SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
for the quarter ended July 31, 2005
Commission file number 033-20966
--------------------------------
Finotec Group, Inc.
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(Exact name of registrant as specified in Its charter)
Nevada 76-0251547
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(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
350 Fifth Avenue, Suite 2712, New York, NY 10118
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(Address of principal executive offices)
Registrant's telephone number, including area code 866-243-0771
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock of $0.001 par value per share
Indicate by, check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 34,985,241 Common Series 0.001
par value
Documents incorporated by reference: None.
1
FINOTEC GROUP, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
July 31, 2005 and January 31, 2005.........................F-1
Consolidated Statements of Operations
Three months and six months ended
July 31, 2005 and 2004.....................................F-2
Consolidated Statements of Cash Flows
Six months ended July 31, 2005 and 2004 ...................F-3
Notes to Consolidated Financial Statements...............F-4-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................3
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................9
Item 2. Changes in Securities and Use of Proceeds.......................10
Item 3. Submission of Matters to a Vote of Security Holders.............10
Item 4. Exhibits and Reports on Form 8-K................................10
Signature.......................................................10
2
FINOTEC GROUP, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE THREE AND SIX
MONTHS ENDED JULY 31, 2005
- --------------------------------------------------------------------------------
FINOTEC GROUP, INC. AND SUBSIDIARIES
CONTENTS
- --------------------------------------------------------------------------------
Consolidated Financial Statements:
Balance Sheets - July 31, 2005 (Unaudited) and January 31, 2005 F-1
Statements of Operations - Three Months and Six Months Ended
July 31, 2005 and 2004 (Unaudited) F-2
Statements of Cash Flows - Six Months Ended July 31, 2005
and 2004 (Unaudited) F-3
Notes to Consolidated Financial Statements (Unaudited) F-4 - F-6
FINOTEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
July 31, 2005
(Unaudited) January 31, 2005
-------------------------------------------------------------------------------------------------------------------
A S S E T S
Current Assets
Cash and cash equivalents $ 2,026,062 $ 1,567,534
Marketable securities 840,743 804,354
Prepaid and other current assets 124,981 73,467
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Total Current Assets 2,991,786 2,445,355
Property and equipment, net 201,915 227,824
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Total Assets $3,193,701 $2,673,179
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short term bank credit - $ 7,991
Loan payable, related party $ 30,000 $ 30,000
Accounts payable and accrued expenses 534,144 371,977
Due to stockholder 104,000 97,500
Customers' deposits 2,057,769 1,958,547
Compensation reserve 21,047 22,558
Loan payable, employee 60,000 60,000
-------------------------------------------------------------------------------------------------------------------
Total Liabilities, All Current 2,806,960 2,548,573
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Stockholders' Equity
Common stock, $.001 par value, 100,000,000 shares
authorized, 34,985,241 shares issued and outstanding 34,985 34,985
Additional paid-in-capital 1,545,378 1,545,378
Accumulated deficit (1,183,066) (1,421,411)
Accumulated other comprehensive (loss) income (10,556) (34,346)
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Total Stockholders' Equity 386,741 124,606
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Total Liabilities and Stockholders' Equity $ 3,193,701 $ 2,673,179
===================================================================================================================
See accompanying notes to consolidated financial statements.
F-1
FINOTEC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
July 31, July 31,
2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------------------
Revenues
Net gains from foreign currency
future operations $1,021,685 $ 471,652 $1,452,546 $ 746,536
----------------------------------------------------------------------------------------------------------------------------------
Total Revenues 1,021,685 471,652 1,452,546 746,536
----------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Selling, general and administrative 728,495 360,970 1,184,315 653,334
Research and development 20,571 20,579 41,771 41,263
----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 749,066 381,549 1,226,086 694,597
----------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 272,619 90,103 226,460 51,939
Other Income (Expense)
Interest income (expense), net 4,417 1,002 11,885 1,671
Financing income - 46,799 - (11,109)
Other expense
----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 277,036 137,904 238,345 42,501
Income tax refund - 5,530 - 5,530
----------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) 277,036 143,434 238,345 $ 48,031
==================================================================================================================================
Weighted average number of
common shares outstanding 34,985,241 34,985,241 34,985,241 34,985,241
==================================================================================================================================
Basic and diluted loss per common share * * * *
==================================================================================================================================
* Less than $.01 per share
See accompanying notes to consolidated financial statements.
F-2
FINOTEC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JULY 31, 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) $ 238,345 $ 48,031
Adjustment to Reconcile Net Income (Loss) to
Net Cash Provided by (Used in) Operating Activities
Depreciation 42,711 23,693
Changes in Operating Assets and Liabilities
(Increase) decrease in prepaid and other current assets ( 51,514) 8,849
Increase (decrease) in accrued expenses 189,738 ( 26,643)
Decrease in income taxes payable - ( 2,932)
Increase in customers' deposits 99,221 815,608
Compensation reserve - 5,825
Increase (decrease) in other current liabilities ( 29,081) 29,188
(Increase) in marketable securities ( 36,389) ( 342,920)
Increase in due to stockholder 6,500 18,165
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 459,531 576,864
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Collection of note receivable - 60,402
Acquisition of property and equipment ( 16,802) ( 18,018)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Investing Activities ( 16,802) 42,384
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds (Repayment) from loan payable, related party - ( 15,000)
Short term bank Credit ( 7,991) 10,250
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities ( 7,991) ( 4,750)
Effect of Foreign Currency Translation 23,790 5,676
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Cash and Cash Equivalents 458,528 620,174
Cash and Cash Equivalents - Beginning 1,567,534 673,884
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents
- Ending $ 2,026,062 $ 1,294,058
===========================================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for income taxes - $2,932
===========================================================================================================================
See accompanying notes to consolidated financial statements.
F-3
FINOTEC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Interim Financial
Information The accompanying unaudited consolidated
financial statements of the Company (as
defined below) should be read in conjunction
with the consolidated financial statements
and notes thereto filed with the U.S.
Securities and Exchange Commission in the
Company's Annual Report on Form 10-KSB for
the fiscal year ended January 31, 2005. In
the opinion of management, the accompanying
consolidated financial statements reflect
all adjustments of a normal recurring nature
considered necessary to present fairly the
financial position of the Company and its
consolidated subsidiaries at July 31, 2005,
and the results of their operations and
their cash flows for the three and six
months ended July 31, 2005 and July 31,
2004. The results of interim periods are not
necessarily indicative of the results that
may be expected for the year ending January
31, 2006.
Principles of
Consolidation The consolidated financial statements
include the accounts of Finotec Inc. and its
wholly-owned subsidiaries, Finotec Trading,
Finotec Ltd., and Finotec Ltd.'s 99.7% owned
subsidiary, Forexcash (collectively referred
to as the "Company", unless otherwise
indicated). All material intercompany
transactions and balances have been
eliminated in consolidation.
Since the liabilities of Forexcash exceed
its assets, and the owner of the 0.3%
minority interest has no obligation to
supply additional capital, no minority
interest has been recorded in the
consolidated financial statements.
Going Concern The accompanying consolidated financial
statements have been prepared on a going
concern basis, which contemplates the
realization of assets and the satisfaction
of liabilities in the normal course of
business. As shown in the financial
statements, since inception, the Company
incurred continuing operating losses, has an
accumulated deficit of losses of $1,183,066,
which resulted mainly from research and
development and selling, general and
administrative expenses. In addition, at
July 31,2005 working capital was $184,826
compