to disclose certain information in public filings and
statements, made materially false and misleading statements and
misrepresentations in public filings and statements, sold artificially inflated
stock and engaged in improper deals, had an improper relationship with and
"schemed" with its customer Bank of Montreal ("BMO"), and understated the
Company's reliance on its relationship with BMO. The Complaint alleges that
while the Company's stock was trading at artificially inflated prices, certain
defendants sold shares of common stock of the Company.
On February 15, 19, and 20, the Company and individual defendants
Nordlicht, Cassidy, Helmig, O'Connor and Boisseau filed motions to dismiss the
Complaint. Plaintiffs have 45 days to respond to Defendants' motions.
The actual costs that will be incurred in connection with this action
cannot be quantified at this time and will depend upon many unknown factors.
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.
Other Matters
Since May 2007, the Company has received requests for documents and information
from the CFTC, the SEC and the DOJ and the District Attorney's Office. Since
that time, the Company has complied, and continues to comply, with these several
requests for documents and information.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is quoted on the Over-the-Counter Bulletin Board
operated by the National Association of Securities Dealers, Inc. Our shares are
listed under the symbol "OPBL."
The following table sets forth, for the fiscal quarters indicated, the
high and low closing prices per share of our common stock as reported on the
Over-the-Counter Bulletin Board. The quotations reflect inter dealer prices,
without retail mark-up, mark-down or commissions and may not represent actual
transactions.
Fiscal 2007 Fiscal 2006 Fiscal 2005
------------- --------- ------------ -------- --------- -------
Quarter Ended High Low High (2) Low (2) High (2) Low (2)
- --------------- ------------- --------- ------------ -------- --------- -------
March 31 $ 6.15 $ 5.85 $1.50 $.90 n/a n/a
June 30 $ .45 $ .40 $0.90 $0.50 n/a n/a
September 30 $ .16 $ .13 $0.75 $0.50 $1.25 $1.00
December 31 $ .09 $ .06 $2.84 $0.50 $1.49 $0.85
At March 24, 2008, the closing price for our common stock was $0.055
At March 24, 2008, there were 52,428,203 shares of our common stock
issued and 52,423,403 shares of our common stock outstanding. There are
approximately 15 stockholders of record at March 24, 2008.
The transfer agent of our common stock is Continental Stock Transfer &
Trust Company , whose address is 17 Battery Place, New York, NY 10004. The phone
number of the transfer agent is (212) 509-4000.
DIVIDENDS
We have not declared any dividends to date. We have no present
intention of paying any cash dividends on our common stock in the foreseeable
future, as we intend to use our assets, if any, to generate growth. The payment
by us of dividends, if any, in the future, rests within the discretion of our
Board of Directors and will depend, among other things, upon our earnings, our
capital requirements and our financial condition, as well as other relevant
factors. There are no restrictions in our articles of incorporation or bylaws
that restrict us from declaring dividends
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY COMPENSATION PLAN INFORMATION
The following table shows information with respect to each equity compensation
plan under which our common stock is authorized for issuance at December 31,
2007:
21
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Plan category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance under
outstanding options, warrants and rights equity compensation plans
warrants and rights (excluding securities
reflected in column (a)
- ------------------------------------ ------------------------ ----------------------- ---------------------------
(a) (b) (c)
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Equity compensation plans approved
by security holders 1,363,000 $0.36 5,964,000
- ------------------------------------ ------------------------ ----------------------- ---------------------------
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Equity compensation plans not
approved by security holders 800,000 $0.95 0
- ------------------------------------ ------------------------ ----------------------- ---------------------------
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Total 2,163,000 $0.58 5,964,,000
- ------------------------------------ ------------------------ ----------------------- ---------------------------
2004 STOCK OPTION PLAN
We adopted our 2004 Stock Option Plan in November 2004. The plan
provides for the grant of options intended to qualify as "incentive stock
options" and options that are not intended to so qualify or "nonstatutory stock
options." The total number of shares of common stock reserved for issuance under
the plan is 7,500,000, subject to adjustment in the event of a stock split,
stock dividend, recapitalization or similar capital change.
The plan is presently administered by our board of directors, which
selects the eligible persons to whom options shall be granted, determines the
number of common shares subject to each option, the exercise price therefor and
the periods during which options are exercisable, interprets the provisions of
the plan and, subject to certain limitations, may amend the plan. Each option
granted under the plan is evidenced by a written agreement between us and the
optionee.
Options may be granted to our employees (including officers) and
directors and certain of our consultants and advisors.
The exercise price for incentive stock options granted under the plan
may not be less than the fair market value of the common stock on the date the
option is granted, except for options granted to 10% stockholders which must
have an exercise price of not less than 110% of the fair market value of the
common stock on the date the option is granted. The exercise price for
nonstatutory stock options is determined by the board of directors. Incentive
stock options granted under the plan have a maximum term of ten years, except
for 10% stockholders who are subject to a maximum term of five years. The term
of nonstatutory stock options is determined by the board of directors. Options
granted under the plan are not transferable, except by will and the laws of
descent and distribution.
RECENT SALES OF UNREGISTERED SECURITIES
We issued the following equity securities during 2007 that were not
registered under the Securities Act of 1933, as amended (the "Securities Act").
During March 2007, we issued 30,689 shares of our common stock to Kevin Cassidy,
our Chief Executive Officer. The shares were valued at $181,987 based on the
traded quoted price of our common stock at the date of issuance.
During March 2007, we issued 900,000 warrants to three individuals with an
exercise price of $5 per share and expiring in March 2012, of which 300,000 are
exercisable immediately and 600,000 become exercisable in March 2008 if the
continued operations of HQ Trading generate revenues exceeding $1.2 million for
the 12-month period following the final agreement. Such warrants were cancelled
in July 2007.
22
During April 2007, we issued 200,000 shares of our common stock, pursuant to the
exercise of options, to two individuals, one of whom is our Executive Chairman,
Albert Helmig.
During May 2007, we issued 55,000 options to our former Chief Executive Officer,
Kevin Cassidy, pursuant to his employment agreement. The exercise price of such
options is $4.63. The options expire in May 2017.
During May 2007, we issued warrants permitting the Investor to purchase a number
of shares of common stock sufficient to increase the Investor's ownership of the
Company's common stock to an amount not to exceed 40% of the Company's then
outstanding common stock on a fully diluted basis, based on the assumption that
the Investor has retained ownership of the Purchased Shares and any shares of
common stock previously issued to the Investor upon a partial exercise of the
Warrant. The Warrant is exercisable at any time and from time to time prior to
October 10, 2008 at an exercise price per share equal to $4.30 (the "Exercise
Price"). The Warrant does not contain a cashless exercise feature. The Exercise
Price is subject to certain customary adjustments to protect against dilution.
During November 2007, we issued 250,000 options to each of our two new
directors. 50,000 options of each of such grant vested upon the grant and the
remainder will vest at a rate of 50,000 options on each six month anniversary of
the grant through November 26, 2009. The options expire on the five year
anniversary of the grant. The exercise price of such options is $0.0918 per
share. During December 2007, we issued an aggregate of 230,000 options to a
consultant and an employee. The options expire on the five year anniversary of
the grant..
All of the aforementioned securities were issued pursuant to the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
N/A
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS - 2007 COMPARED 2006
Results of Operations
(Unaudited)
For the year ended Increase/ Increase/
December 31, (Decrease) (Decrease)
------------------------------- in $ 2007 in % 2007
2007 2006 vs 2006 vs 2006
-------------- ------------- -------------- -----------
Brokerage fees $ 8,786,850 $ 8,987,727 $ (200,877) -2.2%
Brokerage fees-related parties 1,148,885 3,994,131 (2,845,246) -71.2%
Incentives 3,285,058 3,087,653 197,405 6.4%
-------------- ------------- -------------- -----------
Net revenues 13,220,793 16,069,511 (2,848,718) -17.7%
Cost of revenues 7,798,438 5,312,269 2,486,169 46.8%
Cost of revenues-related parties 30,013 909,291 (879,278) -96.7%
-------------- ------------- -------------- -----------
7,828,451 6,221,560 1,606,891 25.8%
Gross profit 5,392,342 9,847,951 (4,455,609) -45.2%
Operating expenses:
Selling, general and administrative 8,624,175 1,030,979 7,593,196 736.5%
Impairment-considerable receivable from stockholder 145,771,878 - 145,771,878 NM
Impairment-intangible asset 1,085,610 - 1,085,610 NM
Research and development 1,094,188 473,645 620,543 131.0%
-------------- ------------- -------------- -----------
Total operating expenses 156,575,851 1,504,624 155,071,227 NM
Operating income (151,183,509) 8,343,327 (159,526,836) NM
Other income (expense):
Interest income 388,757 102,040 286,717 NM
Other income - NM
Other expense (15,250) - (15,250) NM
Deferred taxes -
Interest expense-related parties (340,707) (780,137) (439,430) -56.3%
-------------- ------------- -------------- -----------
32,800 (678,097) (710,897) NM
Net income before income tax (151,150,709) 7,665,230 (158,815,939) NM
Income tax benefit ( expense) 415,548 (1,459,052) (1,874,600) NM
-------------- ------------- -------------- -----------
Net income $(150,735,161) $ 6,206,178 $(156,941,339) NM
============== ============= ============== ===========
NM: Not meaningful
Revenues consist primarily of fees earned from natural gas derivatives
transactions and related incentive arrangements.
The decrease in brokerage fees during 2007 when compared to the prior year
period is primarily due to an decrease in the brokerage fees resulting from
increased volume of transactions of natural gas derivatives traded on the OTC
market on behalf of existing clients. We have not generated any meaningful
brokerage fees since the second quarter of 2007.
The decrease in brokerage fees-related party during 2007 when compared to the
prior year period is primarily due to the fact that our agreement with Capital
Energy Services, Inc., a related party, was effective for twelve months during
2006 and during one month (i.e. January 2007) during the nine month period ended
September 30, 2007, offset by an increase in fees resulting from increased
monthly volume of transactions of natural gas derivatives traded on the futures
market on behalf of existing clients during January 2007.
The increase in incentives earned pursuant to agreement with a US exchange, the
Investor, was due to a higher volume of cleared OTC transactions handled by us
on such exchange.
These increases related primarily to transactions which occurred prior to the
events described above and in Item 1 of Part II of this Report.
The Company anticipates that revenue-generating agreements, if any, under its
revised strategy would take the form of licensing, royalty-based agreements
and/or software development and maintenance agreements.
24
As a result of the factors discussed above, we believe that our revenues for the
remainder of 2008 will decrease when compared to 2007. We believe that revenues
we traditionally generated from OPEX, voice-brokerage and our floor operations
will be minimal for the remainder of 2008 unless we are able to implement our
revised strategy.
Cost of revenues
Cost of revenues consists primarily of compensation of personnel directly
associated with handling the natural gas derivative transactions on behalf of
our clients as well as expenses associated with our floor brokerage operations.
The increase in cost of revenues during the 2007 when compared to the prior year
period is primarily attributable to the fair value of options and warrants we
issued to brokers and expensed during 2007 which amounted to approximately $4.0
million, compared to approximately $246,000 during 2006. The increase in
amortization of the fair value of options results from the issuance of 1,595,000
options during 2007, which were fully expensed pursuant to the termination of
the employment of certain grantees. The Company did not issue any options to its
brokers during 2006.
The increase in cost of revenues is offset by a decrease in commissions paid to
our brokers and to our former chief executive officer during 2007 when compared
to 2006.
We expect that our cost of revenues for the remainder of 2008 will decrease,
commensurate with an expected decrease in revenues, unless we implement our
revised strategy which could change our business model.
Selling, general, and administrative expenses
Selling, general, and administrative expenses consists primarily of legal fees,
incurred in connection with the Company's attention to certain allegations made
recently and to our responses to and compliance with requests for documents and
information received from the United States Commodity Futures Trading Commission
(the "CFTC"), the United States Securities and Exchange Commission (the "SEC"),
the United States Department of Justice (the "DOJ") and a grand jury subpoena
received from the New York County District Attorney's office (the "District
Attorney's Office"),or to handle certain matters which occur during the course
of our operations, and compensation of personnel supporting our operations. The
increase in selling, general, and administrative expenses during the nine-month
period ended September 30, 2007, when compared to the prior period is primarily
due to the following:
o one-time amortization of the Consideration receivable from the
Investor of approximately $3.3 million
o increased legal fees of approximately $$2.6 million, primarily
incurred in connection with our our attention to certain allegations
made recently, our responses to, and compliance with the governmental
requests described above, and in connection with the NYMEX
transaction;
o one-time provision in June 2007 of approximately $640,000 in
connection with our estimated incentives receivable from the Investor;
o one-time compensation of approximately $400,000 to our former
executive chairman
o increased investor relation fees in connection with increased efforts
to position our company before the investors community.
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 2008 will continue to constitute of a
large share of our selling, general, and administrative expenses. We are unable
to predict whether they will remain at comparable level to 2007.
Impairment- Consideration receivable from Investor and Impairment- Intangible
Asset
The impairment- consideration receivable from Investor and impairment-
intangible asset consists of one-time losses attributable to the lack of
perceived likely benefits from 1) the consideration the Investor had agreed to
provide to the Company pursuant to the Stock and Warrant Purchase Agreement and
2) the constructive rescission of the HQ Trading acquisition. The Stock and
Warrant Purchase Agreement and the HQ Trading acquisition both took place during
2007 and no similar expenses occurred during 2006.
25
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 increase in research and development expenses
during 2007 when compared to the prior year period is primarily due to the
following:
o increased compensation and related benefits for additional software
engineers and quality and assurance personnel we hired to enhance our
electronic platform, OPEX.
We expect that our research and development expenses to enhance features and
functionalities of OPEX may exceed $1 million during 2008.
Interest income
Interest income consists primarily of interest earned on interest-bearing cash
and cash equivalents. The increase in interest income during 2007 when compared
to the prior year period is primarily due to an increase in our cash and cash
equivalents' interest bearing balances.
Interest expense to related parties
Interest expense to related parties consists of interest charges associated with
amounts due to related parties, Mark Nordlicht, our former Chairman, Kevin
Cassidy, our former Chief Executive Officer, and Edward O'Connor, our President.
The decrease in interest expense to related parties during 2007 when compared to
the prior year period is primarily due to the accelerated amortization of debt
discount associated with the amount due to Kevin Cassidy during 2006. We have
accelerated the amortization discount on this debt since we reimbursed the debt
at a faster rate than initially contemplated during 2006. The debt to Kevin
Cassidy was fully repaid in 2006. We did not make any debt repayment during 2007
which would have triggered an acceleration of the amortized discount on the
debt.
Income tax
Income tax benefit/expense consists of federal and state current and deferred
income tax or benefit based on our net income. The increase in income tax
benefit during 2007 when compared to the comparable prior year period is
primarily due to losses we incurred during 2007 which can be carried back to
taxes incurred during 2006. During 2006, we generated taxable income, after
deduction for net operating losses carryforward.
LIQUIDITY AND CAPITAL RESOURCES
For the last three fiscal years, we have generated cash flows from our operating
activities. Our cash balance as of December 31, 2007 amounts to approximately
$9.9 million.
During 2007, we generated cash from operating activities of approximately $2.4
million, primarily resulting from:
o net loss of approximately $150.7 million, adjusted for the impairment
of the consideration receivable from the Investor and, the
amortization of the consideration receivable from the Investor, and
the fair value of warrants, options and shares issued during the
period aggregating approximately $145.8 million, $3.4 million, and
$4.0 million, respectively;
o a decrease in accounts receivable and accounts receivable-related
party of approximately $2.3 million, a decrease in incentive
receivables from Investor of approximately $667,000 and a decrease in
accrued compensation $1.9 million due to a recent decline in revenues
and associated expenses since May 2007; and
o an increase in prepaid tax assets/income tax payable of $4.0 million
resulting from the payment of estimated income taxes offset by a
reduction of the anticipated income tax liability.
26
During 2007, we used our cash generated from operating activities to acquire the
customer relationship of HQ Trading, a crude oil broker, for $400,000, acquired
trading rights on the NYMEX floor for $1.2 million, and incurred capital
expenditures aggregating approximately $241,000. We also disposed of the trading
rights for $1,165,000.
During 2007, we generated gross proceeds from the exercise of certain warrants
and options aggregating approximately $220,000.
During 2006, we generated cash from operating activities of approximately $7.3
million, primarily resulting from:
o net income of approximately $6.2 million, adjusted for non-cash
interest expense of approximately $780,000; and
o an increase in accounts receivable, including those receivable
from related parties, incentive receivables from stockholder, due
from related party, and accrued compensation of approximately
$1.9 million, $1.2 million, $185,000 and $1.5 million,
respectively, resulting from an increase in related revenues as
well as increased commission related to such revenues.
o an increase in income tax payable of approximately $1.5 million
due to increase profitability in 2006.
We used our cash generated from operating activities to make principal
repayments of approximately $559,000, $200,000 and $400,000 on amounts due to
Kevin Cassidy, our former Chief Executive Officer, Edward O'Connor, our
President, and Mark Nordlicht, our former Chairman of the Board, respectively.
On May 30, 2006, our Board of Directors authorized us to repurchase such number
of shares of our common stock that have an aggregate purchase price not in
excess of $200,000 at the rate of up to $50,000 worth of common stock each
quarter. The Company repurchased 4,800 shares at a cost aggregating $2,506 since
the commencement of the share repurchase program. We did not repurchase any
shares during 2007.
The Company believes it has enough funds to meet its obligations, based on its
internal projections, for at least the next twelve months. However, the Company
cannot guarantee that it will do so. If there are unforeseen expenses or
financial obligations which occur during that period, the Company may not be
able to generate enough revenues to meet such obligations. Additionally, if the
Company acquires a brokerage firm or a technology company which could be
instrumental in the Company's long-term growth, this could hamper the Company's
ability to continue as going concern, both from a short-term or a long-term
perspective, and the Company would have to resort to financing, through either
debt or equity placements, for the funding of either such acquisitions or
unforeseen expenses or financial obligations.
GOING CONCERN
The Company believes it has enough funds to meet its obligations, based on its
internal projections, for at least the next twelve months. However, the Company
cannot guarantee that it will do so. If there are unforeseen expenses or
financial obligations which occur during that period, the Company may not be
able to meet such obligations. Additionally, if the Company acquires a brokerage
or trading firm or a technology company which could be instrumental in the
Company's long-term growth, this could hamper the Company's ability to continue
as going concern, both from a short-term or a long-term perspective, and the
Company would have to resort to financing, through either debt or equity
placements, for the funding of either such acquisitions or unforeseen expenses
or financial obligations. There can be no assurance that any such financing
would be available on acceptable terms, or at all.
27
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A summary of significant accounting policies is included in Note 2 of the
audited financial statements included in this Annual 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:.
Revenue recognition
Revenue is recognized when earned. Our revenue recognition policies are in
compliance with the SEC's Staff Accounting Bulletin ("SAB") No. 104 "Revenue
Recognition". The application of SAB No. 104 requires us to apply our judgment,
including whether our clients receive services over a period of time.
We generally invoice our clients monthly, for all transactions which have been
executed during such month. Revenues are recognized on the day of trade-trade
date basis. Our revenues derive from a certain predetermined fixed fee of the
transactions we execute on behalf of our clients. The fee is based on the volume
of financial instruments traded. We base our fees on oral and written contracts
and confirm the fees in writing upon the execution of each transaction.
We also receive incentives from the New York Mercantile Exchange for the volume
of OTC transactions we submit to their clearing platforms on behalf of our
clients. The incentives are based on a percentage of the total revenues received
by the exchange attributable to our volume of transactions submitted to the
respective exchanges. We also apply our judgment when making estimates monthly
of such incentives based on the volumes of transactions submitted to the
respective exchanges and the exchanges' published revenues by type of
transaction.
We, pursuant to SAB 104, realize the incentive revenues realized or realizable
when all of the following criteria are met:
1) Persuasive evidence of an arrangement exists. We have a written separate
agreement with an exchange which has publicly published the initial terms of its
incentive program in 2003 which it modified in 2005 and is which is offered to
all intermediaries in the select transactions;
2) Delivery has occurred or services have been rendered. Under arrangements with
the exchange, the incentives are earned on the day we submit transactions to the
respective exchanges based on the revenues generated from such transactions and
are no longer subject to minimum volume of transactions to the exchange. We
account for all transactions submitted to each exchange on a daily basis.
Accordingly, we are able to determine when the incentives are earned based on
the date we submit transactions to the exchange. We have no other obligations to
the exchange to earn the incentives;
3) "Seller's" price to the buyer is fixed or determinable. Based on the
incentive program terms of each exchange, their published prices for the type of
transactions we submit to them, and our transactions records, we are able to
determine an estimate for the revenues each exchange earns in connection with
the transactions it submits, and accordingly, the amount, if any of the
incentives we earn in connection with such transactions; and
4) Collectibility is reasonably assured. The exchange has paid us timely on
incentives earned from 2004 through May 2007. The Company intends to enforce the
payment of any incentives receivable
28
Accounts and incentive receivable and related allowance for doubtful accounts.
Accounts receivable and incentive receivable are reported at net realizable
value. We have established an allowance for doubtful accounts based upon factors
pertaining to the credit risk of specific customers, historical trends, and
other information. Delinquent accounts are written-off when it is determined
that the amounts are uncollectible.
Share-based payment
We account for share-based payments in accordance with SFAS No. 123(R),
Share-Based Payment. Under the fair value recognition provisions of this
statement, share-based compensation cost is measured at the grant date based on
the value of the award and is recognized as expense over the vesting period.
Determining the fair value of share-based awards at the grant date requires
judgment, including estimating expected volatility. In addition, judgment is
also required in estimating the amount of share-based awards that are expected
to be forfeited. If actual results differ significantly from these estimates,
stock-based compensation expense and our results of operations could be
materially impacted.
Impairment of intangible assets
SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill be
tested for impairment on an annual basis and between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of an intangible asset below its carrying value. These events or
circumstances could include a significant change in the relationship with the
contracting party, business climate, legal factors, operating performance
indicators, or competition. Application of the intangible asset impairment test
requires judgment, including the determination of the fair value of each
intangible asset. The fair value of each intangible asset is estimated based on
the consideration given by us to acquire the intangible asset(s). This requires
significant judgment including the estimation of expected volatility if the
Company issued common share equivalent as consideration. Changes in our
estimates of undiscounted cash flows related to each intangible asset could
materially affect the determination of the impairment for each intangible asset.
Contingencies
The outcomes of legal proceedings and claims brought against us are subject to
significant uncertainty. SFAS No. 5, Accounting for Contingencies, 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.
29
RECENT PRONOUNCEMENTS
In September 2006, the FASB issued FASB Statement No. 157 "Fair Value
Measurements". This Statement defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles
("GAAP"), and expands disclosures about fair value measurements. This statement
applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is a relevant measurement attribute. Accordingly,
this statement does not require any new fair value measurements. However, for
some entities, the application of this statement will change current practices.
This statement is effective for financial statements for fiscal years beginning
after November 15, 2007. Earlier application is permitted provided that the
reporting entity has not yet issued financial statements for that fiscal year.
Management believes this statement will have no impact on the financial
statements of the Company once adopted.
In February 2007, the FASB issued FASB Statement No. 159 "The Fair Value Option
for Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115". This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair value
measurement, which is consistent with the FASB's long-term measurement
objectives for accounting for financial instruments. This statement applies to
all entities, including not-for-profit organizations. Most of the provisions of
this statement apply only to entities that elect the fair value option. However,
the amendment to FASB Statement No. 115, Accounting for Certain Investments in
Debt and Equity Securities, applies to all entities with available-for-sale and
trading securities. Some requirements apply differently to entities that do not
report net income. Recognized financial assets and financial liabilities are
eligible items for the measurement option established by this Statement except:
o An investment in a subsidiary that the entity is required to
consolidate
o An interest in a variable interest entity that the entity is
required to consolidate
o Employers' and plans' obligations (or assets representing net
overfunded positions) for pension benefits, other postretirement
benefits (including health care and life insurance benefits),
postemployment benefits, employee stock option and stock purchase
plans, and other forms of deferred compensation arrangements, as
defined in FASB Statements No. 35, "Accounting and Reporting by
Defined Benefit Pension Plans", No. 87, "Employers' Accounting
for Pensions", No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", No. 112, "Employers' Accounting
for Postemployment Benefits", No. 123 (R) (revised December
2004), "Share-Based Payment", No. 43, "Accounting for Compensated
Absences", No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities", and No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans", and APB
Opinion No. 12, "Omnibus Opinion--1967" o Financial assets and
financial liabilities recognized under leases as defined in FASB
Statement No. 13, "Accounting for Leases" (This exception does
not apply to a guarantee of a third-party lease obligation or a
contingent obligation arising from a cancelled lease.) o Deposit
liabilities, withdrawable on demand, of banks, savings and loan
associations, credit unions, and other similar depository
institutions o Financial instruments that are, in whole or in
part, classified by the issuer as a component of shareholder's
equity (including "temporary equity"). An example is a
convertible debt security with a noncontingent beneficial
conversion feature.
o Firm commitments that would otherwise not be recognized at
inception and that involve only financial instruments o
Nonfinancial insurance contracts and warranties that the insurer
can settle by paying a third party to provide those goods or
services
o Host financial instruments resulting from separation of an
embedded nonfinancial derivative instrument from a nonfinancial
hybrid instrument.
The fair value option established by this Statement permits all entities to
choose to measure eligible items at fair value at specified election dates. A
business entity shall report unrealized gains and losses on items for which the
fair value option has been elected in earnings (or another performance indicator
if the business entity does not report earnings) at each subsequent reporting
date. A not-for-profit organization shall report unrealized gains and losses in
its statement of activities or similar statement.
30
The fair value option:
o May be applied instrument by instrument, with a few exceptions,
such as investments otherwise accounted for by the equity method
o Is irrevocable (unless a new election date occurs)
o Is applied only to entire instruments and not to portions of
instruments.
FASB Statement No.115 is effective as of the beginning of an entity's first
fiscal year that begins after November 15, 2007. Early adoption is permitted as
of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of FASB Statement No.
157, "Fair Value Measurements". No entity is permitted to apply this Statement
retrospectively to fiscal years preceding the effective date unless the entity
chooses early adoption.
The FASB issued FASB Statement No. 141 (revised 2007), Business Combinations,
and No. 160, Noncontrolling Interests in Consolidated Financial Statements.
Statement 141(R requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business
combination. FASB No.141 R is effective for fiscal years beginning after
December 15, 2008. The Company does not believe that FAS No. 141 R will have any
impact on its financial statements.
The FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements Statement No.160 requires all entities to report
noncontrolling (minority) interests in subsidiaries in the same way--as equity
in the consolidated financial statements. Moreover, Statement 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and noncontrolling interests by requiring they be treated as equity
transactions. FASB No.160 is effective for fiscal years beginning after December
15, 2008. The Company does not believe that FAS No. 160 will have any impact on
its financial statements.
ITEM 8. FINANCIAL STATEMENTS.
All financial information required by this Item is attached hereto at
the end of this report beginning on page F-1 and is hereby incorporated by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 9A(T). CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of December 31, 2007, our management our 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
President and our Chief Financial Officer concluded that, as of December 31,
2007, 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 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 December 31, 2007, 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.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is defined in Exchange
Act Rule 13a - 15(f). Our internal control system was designed to provide
reasonable assurance to our management and the Board of Directors regarding the
preparation and fair presentation of published financial statements. All
internal control systems, no matter how well designed have inherent limitations.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation. Our management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2007. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal Control -
Integrated Framework - Guidance for Smaller Public Companies (the COSO
criteria). Based on our assessment we believe that, as of December 31, 2007, our
internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting. Our
management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management's report in this annual
report.
31
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth information about our executive
officers, key employees and directors as of March 24, 2008.
Name Age Position Date of Election
Or Appointment
As Director
=======================================================================
Edward O'Connor 53 President and Director 3/2001
Marc Andre-Boisseau 43 Chief Financial Officer n/a
Thomas Burchill 66 Director 11/2007
Dov Rauchwerger 31 Director 11/2007
__________________
Edward J. O'Connor has served as our President and as a director since March
2001 . Mr. O'Connor previously served as our CEO between March 2004 and October
2005. Since December 1996, Mr. O'Connor has served as Managing Director of
Capital Energy Services, LLC (formerly Orion Energy Services, LLC), an energy
options brokerage business on the NYMEX. Mr. O'Connor's primary responsibilities
include negotiating and entering into contracts for our business and accounting
for our funds. Mr. O'Connor graduated from Georgetown University in 1977 with a
BS degree in Business Administration.
Marc-Andre Boisseau has served as our Chief Financial Officer since December
2004. Since January 2002, he has served as an advisor to small and medium
publicly traded and private companies on financial, tax and accounting matters.
Between January 2000 and December 2001, he served as Vice-President Finance of
DataCore Software, Inc., a privately held software developer. Prior to that, he
served as Chief Accounting Officer (from May 1997 to December 1999) and Vice
President Controller (from January 1, 1998 to December 1999) of Citrix Systems,
Inc. a publicly traded software developer. Mr. Boisseau is a certified public
accountant. Mr. Boisseau graduated with a BA degree in Business Administration
in 1987 from the University of Montreal.
Thomas Burchill has served as one of directors since November 2007. He worked at
Hearst, ABC and Viacom, serving, beginning in 1984, as the first President and
Chief Executive Officer of Lifetime Television, owned by the three companies. In
1993, Mr. Burchill, as Chairman and Chief Executive Officer of Petry Television,
was responsible for reengineering that company with computer technology
initiatives and subsequently oversaw the acquisition of, and successful
integration of, a competitor, John Blair Co. Since 2001, Mr. Burchill has
provided leadership or advisory assistance to a number of early stage companies
that serve the media sector, including Mitra Technologies, a traffic and billing
software firm, and SB3 Inc., a media focused business intelligence firm. Mr.
Burchill is also active in a number of industry organizations, including service
as Chairman of the Cable Television Advertising Bureau and as a member of the
Board of Directors of both the Television Bureau of Advertising and the
International Radio and Television Society. Mr. Burchill holds degrees from Holy
Cross College and the Columbia University Graduate School of Business.
32
Dov Rauchwerger has served as one of our directors since November 2007 and has
been involved in all aspects of business as a business owner and manager, from
marketing, development and negotiations to financing and human resources. Mr.
Rauchwerger re-built the electronics business of Adi-Aviv Electronics, an
electronic wholesale and distribution business, where he served as Vice
President from 2000 to 2001 and Managing Partner from 2001 to 2007. In February
2007, Mr. Rauchwerger founded, and continues to serve as the Managing Partner
of, Northern Lights Electronics, a full service consumer electronics wholesaler,
distributor and reseller. Mr. Rauchwerger graduated magnum cum laude with a
Bachelor of Arts degree from Rollins College in May 1998.
Director Compensation
During November 2007, the Company's Board of Directors approved
compensation to be paid to the Messrs. Burchill and Rauchwerger in return for
their service on the Board. The Board also approved a letter agreement with each
of Messrs. Burchill and Rauchwerger which sets forth the compensation to be paid
to the New Directors in return for their service on the Board. The Company will
pay Mr. Burchill $100,000 as annual compensation to be paid in 12 equal monthly
payments. The Company will pay Mr. Rauchwerger $25,000 as annual compensation to
be paid in 12 equal monthly installments.
During November 2007, the Board also approved a grant of 250,000
options to each of Messrs. Burchill and Rauchwerger. 50,000 options of each of
such grant vested upon the grant and the remainder will vest at a rate of 50,000
options on each six month anniversary of the grant through November 26, 2009.
The options expire on the five year anniversary of the grant. The Company
entered into a stock option agreement with Messrs. Burchill and Rauchwerger in
the form approved by the Board (each, a "Stock Option Agreement").
All of our directors are reimbursed for their reasonable expenses for
attending board and board committee meetings.
DIRECTOR INDEPENDENCE, COMMITTEES OF THE BOARD OF DIRECTORS
Two of our members of our Board of Directors, Thomas Burchill and Dov
Rauchwerger are "independent" within the meaning of Marketplace Rule 4200 of the
National Association of Securities Dealers, Inc. We have not established any
committees, including an Audit Committee, a Compensation Committee, a Nominating
Committee, or any committee performing a similar function. The functions of
those committees are being undertaken by the entire board as a whole. Because we
only have two independent directors, none of which are deemed audit committee
financial experts, our Board of Directors believes that the establishment of
such committees of the Board would not provide any benefits to our company and
could be considered more form than substance.
We do not have an audit committee or a compensation committee. We
intend to form such committees once we have selected directors who shall meet
the audit committee financial expert requirements under applicable Securities
and Exchange Commission rules and regulations.. We are unable to determine when
and if we will complete the recruiting of new directors during fiscal year 2008.
FAMILY RELATIONSHIPS
There are no family relationships among our executive officers and
directors.
33
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
We are required to identify each person who was an officer, director or
beneficial owner of more than 10% of our registered equity securities during our
most recent fiscal year and who failed to file on a timely basis reports
required by Section 16(a) of the Securities Exchange Act of 1934.
To our knowledge, based solely on review of these filings and written
representations from the certain reporting persons, we believe that during the
fiscal year ended December 31, 2007, our officers, directors and significant
stockholders have timely filed the appropriate form under Section 16(a) of the
Exchange Act, except as follows:
o Kevin Cassidy, our former chief executive officer and a director,
did not timely file a Form 4 to report an acquisition which
occurred on January 3, 2007;
o Mark Nordlicht, our former Chairman of the Board and a director,
did not timely file a Form 4 to report a disposition that
occurred on January 24, 2007;
o Kevin Cassidy, our former chief executive officer and a director
did not timely file an amended Form 4 to correct the transaction
date, transaction codes and price previously recorded in Form 4s
filed on October 5, 2006 and Janaury 8, 2007..
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation recorded by us in each of the
last two completed fiscal years for our principal executive officer, each other
executive officer serving as such whose annual compensation exceeded $100,000
and up to two additional individuals for whom disclosure would have been made in
this table but for the fact that the individual was not serving as an executive
officer of our company at December 31, 2007. The value attributable to any
option awards is computed in accordance with FAS 123R.
Change in
Pension Value
Non-Equity and
Incentive Non-Qualified
Stock Option Plan Deferred All Other
Name and Compensation Bonus Awards Awards Compensation Compensation Compensation
Principal Position Year ($) ($) ($) ($) ($) Earnings ($) ($) Total ($)
====================================================================================================================
Edward O'Connor 2006 200,000 14,905 214,905
President and 2007 200,000 15,511 215,511
Director (1) (6)
Kevin Cassidy
Chief Executive
Officer,
Vice-Chairman, and 2006 275,000 276,616 240,000 691,541 18,285 1,501,442
Director (2) 2007 150,000 187,672 248,750 454,967 5,016 1,046,405
Albert Helmig
Executive Chairman 2006 0 0
and Director (3) 2007 397,000 397,000
Marc-Andre
Boisseau
Chief Financial 2006 75,916 75,916
Officer 2007 185,327 185,327
Thomas Schnell 2006 100,000 596,584 14,905 711,489
(5) (6) 2007 107,416 888,524 11,575 1,007,515
(1) Mr. O'Connor has served as our principal executive officer since November
6, 2007
(2) Mr. Cassidy has served as our principal executive officer, Chief Executive
Officer, Vice Chairman and Director between October 30, 2005 and May 12,
2007.
(3) Mr. Albert Helmig has served as our principal executive officer and
Executive Chairman between May 11 and November 6, 2007.
(4) Mr. Cassidy's compensation includes 30,689 and 268,083 shares of common
stock issued during 2007 and 2006, respectively.It includes 1,200,000
warrants issued to Pierpont Capital, Inc., exercisable at $0.95 and for
which we recognized $120,000 and $240,000 in compensation expenses during
2007 and 2006, respectively, pursuant to FAS 123 (R ). It also includes
the fair value of 65,000 options for which we recognized $128,750 in
compensation expenses during 2007. Additionally, the Company pays, on
behalf of Mr. Cassidy, a life insurance and health insurance premium,
which are included in other compensation
(5) The other compensation of Mesrrs. O'Connor and Schnell represent the
health insurance premium paid by the Company on their behalf.
(6) Mr. Schnell was a broker and was not an executive officer of the Company.
Mr. Scnell resigned on September 14, 2007.
34
Outstanding Equity Awards at Fiscal Year-End Table.
The following table sets forth information with respect to grants of options to
purchase our common stock to the named executive officers at December 31, 2007.
Option Awards Stock Awards
- -----------------------------------------------------------------------------------------------------------------------------------
Equity Equity
Incentive Incentive
Plan Plan
Awards: Awards:
Number Market
Equity of or Payout
Incentive Market Unearned Value of
Plan Awards Number Value Shares, Unearned
Number of Number of Number of of of Units or Shares,
Securities Securities Securities shares Shares Other Units or
Underlying Underlying Underlying That or units Rights Other
Unexercised Unexercised Unexercised Option Option Have of stock That Have Rights
Options (#) Options (#) Unearned Exercise Expiration Vested that have Not Vested That Have
Name Exercisable Unexercisable Options (#) Price ($) Date (#) not vested (#) Not Vested($)
- -----------------------------------------------------------------------------------------------------------------------------------
Kevin . 5/7/2017
Cassidy 55,000 $4.63 (1)
10,000 7.17 2/23/2009
200,000 .95
Albert
Helmig 200,000 0.20 11/6/2014
- ---------------------------------------------------------------------------------------------------------------------------------
(1) options shall terminate upon the first anniversary of Optionnee's death or
immediately upon the termination of the optionee's employment for cause Director
Compensation
The following table sets forth with respect to the named directors, compensation
information inclusive of equity awards and payments made for the fiscal year
ended December 31, 2007.
Change in
Pension Value
Non-Equity and
Incentive Nonqualified
Fees Earned Plan Deferred
or Paid in Stock Option Awards Compensation Compensation All Other
Name (a) Cash ($) (b) Awards($) (c) ($) (d) ($) (e) Earnings (f) Compensation ($) (g) Total ($) (h)
====================================================================================================================================
Thomas 9,417 7,500 16,917
Burchill
Dov
Rauchwerger 2,354 7,500 9,854
====================================================================================================================================
35
EMPLOYMENT AGREEMENTS
On March 1, 2001, we entered into an employment agreement with Edward
O'Connor, our President and CEO and a member of the board of directors. The
agreement was amended on April 1, 2004.
The terms of the agreement, as amended, provide that we will employ Mr.
O'Connor for a term of five years with the duties of Chief Executive Officer
with an annual salary of $200,000 per year. If we terminate Mr. O'Connor's
employment without "cause" or if Mr. O'Connor terminates his employment with
"good reason" (as both terms are defined in Mr. O'Connor's employment
agreement), we are required to pay him a lump sum equal to nine months' base
salary. Following termination of employment for any reason, other than
expiration of the term of employment, Mr. O'Connor has agreed not to engage in
an electronic OTC business in competition with us for a 90 day period, provided
we pay him bi-monthly installments of $8,333.33 and provide full health benefits
during the 90 day period. When Kevin Cassidy became our Chief Executive Officer
in October 2005, as discussed below, we continued to employ Mr.O'Connor as our
President with the same compensation package as when he was our Chief Executive
Officer.
On November 6, 2007 (the "Termination Date"), we entered into a letter
agreement (the "Separation and Release Letter") with Albert Helmig, a former
Director and Executive Chairman of the Company. The Separation and Release
Letter provides, in part, for the following:
On the Termination Date, the Company entered into a letter agreement
(the "Separation and Release Letter") with Mr. Helmig specifying the terms of
his separation from the Company. The Separation and Release Letter provides, in
part, for the following:
(i) Mr. Helmig will receive a lump-sum cash payment of $141,000 in lieu
of any payments otherwise due to Mr. Helmig, including but not limited to, any
payment due under any agreement between Mr. Helmig and the Company;
(ii) Mr. Helmig will not be eligible for any Company-sponsored benefits
after the Termination Date;
(iii) The Company will indemnify and hold Mr. Helmig harmless to the
full extent permitted by the by-laws of the Company in effect on the Termination
Date in respect of certain proceedings;
(iv) Mr. Helmig agreed to waive any and all claims against the Company
and release and discharge the Company from liability for any and all claims or
damages that Mr. Helmig had, has or may have against the Company as of the
Termination Date;
(v) Each option, warrant or other right of Mr. Helmig to acquire shares
of common stock or other securities from the Company which has an expiration
date that occurs after November 7, 2014 is amended such that its expiration date
is November 7, 2014; and
(vi) Following the Termination Date, Mr. Helmig will be subject to
certain non-disclosure, non-competition and non-solicitation restrictions.
We have a consulting agreement with Mr. Boisseau, who serves as our Chief
Financial Officer. The oral agreement provides that we compensate him at $300
per hour since May 14, 2007. The rate per hour between January 1 and March 6,
2007, amounted to $145 per hour and between March 7 and May 13, 2007, $152 per
hour. This agreement may be terminated at will by both parties.
36
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics to provide
guiding principles to all of our employees. Our Code of Business Conduct and
Ethics does not cover every issue that may arise, but it sets out basic
principles to guide our employees and provides that all of our employees must
conduct themselves accordingly and seek to avoid even the appearance of improper
behavior. Any employee which violates our Code of Business Conduct and Ethics
will be subject to disciplinary action, up to an including termination of his or
her employment. Generally, our Code of Business Conduct and Ethics provides
guidelines regarding:
o compliance with laws, rules and regulations,
o conflicts of interest,
o insider trading,
o corporate opportunities,
o competition and fair dealing,
o discrimination and harassment,
o health and safety,
o record keeping,
o confidentiality,
o protection and proper use of company assets,
o payments to government personnel,
o waivers of the Code of Business Conduct and Ethics,
o reporting any illegal or unethical behavior, and
o compliance procedures.
In addition, we have also adopted a Code of Ethics for our Chief Executive
Officer and Senior Financial Officers. In addition to our Code of Business
Conduct and Ethics, our CEO and senior financial officers are also subject to
specific policies regarding:
o disclosures made in our filings with the SEC,
o deficiencies in internal controls or fraud involving management or other
employees who have a significant role in our financial reporting, disclosure or
internal controls,
o conflicts of interests, and
o knowledge of material violations of securities or other laws, rules or
regulations to which we are subject.
A copy of the Code of Ethics is available on our website,
www.optionable.com, under the management section of the investor relations page.
37
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 24, 2008, the number of and
percent of our common stock beneficially owned by:
o all directors and nominees, naming them,
o our executive officers,
o our directors and executive officers as a group, without naming them,
and
o persons or groups known by us to own beneficially 5% or more of our
common stock:
We believe that all persons named in the table have sole voting and
investment power with respect to all shares of common stock beneficially owned
by them.
A person is deemed to be the beneficial owner of securities that can be
acquired by him within 60 days from March 26, 2008 upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage ownership
is determined by assuming that options, warrants or convertible securities that
are held by him, but not those held by any other person, and which are
exercisable within 60 days of January 18, 2008 have been exercised and
converted.
Name and address of Number of Shares
Title of Class Beneficial Owner Beneficially Owned Percent of Total
- --------------------------------------------------------------------------------------------------------------------
Edward O'Connor (1)
465 Columbus Avenue
Suite 280
Common Stock Valhalla, NY 10595 3,854,130 7.4%
Marc-Andre Boisseau
465 Columbus Avenue
Suite 280
Common Stock Valhalla, NY 10595 0 0.0%
Thomas Burchill (2)
465 Columbus Avenue
Suite 280
Common Stock Valhalla, NY 10595 100,000 0.3%
Dov Rauchwerger (2)
465 Columbus Avenue
Suite 280
Common Stock Valhalla, NY 10595 100,000 0.3%
Mark Nordlicht
159 Wykagil Terrace
Common Stock New Rochelle, NY 10804 8,190,150 15.6%
Nymex Holdings, Inc. (3)
One, North End Avenue
World Financial Center
Common Stock New York, NY 10282 29,284,886 41.3%
Common Stock All Executive Officers and 4,054,130 7.7%
Directors as a Group (4persons )
38
(1) Includes 2,682,201 shares owned by Ridgecrest Capital Corp., Inc., a
corporation wholly owned by Mr. O'Connor, 901,929 shares owned by Mr. O'Connor's
daughter Kathleen O'Connor and 901,929 shares owned by Mr. O'Connor's daughter
Erin O'Connor.
(2) Includes 100,000 shares issuable pursuant to the exercise of stock options
exercisable within 60 days.
(3) Includes 18,526,000 shares issuable pursuant to the exercise of warrants
exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During April 2005, we modified the terms of agreement under which we
initially owed $5,762,753, $765,000 and $765,000 to Mark Nordlicht, our Chairman
of the Board, Kevin Cassidy, our Chief Executive Officer, and Edward O'Connor,
our President, respectively. The modified terms provide that, among other
things, in the event of a Capital Raise-defined as we raising more than
$1,000,000 additional equity or debt financing, the interest rate accrued after
such event is reduced from 12% to 4.68%. Additionally, the modified terms
provide that we may make principal repayments towards the due to Chairman of the
Board, the due to its Chief Executive Officer, and the due to related party
amounting to approximately 25% of its cash flows from operating cash flows less
capital expenditures. During 2006, we modified the terms of the agreements to
allow prepayments at our discretion.
In connection with the modified terms, the Company made principal
repayments of $400,000 on the due to Mark Nordlicht during 2006. Additionally,
we made principal repayment of $558,697 on the due to Kevin Cassidy during 2006
and $200,000 on due to Edward O'Connor, during 2006 .
We were party to a Master Services Agreement with CES pursuant to which
we provide brokerage services on the floor of the New York Mercantile Exchange .
Edward J. O'Connor, our president and a director, is a 50% stockholder of CES.
Kevin P. Cassidy our former Chief Executive Officer until May 2007, is the
Managing Director of CES. Pursuant to this arrangement, we were paying to CES a
minimum annual fixed fee of $50,000 and assume all expenses directly incurred by
CES's associated floor brokerage services. Additionally, we owed to CES
$1,525,000 payable on April 1, 2014. However, upon a Capital Raise, we will pay
up to 10.67% of the amount raised during the Capital Raise, up to $762,500, to
CES, with the remaining principal and accrued interest of 12% from the date of
the Capital Raise payable on April 1, 2014.
During April 2005, CES assigned its rights to the Company's liability
of $1,525,000 equally to Edward O'Connor and Kevin Cassidy, co-owners of CES.
Subsequently, during April 2005, the Company entered into modifications of the
terms of the amounts due from it to Mark Nordlicht, Edward O'Connor and Kevin
Cassidy. The modified terms provide that, among other things, in the event of a
Capital Raise, the interest rate accrued after such event is reduced from 12% to
4.68%. Additionally, the Company may make principal repayments towards such
liabilities amounting to approximately 25% of its quarterly cash flows from
operating activities less capital expenditures.
39
Pursuant to this arrangement, our share of revenues and expenses of the
floor brokerage services amounted to approximately $901,000 and $3.6 million,
respectively, during 2007 and 2006, respectively, and $15,000 and $741,000,
respectively, during 2007 and 2006, respectively. We have received $1.5 million
and $2.6 million from CES in connection with such floor brokerage services
during 2007 and 2006, respectively. In April 2007, the Company reimbursed CES
approximately $165,000 for commissions to a broker that CES paid on the
Company's behalf. All obligations pursuant to this arrangement have been
satisified as of December 31, 2007 This agreement was terminated in January 2007
and our floor operations were assumed by one of our subsidiaries, OPEX
International, Inc.
The Company has recognized revenues from brokerage commissions of
approximately $0, $253,000 and $3,000 during 2006 and $4,000, $206,000 and
$63,000, during 2006, from Northern Lights Energy LLC, Platinum Partners, L.P.
and Fenmore Holdings LLC, respectively, entities in which Mark Nordlicht is also
the managing partner or a stockholder. All obligations from such related parties
have been satisfied at December 31, 2007.
Jules Nordlicht, the father of the Company's former Chairman of the Board,
leased to us a seat on the exchange through which CES maintained its floor
operations. We assumed the cost of the lease in April 2006 and renewed it in
December 2006 through June 2007. We terminated this agreement effective April 1,
2007. The lease provided for monthly payments of $5,000 through June 30, 2007.
The amount paid pursuant to the lease amounted to $15,000 and $188,000 during
2007 and 2006, respectively.
We also received incentives from NYMEX, a significant stockholder ( the
"Investor"). The incentives are earned based on a percentage of the total
revenues received by the exchange attributable to our volume of OTC market
transactions submitted to the respective exchanges. Under this incentive program
offered by NYMEX, 25% of the revenues from NYMEX ClearPort are allocated to an
intermediary incentive pool. At the end of each quarter, the qualifying
intermediaries, including us, receive their pro-rata share based on the volume
for which they were responsible. There is no minimum volume requirement in order
to participate. The Company has recognized revenues from incentives amounting to
approximately $4.0 million and $3.1 million during 2007 and 2006, respectively.
The Company received approximately $ and $1.9 million from the Investor,
pursuant to such incentive arrangement during 2007 and 2006, respectively. NYMEX
owes us approximately $641,000 at December 31, 2007 and, after requests, have
not indicated to us whether they will ever satisfy their obligations to us or
when.
On April 10, 2007, we, Mark Nordlicht, our former Chairman of the Board, Kevin
Cassidy, our former Vice Chairman and Chief Executive Officer, Edward O'Connor,
our President, (together with Mr. Nordlicht and Mr. Cassidy, the "Founding
Stockholders"), and NYMEX Holdings, Inc. (the "Investor") entered into a
definitive stock and warrant purchase agreement (the "Stock and Warrant Purchase
Agreement").
40
Pursuant to the terms of the Stock and Warrant Purchase Agreement, Mr.
Nordlicht, Mr. Cassidy and Mr. O'Connor sold to the Investor, 7,000,000,
1,905,000 and 1,853,886 shares, respectively, of common stock of the Company.
This aggregate of 10,758,886 shares of common stock (the "Purchased Shares")
represented 19% of the then outstanding shares of common stock on a fully
diluted basis (without giving effect to the Warrant, as defined and discussed
below). The purchase price paid by the Investor for the Purchased Shares was
$2.69 per share. Additionally, pursuant to the Stock and Warrant Purchase
Agreement, we physically issued to the Investor the Warrant, as defined and
described below, in consideration of the Investor's agreement (i) to develop
with us a marketing plan, which plan will detail proposed expenditures by the
Investor and joint activities; (ii) subject to regulatory requirements, to
provide space for up to twenty of the our brokers on the Investor's trading
floor; and (iii) to host our electronic trading platform, OPEX, in the
Investor's data center and provide us with computer and networking hardware,
software, bandwidth and ancillary infrastructure and services reasonably
necessary to interconnect OPEX with the Investor's clearing system market
gateway to trading and clearing services. Additionally, we agreed to exclusively
clear all OTC products through the Investor's clearing system for a period of
ten years (provided that the Investor continues to offer clearance for a
particular product through its clearing system) in consideration for additional
fees to be paid by the Investor to us.
The warrant issued by us (the "Warrant") permits the Investor to purchase a
number of shares of common stock sufficient to increase the Investor's ownership
of the Company's common stock to an amount not to exceed 40% of the Company's
then outstanding common stock on a fully diluted basis, based on the assumption
that the Investor has retained ownership of the Purchased Shares and any shares
of common stock previously issued to the Investor upon a partial exercise of the
Warrant. The Warrant is exercisable at any time and from time to time prior to
October 10, 2008 at an exercise price per share equal to $4.30 (the "Exercise
Price"). The Warrant does not contain a cashless exercise feature. The Exercise
Price is subject to certain customary adjustments to protect against dilution.
In connection with the consummation of the transactions contemplated by the
Stock and Warrant Purchase Agreement , the Company, the Investor and the
Founding Stockholders also entered into an Investor Rights Agreement, also dated
April 10, 2007 (the "Investor Rights Agreement"), pursuant to which, for so long
as the Investor owns at least 5,379,443 shares of common stock:
(a) the Investor is entitled to designate one person (reasonably acceptable to
the Company) that we are required to nominate as a member of the our board of
directors (the "Investor Director");
(b) each of the Founding Stockholders are required to vote their shares in favor
of the election of the Investor's designee as one our directors;
(c) the Investor is required to vote its shares in favor of each individual
nominated for election as a member of our board of directors by our nominating
committee;
(d) subject to certain permitted threshold amounts, the consent of the Investor
Director (which may not be unreasonably withheld) is required before we may take
certain actions, including (1) issuances of shares of a class of stock ranking
senior to the common stock, (2) acquisitions of businesses or assets, (3) entry
into related party transactions, (4) the declaration or payment of dividends or
distributions on or with respect to, or the optionable redemption of, capital
stock or the issuance of debt and (5) entry into any business which is not
similar, ancillary or related to any of the businesses in which we are currently
engaged;
41
(e) each of the Founding Stockholders and the Investor have certain rights of
first refusal to purchase or subscribe for their pro rata percentage of shares
in certain subsequent sales by us of common stock and/or certain other
securities convertible into or exchangeable for common stock;
(f) each of the Founding Stockholders and the Investor have certain rights of
first refusal with respect to proposed sales of our common stock by the others;
and
(g) before they may accept any offer by an independent third party to acquire
fifty percent (50%) or more of the total voting power of our common stock, the
Founding Stockholders and we are required to provide notice of such offer to the
Investor and permit the Investor a period of 10 days to make its own offer.
The Investor Rights Agreement additionally requires the Investor to refrain from
purchasing any additional shares of our common stock, with certain limited
exceptions, until April 10, 2008.
The Company and the Investor also entered into a registration rights agreement,
dated April 10, 2007 (the "Registration Rights Agreement"), pursuant to which,
among other things, we have provided the Investor, subject to standard
exceptions, with (a) unlimited "piggyback" rights subject to standard
underwriter lock-up and cutback provisions and (b) the right to two demand
registrations for underwritten offerings or take downs off of a shelf
registration statement, provided that (i) a minimum of $5,000,000 of our common
stock is offered in such demand registration or take down and (ii) we will not
be obligated to effectuate more than one underwritten offering pursuant to a
demand registration by the Investor in any six-month period. In addition, if we
are eligible to register our securities on Form S-3 (or any successor form then
in effect), the Investor will be entitled to unlimited registrations on Form S-3
(or any successor form then in effect), including shelf registrations, provided
that (a) a minimum of $5,000,000 of common stock is offered in the S-3
registration and (b) we will not be obligated to effect more than two S-3
registrations in any twelve month period. An S-3 registration will not count as
a demand registration, unless such registration is for an underwritten offering
or an underwritten take down off of an existing, effective shelf registration
statement.
As a condition to the Investor's obligation to consummate the transactions
contemplated by the Stock and Warrant Purchase Agreement, Mr. Nordlicht executed
an agreement, dated April 10, 2007 (the "Waiver"), waiving any obligation on the
part of the Company to make any prepayment of principal, or to begin paying
interest upon amounts due to Mr. Nordlicht, under the Loan Agreement between him
and the Company, dated March 2004, as a result of any exercise by the Investor
of the Warrant. Also as a condition to the Investor's obligation to consummate
the transactions contemplated by the Stock and Warrant Purchase Agreement, Mr.
Cassidy and the Company entered into an Amended and Restated Employment
Agreement and Mr. O'Connor entered into a Non-Competition Agreement, dated April
10, 2007, with the Company, pursuant to which Mr. O'Connor agreed not to
disclose or use the Company's confidential information and, for a period of nine
months following the termination of Mr. O'Connor's employment, not to compete
with the Company or solicit certain customers of the Company.
Pursuant to our final agreements with the Investor in April 2007, we physically
issued to the Investor warrants which will permit the Investor to purchase a
number of shares of common stock sufficient to increase its ownership to an
amount not to exceed 40% of our then outstanding common stock on a fully diluted
basis, based on the assumption that the Investor has retained ownership of the
Purchased Shares and any shares of common stock previously issued to the
Investor upon a partial exercise of the Warrant. The Warrant will be exercisable
from time to time for a period of 18 months from the closing date of the final
agreement at an exercise price per share equal to $4.30 (the "Exercise Price").
The Exercise Price will be subject to certain customary adjustments to protect
against dilution.
42
The number of warrants issued to NYMEX may increase or decrease from time to
time until October 2008, depending on whether we issue additional shares,
options, and warrants, repurchase treasury shares, or certain outstanding
options and warrants expire or become unexercisable. Because the number of
shares will vary from time to time, the fair value of the warrants issued
pursuant to our agreement and the related amortization may also vary from time
to time, until October 2008.
Following the occurrence of the events which are subject of the matters
discussed in Item 1 of Part II of this Report "Legal Proceedings," we have not
agreed with the Investor on the joint marketing and technology initiatives
discussed, above. Additionally, the Investor indicated in a Schedule 13D it
filed with the SEC on July 6, 2007, with respect to its holdings of equity
securities of the Company, that it was now re-considering its potential joint
marketing and technology initiatives with the Company. As a result, the Investor
and the Company have not developed the contemplated joint marketing and
technology initiatives.
The Company is considering the effect of the failure of the Investor to provide
the consideration for the Warrant upon the Company's obligations under the
Warrant.
The sale of the Purchased Shares by the Founding Stockholders in an agreement in
which the Company would benefit from the Consideration constitutes a
shared-based payment transaction. As such, the Company established that the fair
value of the Purchased Shares is more reliably measurable than the Consideration
from the Investor.
The fair value of the Consideration attributable to the Purchased Shares
represents the difference between the market value of the Purchased Shares at
the date of the Stock and Warrant Purchase Agreement, as quoted on the
Over-the-Counter Bulletin Board, and the disposition proceeds of the Purchased
Shares. The fair value of the Consideration at April 10, 2007 amounted to
$49,490,876 and was initially recorded as capital contribution from the Founding
Stockholders.
The fair value of the Consideration attributable to the Warrant amounted to
$99,594,000.
However, at June 30, 2007, based upon the statements made by the Investor, the
Company is unable to assert that it will receive any of the benefits initially
contemplated by the Stock and Warrant Purchase Agreement. Accordingly, the
Company has recorded a charge to its statement of operations amounting to
approximately $145.8 million, at June 30, 2007.
Pursuant to an agreement providing for the reimbursement of certain
administrative expenses for services provided to a coffee bean roaster, Sleepy
Hollow Coffee Roasters, Inc. ("Sleepy Hollow"), a company owned by Edward J.
O'Connor and by Kevin P. Cassidy, we charged an administrative fee of $8,000 and
$17,000 to Sleepy Hollow during 2007 and 2006, respectively. We provided such
services to Sleepy Hollow to ensure that Edward O'Connor and Kevin Cassidy can
focus as much time and efforts as possible on our operations. This agreement was
terminated by both parties effective June 30, 2007.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The firm Sherb & Co., LLP, independent registered accounting firm, has audited
our financial statements for the years ended December 31, 2007 and 2006. The
Board of Directors has appointed Sherb & Co. to serve as our registered
accounting firm for the 2006 year-end audit and to review our quarterly
financial reports for filing with the Securities and Exchange Commission during
fiscal year 2007. The following table shows the fees paid or accrued by us for
the audit and other services provided by Sherb & Co. for fiscal year 2007 and
2006.
43
2007 2006
============ ==============
Audit Fees(1) $ 78,000 $ 67,000
Audit-Related Fees $ -- $ --
Tax Fees $ -- $ --
All Other Fees (2) $ 2,580 $ 2,880
------------ --------------
Total $ 80,580 $ 69,880
============ ==============
__________________
(1) Audit fees represent fees for professional services provided in connection
with the audit of our annual financial statements and review of our quarterly
financial statements and audit services provided in connection with other
statutory or regulatory filings.
(2) All Other Fees represent edgarization services related to the certain
statutory and regulatory filings. Pre-Approval of Non-Audit Services
The Company does not currently have an audit committee in place and thus,
management must obtain the specific prior approval of the Board of Directors for
each engagement of the independent auditor to perform any non-audit services
that exceed any pre-approved amounts determined by the Board of Directors.
ITEM 15. EXHIBITS.
Exhibit
No. Description
================================================================================
3.1 Certificate of Incorporation of Optionable, Inc., dated February 4, 2000
(incorporated by reference to Exhibit 3(i)(a)to the Registrant's
Registration Statement on Form SB-2, filed December 22, 2004, file no.
333-121543 (the "SB-2").
3.2 Certificate of Amendment to the Certificate of Incorporation of Optionable,
Inc., dated March 30, 2000 (incorporated by reference to Exhibit 3(i)(b) to
the SB-2)
3.3 Certificate of Amendment to the Certificate of Incorporation of Optionable,
Inc., dated May 31, 2000 (incorporated by reference to Exhibit 3(i)(c) to
the SB-2).
3.4 Certificate of Amendment to the Certificate of Incorporation of Optionable,
Inc., dated July 21, 2000 (incorporated by reference to Exhibit 3(i)(d) to
the SB-2).
3.5 Corrected Certificate of Amendment to the Certificate of Incorporation of
Optionable, Inc., dated January 31, 2003 (incorporated by reference to
Exhibit 3(i)(e) to the SB-2).
3.6 Certificate of Amendment to the Certificate of Incorporatin of Optionable,
Inc., dated June 9, 2004 (incorporated by reference to Exhibit 3(i)(f) to
the SB-2).
3.7 Amended and Restated By-laws of Optionable, Inc. (incorporated by reference
to Exhibit 3(ii) to the SB-2)
44
10.1 Lease Agreement between 24 South Third Avenue Corp. and 60 3rd Ave. Corp.,
as Lessor, and Optionable, Inc., as Lessee, dated October 3, 2001
(incorporated by reference to Exhibit 10(i) to the SB-2)
10.2 Master Services Agreement with Capital Energy Services LLC dated April 1,
2004 including the Consulting Agreement as a part thereof and Addendum,
dated October 7, 2004 (incorporated by reference to Exhibit 10(ii)(a) to
the SB-2)
10.3 Addendum to Master Services Agreement (incorporated by reference to Exhibit
10(ii)(b) to the SB-2)
10.4 Amendment to Master Services Agreement (incorporated reference to the
Registrant's Current Report on Form 8-K, dated as of April 10, 2006)
10.5 Termination Agreement (of Master Service Agreement; incorporated by
reference to the Registrant's Current Report of Form 8-K, dated as of
January 31, 2007)
10.6 Options Order Flow Agreement, dated July 1, 2004, between the Company and
Intercontinental Exchange,Inc. (incorporated by reference to Exhibit
10(iii)(a) to the SB-2)
10.7 Superseding Option Order Flow Agreement, dated as of March 2, 2005
(incorporated by reference to Exhibit 10(iii)(b) to the SB-2)
10.8 Employment Agreement, as amended, between the Company and Edward J.
O'Connor (incorporated by reference to Exhibit 10(iv) (a) to the SB-2)
10.9 Optionable, Inc. 2004 Stock Option Plan (incorporated by reference to
Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, file
number 333-129853, as filed on November 21, 2005 (the "S-8")
10.10 Form of Incentive Stock Option Agreement(incorporated by reference to
Exhibit 4.2 to the S-8)
10.11 Nonstatutory Stock Option Agreement(incorporated by reference to Exhibit
4.3 to the S-8)
10.12 Prepaid Commission Agreement, dated February 3, 2003, between the Company
and Mark Nordlicht (incorporated by reference to Exhibit 10(vi) to the
SB-2).
10.13 Revolving Credit Facility Agreement, dated June 5, 2003, between the
Company and Platinum Value Arbitrage Fund LP(incorporated by reference to
Exhibit 10(vii)(a) to the SB-2)
10.14 $500,000 Revolving Promissory Note from the Company to Platinum Value
Arbitrage Fund LP dated June 5, 2003 (incorporated by reference to Exhibit
10(vii)(b) to the SB-2)
10.15 Prepaid Commission Agreement, dated June 9, 2003, between the Company and
Platinum Partners Value Arbitrage Fund LLP(incorporated by reference to
Exhibit 10(viii) to the SB-2)
10.16 Loan Agreement, dated February 13, 2004, between the Company and Mark
Nordlicht (incorporated by reference to Exhibit 10(ix)(a) to the SB-2)
10.17 $250,000 Promissory Note, dated February 13, 2004, from the Company to
Mark Nordlicht (incorporated by reference to Exhibit 10(ix)(b) to the
SB-2)
10.18 $250,000 Promissory Note Extension Agreement, dated September 9, 2004
(incorporated by reference to Exhibit 10(ix)(c) to the SB-2)
10.19 Loan Agreement, dated March 8, 2004, between the Company and Mark
Nordlicht (incorporated by reference to Exhibit 10(x)(a) to the SB-2)
45
10.20 $50,000 Promissory Note, dated March 8, 2004, from the Company to Mark
Nordlicht (incorporated by reference to Exhibit 10(x)(b) to the SB-2)
10.21 $50,000 Promissory Note Extension Agreement, dated September 9, 2004
(incorporated by reference to Exhibit 10(x)(c) to the SB-2)
10.22 Loan Agreement, dated March 22, 2004, between the Company and Mark
Nordlicht (incorporated by reference to Exhibit 10(xi)(a) to the SB-2)
10.23 $5,621,753.18 Promissory Note, dated March 22, 2004, from the Company to
Mark Nordlicht (incorporated by reference to Exhibit 10(xi)(b) to the
SB-2)
10.24 Addendum to Loan Agreement, dated March 22, 2004 (incorporated by
reference to Exhibit 10(xi)(c) to the SB-2)
10.25 Addendum to Promissory Note, dated March 22, 2004 (incorporated by
reference to Exhibit 10(xi)(d) to the SB-2)
10.26 Revolving Credit Facility Agreement, dated April 15, 2004, between the
Company and Mark Nordlicht (incorporated by reference to Exhibit 10(xii)
(a) to the SB-2)
10.27 $50,000 Promissory Note, dated April 15, 2004, from the Company to Mark
Nordlicht (incorporated by reference to Exhibit 10(xii)(b) to the SB-2)
10.28 Warrant Agreement for the Purchase of Common Stock (incorporated by
reference to the Registrant's Quarterly Report on Form 10-QSB for the
quarterly period ended March 31, 2006)
10.29 Service and Repurchase Agreement (incorporated by reference to the
Registrant's Current Report on Form 8-K, dated as of January 31, 2007
10.30 Code of Business Conduct and Ethics (Incorporated by reference to the
Registrant's Form 10-KSB for the fiscal year ended December 31, 2007)
10.31 Acquisition Agreement, dated March 23, 2007, between the Company,
Peter Holmquist, Douglas Towne, and A Joseph McHugh (incorporated by
reference to the Registrant's Current Report on Form 8-K, dated as of
March 23, 2007.
10.32 Release, Rescission and Termination Agreement, dated May 18, 2007, by and
among Optionable, Inc., Peter Holmquist, Douglas Towne, Joseph McHugh and
Nicole Troiani (incorporated by reference to the Registrant's Current
Report on Form 8-K, dated as of May 18, 2007.
10.33 Separation and Release Agreement, dated July 25, 2007, by and among
Optionable, Inc., Opex International, Inc., Kevin DeAndrea, Noah
Rothblatt, Kevin Brennan and Nicole Troiani. (incorporated by reference to
the Registrant's Current Report on Form 8-K, dated as of July 25, 2007).
10.34 Warrant, dated April 10, 2007, issued pursuant to that certain Stock and
Warrant Purchase Agreement, dated April 10, 2007, by and among Optionable,
Inc., NYMEX Holdings, Inc., Mark Nordlicht, Kevin Cassidy through Pierpont
Capital, Inc. and Edward O'Connor through Ridgecrest Capital, Inc.
(incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the quarterly period ended June 30, 2007)
46
10.35 Stock and Warrant Purchase Agreement, dated April 10, 2007, by and among
Optionable, Inc., NYMEX Holdings, Inc., Mark Nordlicht, Kevin Cassidy
through Pierpont Capital, Inc. and Edward O'Connor through Ridgecrest
Capital, Inc.(portions of this exhibit are subject to a confidential
treatment request) (incorporated by reference to the Registrant's
Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
2007)
10.36 Investor Rights Agreement, dated April 10, 2007, by and among Optionable,
Inc., NYMEX Holdings, Inc., I Mark Nordlicht, Kevin Cassidy and Edward
O'Connor. (incorporated by reference to the Registrant's Quarterly Report
on Form 10-QSB for the quarterly period ended June 30, 2007)
10.37 Waiver, dated April 10, 2007, by and between Optionable, Inc. and Mark
Nordlicht, to that certain Loan Agreement, dated March 22, 2004, by and
between Optionable, Inc. and Mark Nordlicht. (incorporated by reference to
the Registrant's Quarterly Report on Form 10-QSB for the quarterly period
ended June 30, 2007)
10.38 Amended and Restated Employment Agreement, dated April 10, 2007, by and
between Optionable, Inc. and Kevin Cassidy. (incorporated by reference to
the Registrant's Quarterly Report on Form 10-QSB for the quarterly period
ended June 30, 2007)
10.39 Registration Rights Agreement, dated April 10, 2007, by and between
Optionable, Inc. and NYMEX Holdings, Inc. (incorporated by reference to
the Registrant's Quarterly Report on Form 10-QSB for the quarterly period
ended June 30, 2007)
10.40 Separation and Release Letter, dated November 6, 2007, by and between
Optionable, Inc. and Albert Helmig (incorporated by reference to the
Registrant's Current Report on Form 8-K, dated as of November 6, 2007).
10.41 Letter Agreement, dated as of November 26, 2007, by and between
Optionable, Inc. and Thomas Burchill. (incorporated by reference to the
Registrant's Current Report on Form 8-K, dated as of November 26, 2007).
10.42 Letter Agreement, dated as of November 26, 2007, by and between
Optionable, Inc. and Dov Rauchwerger. (incorporated by reference to the
Registrant's Current Report on Form 8-K, dated as of November 26, 2007).
10.43 Stock Option Agreement, dated as of November 26, 2007, by and between
Optionable, Inc. and Thomas Burchill. (incorporated by reference to the
Registrant's Current Report on Form 8-K, dated as of November 26, 2007).
10.44 Stock Option Agreement, dated as of November 26, 2007, by and between
Optionable, Inc. and Dov Rauchwerger. (incorporated by reference to the
Registrant's Current Report on Form 8-K, dated as of November 26, 2007).
10.45
21* Subsidiaries of the Company.
31.1* Certification by Principal Executive Officer, required by Rule 13a-14(a)
or Rule 15d-14(a) of the Exchange Act
31.2* Certification by Chief Financial Officer, required by Rule 13a-14(a) or
Rule 15d-14(a) of the Exchange Act
32.1* Certification by PrincipalExecutive Officer, required by Rule 13a-14(b) or
Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title
18 of the United States Code
32.2* Certification by Chief Financial Officer, required by Rule 13a-14(b) or
Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title
18 of the United States Code * Filed herewith
47
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on March 28, 2008.
Optionable, Inc.
By: /s/ Edward O'Connor
----------------------------------------
Edward O'Connor
President
and Director (Principal Executive
Officer)
By: /s/ Marc Andre-Boisseau
----------------------------------------
Marc Andre-Boisseau
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated:
Signature Title Date
/s/ Edward O'Connor President and Director March 28, 2008
- ------------------------
Edward O'Connor
/s/ Marc-Andre Boisseau Chief Financial Officer March 28, 2008
- ------------------------
Marc-Andre Boisseau
/s/ Thomas Burchill Director March 28, 2008
- ------------------------
Thomas Burchill
/s/ Dov Rauchwerger Director March 28, 2008
- ------------------------
Dov Rauchwerger
48
OPTIONABLE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm.....................F-1
Balance Sheet...............................................................F-2
Statements of Operations....................................................F-3
Statement of Stockholders' Equity (Deficit).................................F-4
Statements of Cash Flows....................................................F-5
Notes to Financial Statements.......................................F-6 to F-41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Optionable, Inc.
Valhalla, New York
We have audited the accompanying balance sheet of Optionable, Inc, and
Subsidiary as of December 31, 2007 and 2006 and the related statements of
operations, stockholders' equity and cash flows for the years ended December 31,
2007 and 2006. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company has determined that it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Optionable, Inc, and
Subsidiary as of December 31, 2007 and 2006 and the results of their operations
and their cash flows for the years ended December 31, 2007 and 2006, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
significant losses as more fully described in Note 1. These issues raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Sherb & Co., LLP
---------------------------------
Certified Public Accountants
New York, New York
March 28, 2008
-F-1-
OPTIONABLE, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------------
2007 2006
--------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ 9,919,727 $ 7,913,393
Accounts receivable, net of allowance for doubtful accounts
of $35,368 and $29,693 at December 31, 2007 and 2006,
respectively - 2,100,805
Accounts receivable from related parties - 182,338
Incentives receivable from stockholder, net of allowance for
doubtful account of $640,947 and $0 at December 31, 2007
and 2006, respectively - 1,307,859
Due from related party - 488,273
Prepaid income taxes 2,281,432 -
Deferred tax assets 281,356 -
Prepaid expenses 387,636 64,162
--------------- ---------------
Total current assets 12,870,151 12,056,830
Property and equipment, net of accumulated depreciation of
$569,712 and $457,204 at December 31, 2007 and 2006,
respectively 186,231 57,501
Other receivable - 150,000
Other assets 19,900 19,900
--------------- ---------------
Total assets $ 13,076,282 $ 12,284,231
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 80,123 $ 51,004
Accrued expenses 308,068 141,989
Accrued compensation - 1,891,885
Other liabilities 4,207 -
Income tax payable - 1,454,246
--------------- ---------------
Total current liabilities 392,398 3,539,124
Other liabilities, net of short-term portion 59,367 -
Due to stockholder, net of unamortized discount of $2,956,314
and $3,256,311 at December 31, 2007 and 2006, respectively 2,088,196 1,788,199
Due to executive officer, net of unamortized discount of
$400,976 and $441,686 at December 31, 2007 and 2006,
respectively 107,721 67,011
--------------- ---------------
Total liabilities 2,647,682 5,394,334
Stockholders' Equity:
Preferred Stock; $.0001 par value, 5,000,000 shares
authorized, none issued and outstanding at December
31, 2007 and 2006, respectively - -
Common stock; $.0001 par value, 100,000,000 shares authorized,
52,428,203 issued and 52,423,403 outstanding at December
31, 2007 and 51,674,514 issued and 51,669,714 outstanding
at December 31, 2006 5,242 5,167
Additional paid-in capital 162,743,356 8,469,567
Treasury stock at cost, 4,800 shares (2,506) (2,506)
Accumulated deficit (152,317,492) (1,582,331)
--------------- ---------------
Total stockholders' equity 10,428,600 6,889,897
--------------- ---------------
Total liabilities and stockholders' equity $ 13,076,282 $ 12,284,231
=============== ===============
See Notes to Financial Statements.
-F-2-
OPTIONABLE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended
December 31,
-------------------------------------
2007 2006
----------------- -----------------
Revenues:
Brokerage fees $ 8,786,850 $ 8,987,727
Brokerage fees-related parties 1,148,885 3,994,131
Incentives-stockholder 3,285,058 3,087,653
----------------- -----------------
Net revenues 13,220,793 16,069,511
Cost of revenues 7,798,438 5,312,269
Cost of revenues-related parties 30,013 909,291
----------------- -----------------
7,828,451 6,221,560
----------------- -----------------
Gross profit 5,392,342 9,847,951
----------------- -----------------
Operating expenses:
Selling, general and administrative 8,624,175 1,030,979
Impairment-consideration receivable from stockholder 145,771,878 -
Impairment-intangible asset 1,085,610 -
Research and development 1,094,188 473,645
----------------- -----------------
Total operating expenses 156,575,851 1,504,624
----------------- -----------------
Operating (loss) income (151,183,509) 8,343,327
----------------- -----------------
Other income (expense):
Interest income 388,757 102,040
Other expense (15,250) -
Interest expense to related parties (340,707) (780,137)
----------------- -----------------
32,800 (678,097)
----------------- -----------------
(Loss) income before income tax (151,150,709) 7,665,230
Income tax benefit-deferred 281,356 -
Income tax benefit ( expense)- current 134,192 (1,459,052)
----------------- -----------------
Income tax benefit (expense) 415,548 (1,459,052)
----------------- -----------------
Net (loss) income $ (150,735,161) $ 6,206,178
================= =================
Basic (loss) earnings per common share $ (2.88) $ 0.12
================= =================
Diluted (loss) earnings per common share $ (2.88) $ 0.12
================= =================
Basic weighted average common
shares outstanding 52,320,030 51,478,354
================= =================
Diluted weighted average common shares outstanding 52,320,030 52,559,445
================= =================
See Notes to Financial Statements.
-F-3-
OPTIONABLE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From January 1, 2006 to December 31, 2007
Treasury
Common Stock Additional Stock, Accumulated
Shares $ Paid-in Capital at Cost Deficit Total
------------ --------- --------------- --------- -------------- --------------
Opening balance, January 1, 2006 51,406,431 $ 5,141 $ 7,946,471 $ - $ (7,788,509) $ 163,103
Fair value of warrants issued to related party - - 240,000 - - 240,000
Fair value of options - - 6,506 - - 6,506
Fair value of shares issued for compensation
to chief executive officer 268,083 26 276,590 276,616
Repurchase of shares (4,800) - - (2,506) (2,506)
Net income - - - - 6,206,178 6,206,178
------------ --------- --------------- --------- -------------- --------------
Balance at December 31, 2006 51,669,714 5,167 8,469,567 (2,506) (1,582,331) 6,889,897
Fair value of warrants issued to related party - - 120,000 - - 120,000
Fair value of share-based payments issued to
shareholder - - 149,084,876 - - 149,084,876
Fair value of warrants issued to acquire
intangible asset - - 756,000 - - 756,000
Fair value of options - - 3,911,401 - - 3,911,401
Exercise of warrants 550,000 55 184,945 - - 185,000
Exercise of options 173,000 17 34,583 - - 34,600
Fair value of shares issued for compensation to
chief executive officer 30,689 3 181,984 - - 181,987
Net loss - - - (150,735,161) (150,735,161)
------------ --------- --------------- --------- -------------- --------------
Ending balance, December 31, 2007 52,423,403 $ 5,242 $ 162,743,356 $ (2,506) $(152,317,492) $ 10,428,600
============ ========= =============== ========= ============== ==============
See Notes to Financial Statements
-F-4-
OPTIONABLE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended
December 31,
----------------------------------
2007 2006
--------------- ----------------
Cash flows from operating activities:
Net (loss) income $ (150,735,161) $ 6,206,178
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation 112,508 31,508
Amortization of debt discount 340,707 780,137
Amortization of intangible asset - -
Amortization of consideration receivable from stockholder 3,383,387 -
Provision for doubtful accounts 646,622 (37,727)
Fair value of warrants and options 4,025,716 246,506
Fair value of shares issued to chief executive officer 187,672 276,616
Loss on sale of trading right 15,250 -
Impairment-consideration receivable from stockholder 145,771,879 -
Impairment- intangible asset 1,085,610 -
Changes in operating assets and liabilities:
Accounts receivable 2,095,131 (1,751,941)
Accounts receivable-related parties 182,338 (141,143)
Due from related party 488,273 (184,701)
Incentives receivable from stockholder 666,912 (1,153,076)
Prepaid expenses (323,474) (15,073)
Other receivable 150,000 (19,900)
Accounts payable 29,119 82,507
Accrued expenses 166,079 55,500
Other liabilities 63,574 -
Income tax payable (1,454,246) 1,454,246
Deferred tax assets (281,356) -
Prepaid income taxes (2,281,433) -
Accrued compensation (1,891,885) 1,481,330
--------------- ----------------
Net cash provided by operating activities 2,443,222 7,310,967
--------------- ----------------
Cash flows used in investing activities:
Acquisition of intangible asset (400,000) -
Acquisition of trading rights (1,180,250) -
Proceeds from disposition of trading right 1,165,000 -
Purchases of property and equipment (241,238) (47,824)
--------------- ----------------
Net cash used in investing activities (656,488) (47,824)
--------------- ----------------
Cash flows from financing activities:
Principal repayments of due to former chief executive officer - (558,697)
Principal repayments of due to executive officer - (200,000)
Principal repayments of due to former chairman of the board - (400,000)
Repurchase of shares of common stock - (2,506)
Proceeds from issuance of shares of subsidiary 5,100 -
Repurchase of shares of subsidiary (5,100) -
Proceeds from exercise of options 34,600 -
Proceeds from exercise of warrants 185,000 -
--------------- ----------------
Net cash provided by (used in) financing activities 219,600 (1,161,203)
--------------- ----------------
Net increase in cash 2,006,334 6,101,940
Cash, beginning of year 7,913,393 1,811,453
--------------- ----------------
Cash, end of year $ 9,919,727 $ 7,913,393
=============== ================
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 3,750,000 $ 4,806
=============== ================
Cash paid for interest $ - $ -
=============== ================
Noncash investing and financing activities:
Fair value of warrants issued in connection with the
acquisition of intangible asset $ 756,000 $ -
=============== ================
See Notes to Financial Statements.
-F5-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 1-Organization, Description of Business and Going Concern
Optionable, Inc. (the "Company") was formed in Delaware in February 2000 and
offers trading and brokerage services to brokerage firms, financial
institutions, energy traders, and hedge funds nationwide. The Company's
operations are located in the New York metropolitan area. The Company offers its
services through an automated electronic trading platform.
Recent Developments
Several recent developments, such as a statement made by the Company's most
significant customer, such customer's suspension of its business relationship
with the Company, the matters discussed in Note 10, together with the combined
succession of events since then have had a significant adverse impact on our
business, including current and, likely, future results of operations and
financial condition and have impacted the Company's ability to continue to
operate as a brokerage services provider through traditional voice-brokerage and
on the floor of a US exchange. Consequently, the Company is formulating a
revised strategy to:
1) emphasize the marketing of its automated electronic trading platform to
end-users through indirect channels, such as through other third-party
brokers and other exchanges;
2) develop and enhance its automated trading platform to end-users other
than those in the energy derivatives markets;
3) provide software development services to third-party brokers and other
exchanges.
The Company is also considering whether it would be more advantageous to sell
its intangible assets, including the technology it has developed.
The Company anticipates that revenue-generating agreements under its revised
strategy may take the form of licensing, royalty-based agreements and/or
software development and maintenance agreements.
The Company has not generated revenues since the third quarter of 2007. The
Company believes that revenues from its brokerage services will be minimal under
its existing structure. While the Company is not discontinuing its brokerage
services, it will most likely need to 1) acquire the operations of a brokerage
firm, or several brokerage firms, and hire their personnel, to expand its
-F6-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 1-Organization, Description of Business and Going Concern-Continued
current operations or 2)form a consortium of brokerage companies that would
jointly use the electronic platform.
Going Concern
The Company believes it has enough funds to meet its obligations, based on its
internal projections, for at least the next twelve months. However, the Company
cannot guarantee that it will do so. If there are unforeseen expenses or
financial obligations which occur during the next twelve months, the Company may
not be able to meet such obligations. Additionally, if the Company acquires a
brokerage firm or a technology company which could be instrumental in the
Company's long-term growth, this could hamper the Company's ability to continue
as going concern, both from a short-term or a long-term perspective, and the
Company would have to resort to financing, through either debt or equity
placements, for the funding of either such acquisitions or unforeseen expenses
or financial obligations.
Principles of consolidation
The accompanying consolidated financial statements include the results of
operations of Opex International, Inc. and Hydra Commodity Services, Inc. for
the year ended December 31, 2007. All material inter-company
accounts and transactions between the Company and its subsidiaries have been
eliminated in consolidation.
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. During the year ended December 31, 2007, the Company
has reached bank balances exceeding the FDIC insurance limit. To reduce its risk
associated with the failure of such financial institutions, the Company
-F7-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 2- Summary of Significant Accounting Policies-Continued
periodically evaluates the credit quality of the financial institutions in which
it holds deposits.
At December 31, 2006, the Company's accounts receivable were due from energy
trading firms, financial institutions, and hedge funds, located primarily in the
United States. Collateral was generally not required. One of the Company's
customers accounted for 37% of its accounts receivable net of allowance for
doubtful accounts, at December 31, 2006. No other customers accounted for more
than 10% of its accounts receivable at December 31, 2006.
Customer Concentration
One of the Company's customers accounted for approximately 24% and 24% of its
revenues during 2007 and 2006, respectively. During May 2007, this customer
announced that it was suspending its relationship with the Company and that
customer has not used the Company's services in connection with any additional
transactions since that time.
Product Concentration
All of the Company's revenues were derived from fees earned from energy
derivatives transactions and related incentives provided by a United States
exchange.
Allowance for Doubtful Accounts
The Company has established an allowance for doubtful accounts for its accounts
and incentives receivable based upon factors pertaining to the credit risk of
specific customers, historical trends, and other information. Delinquent
accounts are written-off when it is determined that the amounts are
uncollectible.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts
receivable from related parties, due from related party, incentive receivable
from shareholder, prepaid income taxes, other receivable and other current
assets and accounts payable and accrued expenses, accrued compensation, and
income tax payable approximate their fair value due to their short-term
maturities. The carrying amounts of due to former Chairman of the Board and due
to an executive officer approximate their fair value based on the Company's
incremental borrowing rate.
-F8-
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 2- Summary of Significant Accounting Policies-Continued
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives of three to five years.
Maintenance and repairs are charged to expense as incurred. Significant renewals
and betterments are capitalized.
Property and equipment consist of the following as:
December 31,
2007 2006
---------- -----------
Computer equipment and software $ 647,903 $ 445,159
Office furniture and equipment 108,040 69,546
---------- -----------
755,943 514,705
Accumulated depreciation (569,712) (457,204)
---------- -----------
$ 186,231 $ 57,501
========== ===========
Depreciation expense amounted to approximately $112,500 and $32,000 during 2007
and 2006, respectively.
Software Development Costs
Costs incurred in the research and development of software products are expensed
as incurred until technological feasibility has been established. After
technological feasibility is established, any additional costs are capitalized
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed". Costs of maintenance and customer support will be charged to expense
when related revenue is recognized or when those costs are incurred, whichever
occurs first. The Company believes that the current process for developing
software is essentially completed concurrently with the establishment of
technological feasibility; accordingly, no software development costs have been
capitalized at December 31, 2007 and 2006, respectively.
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for
Income Taxes". SFAS No. 109 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
-F9-
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 2- Summary of Significant Accounting Policies-Continued
consequences of differences between financial reporting bases and tax bases of
the Company's assets and liabilities result in a deferred tax asset, SFAS No.
109 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. 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 1,363,000
and 941,000 at December 31, 2007 and 2006, respectively. The outstanding
warrants amounted to 19,426,000 and 1,650,000 at December 31, 2007 and 2006,
respectively. The outstanding warrants at December 31, 2007 include 18,526,000
warrants issued to an investor but for which the Company has not received the
agreed consideration. The options and warrants outstanding at December 31, 2007
have been excluded from the computation of diluted earnings per share due to
their antidilutive effect.
-F10-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 2- Summary of Significant Accounting Policies-Continued
The following sets forth the computation of basic and diluted earnings per share
for the years ended December 31:
- ---------------------------- --------------------------------------------
Year ended
December 31,
- ---------------------------- -------------- -------------- --------------
2007 2006
- ---------------------------- -------------- -------------- --------------
Numerator:
- ---------------------------- -------------- -------------- --------------
Net (loss) income $(150,735,161) $ 6,206,178
- ---------------------------- -------------- -------------- --------------
Denominator:
- ---------------------------- -------------- -------------- --------------
Denominator for basic
earnings per share-weighted
average shares outstanding 52,320,030 51,478,354
- ---------------------------- -------------- -------------- --------------
Effect of dilutive employee
stock options - 643,337
- ---------------------------- -------------- -------------- --------------
Effect of dilutive warrants - 437,755
- ---------------------------- -------------- -------------- --------------
Denominator for diluted
earnings per share-weighted
average shares outstanding 52,320,030 52,559,445
- ---------------------------- -------------- -------------- --------------
Basic earnings (loss)
per share $(2.88) $0.12
- ---------------------------- -------------- ----------- -- --------------
Diluted earnings (loss)
per share $(2.88) $0.12
- ---------------------------- -------------- -------------- --------------
-F11-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 2- Summary of Significant Accounting Policies-Continued
Revenue Recognition
Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with the Securities and Exchange Commission's ("SEC") Staff
Accounting Bulletin ("SAB") No. 104 "Revenue Recognition".
The Company generally invoices its customers monthly, for all transactions which
have been executed during such month. Revenues are recognized on the day of
trade-trade date basis. The Company's revenues derive from a certain
predetermined fixed fee of the transactions it executes on behalf of its
customers. The fee is based on the volume of financial instruments traded. The
Company bases its fees on oral and written contracts and confirms the fees in
writing upon the execution of each transaction.
The Company also receives incentives from a United States exchange for the
volume of transactions conducted by the Company using their platform. The
incentives are based on a percentage of the total revenues received by the
exchange attributable to the Company's volume of transactions submitted to the
exchange. The Company estimates monthly such incentives based on the volumes of
daily transactions submitted to the exchange using the day of trade-trade date
basis, and the exchange's published revenues by type of transactions. The
Company, pursuant to SAB 104, recognizes the incentive revenues realized or
realizable when all of the following criteria are met:
1) persuasive evidence of an arrangement exists. The exchange has publicly
published the terms of its incentive program in 2003 which is offered to all
intermediaries in the select transactions;
2) delivery has occurred or services have been rendered. Under arrangements with
the exchange, the incentives are earned on the day the Company submits
transactions to the exchange based on the revenues generated from such
transactions and are no longer subject to a minimum transaction volume. The
Company accounts for all transactions submitted to the exchange on a daily
basis. Accordingly, the Company is able to determine when the incentives are
-F12-
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 2- Summary of Significant Accounting Policies-Continued
earned based on the date it submits transactions to the exchange. The Company
has no other obligations to the exchange to earn the incentives;
3) "seller's" price to the buyer is fixed or determinable. Based on the
incentive program terms of the exchange, its published prices for the type of
transactions the Company submits to it, and the Company's transactions records,
the Company is able to estimate the revenues the exchange earns in connection
with the transactions the Company submits, and accordingly, the amount, if any,
of the incentives the Company earns in connection with such transactions; and
4) collectibility is reasonably assured. The exchange has paid the Company
timely on incentives earned from 2004 through May 2007. The Company intends to
enforce the payment of any incentives receivable under the incentive program.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts may
not be recovered. In such circumstances, the Company will estimate the future
cash flows expected to result from the use of the asset and its eventual
disposition. Future cash flows are the future cash inflows expected to be
generated by an asset less the future outflows expected to be necessary to
obtain those inflows. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the asset, the
Company will recognize an impairment loss to adjust to the fair value of the
asset.
Share-Based Payments
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123(R), "Share-Based Payment," which replaces SFAS No. 123 and supersedes
APB Opinion No. 25. Under SFAS No. 123(R), companies are required to measure the
compensation costs of share-based compensation arrangements based on the
grant-date fair value and recognize the costs in the financial statements over
-F13-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 2- Summary of Significant Accounting Policies-Continued
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 SFAS No. 123(R) and certain SEC rules
and regulations and provides the staff's views regarding the valuation of
share-based payment arrangements for public companies. SFAS No. 123(R) permits
public companies to adopt its requirements using one of two methods. On April
14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS
123(R). Companies may elect to apply this statement either prospectively, or on
a modified version of retrospective application under which financial statements
for prior periods are adjusted on a basis consistent with the pro forma
disclosures required for those periods under SFAS 123. Effective January 1,
2006, the Company has fully adopted the provisions of SFAS No. 123(R) and
related interpretations as provided by SAB 107 prospectively. As such,
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. The Company applies this statement prospectively.
The Company accounts for share-based payments awarded to the Investor pursuant
to FAS No. 123R and Emerging Issue Task Force Release No.96-16, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services". Share-based payments awarded to
NYMEX Holdings, Inc. (the "Investor"), including those awarded by another holder
of an economic interest in the Company as compensation for services to the
Company, are share-based payments transactions. The Company measures the fair
value of the equity instruments to the Investor using the stock price and other
measurement assumptions as of the earlier of either of the following: 1) the
date at which a commitment for performance, as defined, by the counterparty to
earn the equity instruments is reached, or 2) the date at which the
counterparty's performance is complete. The fair value of the equity instruments
amounts to the carrying value of the consideration receivable from the Investor
and is recognized over the agreed-upon terms of the consideration, which is at
most 10 years. The Company evaluates the carrying value of the consideration
receivable from the Investor at each measurement date.
-F14-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 2- Summary of Significant Accounting Policies-Continued
Segment reporting
The Company operates in one segment, brokerage services. The Company's chief
operating decision-maker evaluates the performance of the Company based upon
revenues and expenses by functional areas as disclosed in the Company's
statement of operations.
Recent Pronouncements
In September 2006, the FASB issued FASB Statement No. 157 "Fair Value
Measurements". This Statement defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles
("GAAP"), and expands disclosures about fair value measurements. This statement
applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is a relevant measurement attribute. Accordingly,
this statement does not require any new fair value measurements. However, for
some entities, the application of this statement will change current practices.
This statement is effective for financial statements for fiscal years beginning
after November 15, 2007. Earlier application is permitted provided that the
reporting entity has not yet issued financial statements for that fiscal year.
Management believes this statement will have no impact on the financial
statements of the Company once adopted.
In February 2007, the FASB issued FASB Statement No. 159 "The Fair Value Option
for Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115". This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair value
measurement, which is consistent with the FASB's long-term measurement
objectives for accounting for financial instruments. This statement applies to
all entities, including not-for-profit organizations. Most of the provisions of
this statement apply only to entities that elect the fair value option. However,
the amendment to FASB Statement No. 115, Accounting for Certain Investments in
Debt and Equity Securities, applies to all entities with available-for-sale and
-F15-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 2- Summary of Significant Accounting Policies-Continued
trading securities. Some requirements apply differently to entities that do not
report net income. Recognized financial assets and financial liabilities are
eligible items for the measurement option established by this Statement except:
o An investment in a subsidiary that the entity is required to
consolidate
o An interest in a variable interest entity that the entity is required
to consolidate
o Employers' and plans' obligations (or assets representing net
overfunded positions) for pension benefits, other postretirement
benefits (including health care and life insurance benefits),
postemployment benefits, employee stock option and stock purchase
plans, and other forms of deferred compensation arrangements, as
defined in FASB Statements No. 35, "Accounting and Reporting by
Defined Benefit Pension Plans", No. 87, "Employers' Accounting for
Pensions", No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions", No. 112, "Employers' Accounting for
Postemployment Benefits", No. 123 (R) (revised December 2004),
"Share-Based Payment", No. 43, "Accounting for Compensated Absences",
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", and No. 158, "Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans", and APB Opinion No. 12,
"Omnibus Opinion--1967"
o Financial assets and financial liabilities recognized under leases as
defined in FASB Statement No. 13, "Accounting for Leases" (This
exception does not apply to a guarantee of a third-party lease
obligation or a contingent obligation arising from a cancelled lease.)
o Deposit liabilities, withdrawable on demand, of banks, savings and
loan associations, credit unions, and other similar depository
institutions
o Financial instruments that are, in whole or in part, classified by the
issuer as a component of shareholder's equity (including "temporary
equity"). An example is a convertible debt security with a
noncontingent beneficial conversion feature.
-F16-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 2- Summary of Significant Accounting Policies-Continued
o Firm commitments that would otherwise not be recognized at inception
and that involve only financial instruments o Nonfinancial insurance
contracts and warranties that the insurer can settle by paying a third
party to provide those goods or services
o Host financial instruments resulting from separation of an embedded
nonfinancial derivative instrument from a nonfinancial hybrid
instrument.
The fair value option established by this Statement permits all entities to
choose to measure eligible items at fair value at specified election dates. A
business entity shall report unrealized gains and losses on items for which the
fair value option has been elected in earnings (or another performance indicator
if the business entity does not report earnings) at each subsequent reporting
date. A not-for-profit organization shall report unrealized gains and losses in
its statement of activities or similar statement.
The fair value option:
o May be applied instrument by instrument, with a few exceptions, such
as investments otherwise accounted for by the equity method
o Is irrevocable (unless a new election date occurs)
o Is applied only to entire instruments and not to portions of
instruments.
FASB Statement No.115 is effective as of the beginning of an entity's first
fiscal year that begins after November 15, 2007. Early adoption is permitted as
of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of FASB Statement No.
157, "Fair Value Measurements". No entity is permitted to apply this Statement
retrospectively to fiscal years preceding the effective date unless the entity
chooses early adoption.
-F17-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 2- Summary of Significant Accounting Policies-Continued
The FASB issued FASB Statement No. 141 (revised 2007), Business Combinations,
and No. 160, Noncontrolling Interests in Consolidated Financial Statements.
Statement 141(R requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business
combination. FASB No.141 R is effective for fiscal years beginning after
December 15, 2008. The Company does not believe that FAS No. 141 R will have any
impact on its financial statements.
The FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements Statement No.160 requires all entities to report
noncontrolling (minority) interests in subsidiaries in the same way--as equity
in the consolidated financial statements. Moreover, Statement 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and noncontrolling interests by requiring they be treated as equity
transactions. FASB No.160 is effective for fiscal years beginning after December
15, 2008. The Company does not believe that FAS No. 160 will have any impact on
its financial statements.
-F18-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 3-Due from Related Party
In April 2004, under the Master Services Agreement, as amended on April 12,
2005, with a related party, Capital Energy Services, Inc., the Company agreed to
pay certain fixed and variable fees and support services to such related party
entity, partly owned by its former Chief Executive Officer and by an Executive
Officer in exchange for a share of revenues of the floor brokerage services of
the related party. The Company has agreed to pay a fixed fee in the amount of
$50,000 per year. This agreement was terminated on January 31, 2007.
The Company's share of revenues of the floor brokerage services amounted to
approximately $901,000 and $3.6 million during the years ended December 31, 2007
and 2006, respectively. The Company's share of expenses of the floor brokerage
services amounted to approximately $15,000 and $741,000 during the years ended
December 31, 2007 and 2006, respectively. The Company has received approximately
$1.5 million and $2.6 million from the related party in connection with such
floor brokerage services during the years ended December 31, 2007 and 2006,
respectively. Additionally, in April 2007, the Company reimbursed the related
party approximately $165,000 for commissions to a broker that such related party
paid on the Company's behalf.
The Company recognized its share of revenues of the floor brokerage services
based on the commissions earned for such services which are recognized on the
day of the trade-trade date basis.
The father of the Company's former Chairman of the Board leases to the Company a
seat on the exchange through which Capital Energy maintains its floor
operations. The Company assumed the cost of the lease in April 2006 and renewed
it in December 2006 through June 2007. The Company terminated this agreement
effective April 1, 2007. The lease provided for monthly payments of $5,000
through June 30, 2007. The amount paid pursuant to the lease amounted to $15,000
and $188,000 during 2007 and 2006, respectively.
Note 4-Trading rights
During March 2007, the Company acquired two trading rights for an aggregate
amount of approximately $1,180,250, allowing it to operate on the floor of a
United States exchange. The trading rights do not have a finite life. During
June and August 2007, the Company sold its trading rights for $1,165,000,
generating a loss of approximately $15,000 which is included in other expenses.
-F19-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 5-Agreement with NYMEX Holding, Inc.
On April 10, 2007, the Company and its former Chairman of the Board, its former
Vice Chairman and Chief Executive Officer, and its President, (the "Founding
Stockholders") and NYMEX Holdings, Inc. (the "Investor") entered into a
definitive stock and warrant purchase agreement (the "Stock and Warrant Purchase
Agreement") and consummated the transactions contemplated thereby.
Pursuant to the terms of the Stock and Warrant Purchase Agreement, the Investor
purchased 10,758,886 shares of the Company's common stock ("Common Stock") from
the Founding Stockholders (the "Purchased Shares") representing 19% of the then
outstanding shares of common stock on a fully diluted basis (without giving
effect to the Warrant, as defined and discussed below). Additionally, pursuant
to the Stock and Warrant Purchase Agreement, the Company physically issued to
the Investor a Warrant, as defined and described below, in consideration of the
Investor's agreement (the "Consideration"):
1. to develop a marketing plan, which plan was to detail proposed
expenditures by the Investor and joint activities;
2. subject to regulatory requirements, to provide space for up to
twenty of the Company's brokers on the Investor's trading floor;
3. to host the Company's OPEX electronic trade matching and
brokerage system ("OPEX") in the Investor's data center and
provide the Company with computer and networking hardware,
software, bandwidth and ancillary infrastructure and services
reasonably necessary to interconnect OPEX with the Investor's
ClearPort market gateway to trading and clearing services; and
4. Additionally, the Company agreed to exclusively clear all
over-thecounter ("OTC") products through the Investor's NYMEX
ClearPort clearing system for a period of ten years (provided
that the Investor continues to offer clearance for a particular
product through the NYMEX ClearPort clearing system) in
consideration for additional fees to be paid by the Investor to
the Company.
The terms of the warrant issued by the Company (the "Warrant"), as contemplated
in the Stock and Warrant Purchase Agreement, permit the Investor to purchase a
number of shares of Common Stock sufficient to increase the Investor's ownership
of the Company's Common Stock to an amount not to exceed 40% of the Company's
-F20-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 5-Agreement with NYMEX Holding, Inc.
then outstanding Common Stock on a fully diluted basis, based on the assumption
that the Investor has retained ownership of the Purchased Shares and any shares
of Common Stock previously issued to the Investor upon a partial exercise of the
Warrant. The Warrant could be exercisable at any time and from time to time
prior to October 10, 2008 at an exercise price per share equal to $4.30 (the
"Exercise Price"). The Warrant does not contain a cashless exercise feature. The
Exercise Price is subject to certain customary adjustments to protect against
dilution.
Following the occurrence of the events which are the subject of the matters
discussed in Note 10 "Litigation," the Company and the Investor have not agreed
upon the aforementioned joint marketing and technology initiatives.
Additionally, the Investor indicated in a Schedule 13D it filed with the SEC on
July 6, 2007, with respect to its holdings of equity securities of the Company,
that it was now re-considering its potential joint marketing and technology
initiatives with the Company. As a result, the Investor and the Company have not
developed the contemplated joint marketing and technology initiatives.
The Company is considering the effect of the failure of the Investor to provide
the Consideration for the Warrant upon the Company's obligations under the
Warrant.
-F21-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 5-Agreement with NYMEX Holding, Inc.-Continued
The sale of the Purchased Shares from the Founding Stockholders in an agreement
in which the Company would benefit from the Consideration constitutes a
share-based payment transaction. As such, the Company established that the fair
value of the Purchased Shares is more reliably measurable than the Consideration
from the Investor.
The fair value of the Consideration attributable to the Purchased Shares
represents the difference between the market value of the Purchased Shares at
the date of the Stock and Warrant Purchase Agreement, as quoted on the
Over-the-Counter Bulletin Board, and the disposition proceeds of the Purchased
Shares. The fair value of the Consideration at April 10, 2007 amounted to
$49,490,876 and was initially recorded as capital contribution from the Founding
Stockholders.
The fair value of the Consideration attributable to the Warrant amounted to
$99,594,000. The fair value is based on the Black Scholes Model using the
following assumptions: exercise price: $4.30; market value: $7.29; term: 1.5
years; risk-free interest rate: 4.89%; expected volatility: 128%; expected
dividend rate: 0%.
The Company recognized an amortization expense of approximately $3.3 million in
connection with the Consideration during the year ended December 31, 2007.
However, at June 30, 2007, based upon the statements made by the Investor, the
Company was unable to assert that it will receive any of the benefits initially
contemplated by the Stock and Warrant Purchase Agreement. Accordingly, the
Company has recorded a charge to its statement of operations amounting to
approximately $145.8 million, during the year ended December 31, 2007.
The Company has also provided for an allowance for doubtful accounts for the
incentives receivable from the Investor of approximately $640,000 at December
31, 2007.
-F22-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 6- Intangible Asset
During March 2007, the Company acquired the customer list of HQ Trading, an
energy derivatives brokerage firm, and assumed its continued operations. The
Company acquired such assets to expand its customer base and provide a critical
mass entry in the crude oil options market. The terms of the agreement provided,
among other things, the following:
o $400,000 payable to the owners of HQ Trading upon execution of
final agreement;
o $400,000 payable to the owners of HQ Trading in September 2008;
o $400,000 payable to the owners of HQ Trading in March 2010;
o 900,000 warrants with an exercise price of $5 per share and
expiring in March 2012, of which 300,000 are exercisable
immediately and 600,000 become exercisable in March 2008 if the
continued operations of HQ Trading generate revenues exceeding
$1.2 million for the 12-month period following the final
agreement.
-F23-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 6- Intangible Asset-Continued
The aggregate value assigned to the consideration amounted to $1,156,000 and is
as follows:
o The cash consideration amounts to $400,000.
o The fair value of the 300,000 warrants exercisable at the date of
the agreement amounts to $756,000, based on the Black Scholes
Model, using the following assumptions: exercise price of $5,
market value of $5, risk-free interest rate of 4.54%, expected
volatility of 52%, expected dividend rate: 0%, term: 5 years
The expected volatility was based on the average historical volatility of
comparable publicly-traded companies considering the Company's period of
observable historical data is shorter than the terms of the warrants.
The fair value of the consideration was assigned to customer relationships and
was amortized over a period of three years. The Company recognized approximately
$70,000 as amortization expense during the year ended December 31, 2007 and is
included as selling, general and administrative expenses in the accompanying
consolidated statement of income.
During May 2007, following the occurrence of the events which are the subject of
the matters discussed in Note 10, "Litigation", the former owners of HQ Trading
agreed to unwind the acquisition. As part of the unwinding, the former owners of
HQ Trading released the Company from its obligations related to the two payments
of $400,000 payable in September 2008 and March 2010 and agreed to the
cancellation of the 900,000 warrants. The former owners of HQ Trading retained
the $400,000 which was paid upon execution of the final agreement. Both parties
retained the right to use the HQ Trading customer list.
Accordingly, the Company will not be recognizing the fair value of the remaining
600,000 warrants and the two payments of aggregating $800,000.
Following the separation agreement with the former owners of HQ Trading
effective May 2007, the carrying value of the client list acquired in March 2007
has been impaired. The Company is currently unable to assert that it will derive
any benefit from this client list in the foreseeable future. Accordingly, it has
recorded a charge to its statement of operations amounting to the carrying value
during 2007, which amounted to approximately $1.1 million.
-F24-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 7-Due to Related Parties
The terms and amounts of due to related parties at December 31, 2007 and 2006
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:
As of December 31,
2007 2006
------------ -------------
$ 5,044,510 $ 5,044,510
Discount, using initial implied rate of 12%: (2,956,314) (3,256,311)
------------ -------------
$ 2,088,196 $ 1,789,199
============ =============
Due to Executive Officer, 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 Executive
Officer 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:
As of December 31,
2007 2006
------------ -------------
$ 508,697 $ 508,697
Discount, using initial implied rate of 12%: (400,976) (441,686)
------------ -------------
$ 107,721 $ 67,011
============ =============
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 its Executive Officer 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.
-F25-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 7-Due to Related Parties-Continued
As a condition to the Investor's obligation to consummate the transactions
contemplated by the Stock and Warrant Purchase Agreement, the Company's former
Chairman of the Board executed an agreement, dated April 10, 2007 (the
"Waiver"), waiving any obligation on the part of the Company to make any
prepayment of principal, or to begin paying interest upon amounts due to the
Company's former Chairman of the Board, under the Loan Agreement between him and
the Company, dated March 22, 2004, as a result of any exercise by the Investor
of the Warrant.
The Company satisfied its due to its former Chief Executive Officer during
fiscal 2006. The due to former Chief Executive Officer had the same terms as the
due to Executive Officer.
The amortization of the discount on the due to related parties amounted to
approximately $340,000 and $780,000 during 2007 and 2006, respectively.
During 2006, the Company made principal repayments amounting to approximately
$1.2 million towards its due to related parties.
Note 8- Other Related Party Transactions
The Company provided administrative services to a related party, an entity owned
by the Company's former Chief Executive Officer and an Executive Officer. The
Company charged approximately $8,000 and $17,000 during 2007 and 2006,
respectively. The related party satisfied its obligations owed to the Company
prior to September 30, 2007. This agreement was terminated by both parties
effective June 30, 2007.
The Company has recognized revenues of approximately $250,000 and $273,000
during 2007 and 2006, respectively, from three
related parties, entities in which one of its stockholders and former Chairman
of the Board is also the managing director. Such related parties satisfied their
obligations to the Company at December 31, 2007.
-F26-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 9- Stockholders' Equity
During the 2007 and 2006, the Company issued 30,689 and 268,083 shares of common
stock, respectively, to its former Chief Executive Officer. The fair value of
the shares issued during 2007 and 2006 amounted to approximately $182,000 and
$276,000, respectively, based on the quoted price of the Company's common stock
at the date of issuance. The shares were issued pursuant to the employment
agreement between the Company and its former Chief Executive Officer.
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. There are 1,363,000 options
outstanding at December 31, 2007. The outstanding options are exercisable at a
weighted average price per share of $0.79 per share. The Company granted
2,325,000 options during 2007. The options outstanding vest over periods of up
to three years.
During 2007 and 2006, the Company recorded share-based payment expenses
amounting to approximately $3.9 million and $7,000, respectively, in connection
with all options outstanding at the respective measurement dates. The
amortization of share-based payment were recorded in cost of revenues.
-F27-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 9- Stockholders' Equity-continued
The share-based payment is based on the fair value of the outstanding options
amortized over the requisite period of service for optionholders, which is
generally the vesting period of the options.
The fair value of the options is based on the Black Scholes Model using the
following assumptions :
2007 2006
------------- -------
Exercise price : $0.0918-$7.17 $0.51
Market price at date of grant : $0.0918-$7.17 $0.51
Volatility : 40-52% 57%
Expected dividend rate : 0% 0%
Expected terms: 3-3.3 years 3 years
Risk-free interest rate : 3.07%-4.54% 4.81%
The expected volatility was based on the average historical volatility of
comparable publicly-traded companies considering the Company's period of
observable historical data is shorter than the terms of the options.
-F28-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 9- Stockholders' Equity-continued
A summary of the activity during 2007 and 2006 of the Company's stock option
plan is presented below:
Weighted Aggregate
Average Intrinsic
Options Exercise Price Value
---------- -------------- ----------
Outstanding at January 1, 2006 791,000 $0.21
Granted 150,000 0.51
Exercised - -
Expired or cancelled - -
---------- --------------
Outstanding at December 31, 2006 941,000 0.26
Granted 2,325,000 0.36
Exercised 173,000 0.20
Expired or cancelled 1,730,000 -
---------- --------------
Outstanding at December 31, 2007 1,363,000 $0.36 $ -
========== ============== ==========
Exercisable and vested at December 31, 2007 683,000 $0.69 $ -
========== ============== ==========
-F29-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 9- Stockholders' Equity-continued
The weighted-average remaining contractual term of the options are as follows:
Options outstanding at December 31, 2007:
- --------------------------------------------------------------------------------
Weighted-average remaining Weighted-average exercise
contractual term Number of options price
- --------------------------------------------------------------------------------
Earlier of termination for
cause or death 283,000 $1.31
- --------------------------------------------------------------------------------
5.96 years 1,080,000 0.17
- --------------------------------------------------------------------------------
Options exercisable and vested at December 31, 2007:
- --------------------------------------------------------------------------------
Weighted-average remaining Weighted-average exercise
contractual term Number of options price
- --------------------------------------------------------------------------------
Earlier of termination for 283,000 $1.31
cause or death
- --------------------------------------------------------------------------------
7.1 years 400,000 0.25
- --------------------------------------------------------------------------------
The following activity occurred under our plan:
2007 2006
---------- --------
Weighted-average grant-date fair value of options granted $ 2.44 $0.51
Aggregate intrinsic value of options exercised $ 966,850 N/A
Fair value of options recognized as expense: $3,911,401 $6,506
The total compensation cost related to nonvested options not yet recognized
amounted to approximately $26,000 at December 31, 2007 and the Company expects
that it will be recognized over the following weighted-average period of 21
months.
-F30-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
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 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.
-F31-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 9- Stockholders' Equity-continued
Performance-based Warrants
The Company has issued warrants to a company wholly-owned by its former Chief
Executive Officer. The warrants are exercisable in tranches of up to 400,000
warrants beginning December 31, 2005 and every six-month thereafter, upon
reaching certain brokerage milestones by two of the Company's customers.
The fair value of the warrants issued in 2006 is based on their fair value at
the time of grant. The fair value of the warrants is based on the Black Scholes
Model using the following assumptions:
Exercise price : $0.95
Market price at date of grant: $0.95
Volatility: 57%
Expected dividend rate: 0%
Risk-free interest rate: 5.13%
The expected volatility was based on the average historical volatility of
comparable publicly-traded companies considering the Company's period of
observable historical data is shorter than the terms of the warrants.
-F32-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 9- Stockholders' Equity-continued
A summary of the activity during 2007 and 2006 of the warrants issued to a
company wholly-owned Company's former Chief Executive Officer is presented
below:
Weighted
Average
Weighted Remaining
Average Contractual
Warrants Exercise Price Terms (years)
---------- -------------- -------------
Outstanding at January 1, 2006 450,000 $ 0.20
Granted 1,200,000 0.95
Exercised - -
Expired or cancelled (200,000) 0.95
---------- --------------
Outstanding at December 31, 2006 1,450,000 0.72
Granted - -
Exercised 550,000 0.34
Expired or cancelled (200,000) 0.95
---------- --------------
Outstanding, vested,
and exercisable at December 31, 2007 800,000 $0.95 1.5
---------- -------------- -------------
There is no intrinsic value for such outstanding, vested, and exercisable
warrants at December 31, 2007
The following activity occurred with respect to the performance-based warrants:
2007 2006
---------- --------
Weighted-average grant-date fair value of warrants granted N/A $0.40
Aggregate intrinsic value of warrants exercised $3,172,500 N/A
Fair value of warrants recognized as expense: $ 120,000 $240,000
-F33-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 9- Stockholders' Equity-continued
Other warrants
The Company issued 100,000 warrants to a former employee during 2004. The
exercise price of the warrants is $0.20 per share. The warrants expire upon the
death of the former employee.
During March 2007, the Company issued warrants to the owners of HQ Trading, in
connection with the Company's purchase of the HQ Trading customer relationships.
The terms of the warrants are as follows:
900,000 warrants with an exercise price of $5 per share and expiring in March
2012, of which 300,000 are exercisable immediately and 600,000 warrants become
exercisable in March 2008 if the continued operations of HQ Trading generate
revenues exceeding $1.2 million for the 12-month period following the final
agreement.
All of these warrants were cancelled in May 2007 in connection with the
unwinding of the HQ Trading transaction.
During 2007, the Company issued warrants to a US exchange ( See Note 5-Agreement
with NYMEX Holding, Inc ) The terms of the warrant issued by the Company (the
"Warrant"), as contemplated in the Stock and Warrant Purchase Agreement, permit
the Investor to purchase a number of shares of Common Stock sufficient to
increase the Investor's ownership of the Company's Common Stock to an amount not
to exceed 40% of the Company's then outstanding Common Stock on a fully diluted
basis, based on the assumption that the Investor has retained ownership of the
Purchased Shares and any shares of Common Stock previously issued to the
Investor upon a partial exercise of the Warrant. The Warrant could be
exercisable at any time and from time to time prior to October 10, 2008 at an
exercise price per share equal to $4.30 (the "Exercise Price"). The Warrant does
not contain a cashless exercise feature. The Exercise Price is subject to
certain customary adjustments to protect against dilution. The warrants are
exercisable into 18,526,000 shares of the Company's common stock at December 31,
2007.
-F34-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 9- Stockholders' Equity-continued
Investor Rights and Registration Agreements
In connection with the consummation of the transactions contemplated by the
Stock and Warrant Purchase Agreement, the Company, the Investor and the Founding
Stockholders also entered into an Investor Rights Agreement, also dated April
10, 2007 (the "Investor Rights Agreement"), pursuant to which, for so long as
the Investor owns at least 5,379,443 shares of Common Stock:
(a) the Investor is entitled to designate one person (reasonably acceptable to
the Company) that the Company is required to nominate as a member of the
Company's board of directors (the "Investor Director");
(b) each of the Founding Stockholders are required to vote their shares in favor
of the election of the Investor's designee as a director of the Company;
(c) the Investor is required to vote its shares in favor of each individual
nominated for election as a member of the Company's board of directors by the
nominating committee of the Company;
(d) subject to certain permitted threshold amounts, the consent of the Investor
Director (which may not be unreasonably withheld) is required before the Company
may take certain actions, including (1) issuances of shares of a class of stock
ranking senior to the Common Stock, (2) acquisitions of businesses or assets,
(3) entry into related party transactions, (4) the declaration or payment of
dividends or distributions on or with respect to, or the optional redemption of,
capital stock or the issuance of debt and (5) entry into any business which is
not similar, ancillary or related to any of the businesses in which the Company
is currently engaged;
(e) each of the Founding Stockholders and the Investor have certain rights of
first refusal to purchase or subscribe for their pro rata percentage of shares
in certain subsequent sales by the Company of Common Stock and/or certain other
securities convertible into or exchangeable for Common Stock;
(f) each of the Founding Stockholders and the Investor have certain rights of
first refusal with respect to proposed sales of Common Stock by the others; and
-F35-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 9- Stockholders' Equity-continued
(g) before they may accept any offer by an independent third party to acquire
fifty percent (50%) or more of the total voting power of the Common Stock or
voting stock of the Company, the Founding Stockholders and the Company are
required to provide notice of such offer to the Investor and permit the Investor
a period of 10 days to make its own offer.
The Investor Rights Agreement additionally requires the Investor to refrain from
purchasing any additional shares of the Company's Common Stock, with certain
limited exceptions, until April 10, 2008.
The Company and the Investor also entered into a registration rights agreement,
dated April 10, 2007 (the "Registration Rights Agreement"), pursuant to which,
among other things, the Company has provided the Investor, subject to standard
exceptions, with (a) unlimited "piggyback" rights subject to standard
underwriter lock-up and cutback provisions and (b) the right to two demand
registrations for underwritten offerings or take downs off of a shelf
registration statement, provided that (i) a minimum of $5,000,000 of Common
Stock is offered in such demand registration or take down and (ii) the Company
will not be obligated to effectuate more than one underwritten offering pursuant
to a demand registration by the Investor in any six-month period. In addition,
if the Company is eligible to register its securities on Form S-3 (or any
successor form then in effect), the Investor will be entitled to unlimited
registrations on Form S-3 (or any successor form then in effect), including
shelf registrations, provided that (a) a minimum of $5,000,000 of Common Stock
is offered in the S-3 registration and (b) the Company will not be obligated to
effect more than two S-3 registrations in any twelve month period. An S-3
registration will not count as a demand registration, unless such registration
is for an underwritten offering or an underwritten take down off of an existing,
effective shelf registration statement.
On May 14, 2007, the Investor Director resigned and the Investor has stated that
it has no current plans to fill the vacancy created by the Investor Director's
resignation.
-F36-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 10- Litigation and Contingencies
On May 11, 2007, two lawsuits, captioned Alexander Fleiss v. Optionable Inc.,
Mark Nordlicht, Kevin Cassidy, Edward J. O'Connor, Albert Helmig and Marc-Andre
Boisseau, 07 CV 3753 (LAK) ("Fleiss") and Robert Rastocky v. Optionable, Inc.,
Kevin Cassidy and Edward O'Connor, 07 CV 3755 (CLB), were filed in the United
States District Court for the Southern District of New York. Subsequently, five
additional lawsuits were filed in the United States District Court for the
Southern District of New York as follows: one on May 16, 2007, Jagdish Patel v.
Optionable Inc., Kevin Cassidy, and Edward J. O'Connor, 07 CV 3845 (LAK)
("Patel"); two on May 17, 2007, Peters v. Optionable, Inc., Mark Nordlicht,
Kevin P. Cassidy, Edward J. O'Connor, Albert Helmig, and Marc-Andre Boisseau, 07
CV 3877 (LAK) ("Peters"); and Manowitz v. Optionable Inc., Kevin Cassidy, Edward
J. O'Conner, and Mark Nordlicht, 07 CV 3884 (UA) ("Manowitz"); one on May 24,
2007, Glaubach v. Optionable Inc., Kevin Cassidy, Mark Nordlicht, Edward J.
O'Connor, Albert Helmig, and Marc-Andre Boisseau; 07 CV 4085 (LAK) ("Glaubach");
and one on June 22, 2007, Bock v. Optionable Inc., Kevin Cassidy, Mark
Nordlicht, Edward J. O'Connor, Albert Helmig, and Marc-Andre Boisseau, 07 CV
5948 (LAK) ("Bock"). Each of the lawsuits names the Company as a defendant and
some of the lawsuits name as defendants all or certain of the directors and
officers of the Company during the time period referenced. The directors and
officers of the Company named as defendants include Mark Nordlicht, the former
Chairman of the Board of Directors of the Company; Kevin Cassidy, the former
Chief Executive Officer and Vice-Chairman of the Board of Directors of the
Company; Edward J. O'Connor, the President of the Company and member of the
Board of Directors; Albert Helmig, a member of the Board of Directors during the
relevant time period; and Marc-Andre Boisseau, the Chief Financial Officer of
the Company. By Order dated May 24, 2007, Rastocky was voluntarily dismissed.
By Orders dated June 20, 2007 and July 3, 2007, Fleiss, Patel, Peters,
Manowitz and Glaubach were consolidated under In re Optionable Securities
Litigation, 07 CV 3753 (LAK). . By Order November 20, 2007, Judge Kaplan granted
the motion of KLD Investment Management, LLC to serve as Lead Plaintiff and
approved its choice of counsel, Kahn Gauthier Swick, LLC.
On January 17, 2008, Lead Plaintiff filed a Consolidated Amended Class
Action Complaint ("Complaint.") The Complaint seeks unspecified damages arising
from alleged violations of the federal securities laws, including the Securities
Exchange Act of 1934, 15 U.S.C. ss. 78a et seq., (the "Exchange Act"), and Rule
10b-5 under the Exchange Act, 17 C.F.R. ss. 240.10b-5. The Complaint alleges,
among other things, that during the class period of January 22, 2007 to May 14,
2007, defendants failed to disclose certain information in public filings and
statements, made materially false and misleading statements and
misrepresentations in public filings and statements, sold artificially inflated
stock and engaged in improper deals, had an improper relationship with and
"schemed" with its customer Bank of Montreal ("BMO"), and understated the
Company's reliance on its relationship with BMO. The Complaint alleges that
while the Company's stock was trading at artificially inflated prices, certain
defendants sold shares of common stock of the Company.
On February 15, 19, and 20, the Company and individual defendants
Nordlicht, Cassidy, Helmig, O'Connor and Boisseau filed motions to dismiss the
Complaint. Plaintiffs have 45 days to respond to Defendants' motions.
The actual costs that will be incurred in connection with these actions cannot
be quantified at this time and will depend upon many unknown factors.
-F37-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 10- Litigation and Contingencies-Continued
On October 15, 2007, 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;
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.
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.
-F38-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 11-Income Taxes
The components of the (provision) benefit for income taxes are as follows:
2007 2006
------------- --------------
Current:
Federal $ 103,833 $ (1,141,779)
State 30,359 (318,273)
------------- --------------
Total current 134,192 (1,459,052)
------------- --------------
------------- --------------
Deferred:
------------- --------------
Federal 221,245 -
------------- --------------
State 60,111 -
------------- --------------
281,356
------------- --------------
Total benefit (provision) for
income taxes $ 415,548 $ (1,459,052)
============= ==============
A reconciliation of the Company's effective tax rate to the statutory
federal rate is as follows:
2007 2006
--------- --------
Federal statutory taxes 35.0% 35.0%
State income taxes, net of federal tax benefit 5.7 5.7
Permanent differences (40.9) (4.5)
Utilization of net operating losses - (26.2)
--------- --------
(0.2%) 19.0%
-F39-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 8-Income Taxes-Continued
The tax effects of principal temporary differences between the carrying amount
of assets and their tax bases are summarized below.
Management believes it is more likely than that it will be able to offset
certain deductions associated with these deferred tax assets to its prior year
taxable income:
The components of the deferred tax assets are as follows:
2007 2006
------------ ----------
Allowance for bad debt $ 259,502 $ -
Goodwill, net of amortization 154,660 -
------------ ----------
414,162 -
Valuation (132,806) -
------------ ----------
Total deferred tax assets- noncurrent $ 281,356 -
============ ==========
The Company offset its prior year net operating losses of $4.9 million against
its taxable income during 2006.
-F40-
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 9- Commitments
Effective February 1, 2007, the Company leases its executive offices under a
10-year leasing arrangement providing for a monthly base rent of $9,953,
increasing gradually to up to $11,684. The first 6 months of occupancy are free.
The minimum annual payments under such commitment for the next five years and
thereafter are as follows:
Year Minimum Annual Payments
- ---- -----------------------
2008 119,436
2009 124,199
2010 124,632
2011 129,395
2012 and thereafter 691,111
The Company's rental expense amounted to approximately $81,000 and $74,000
during 2007 and 2006, respectively.
-F41-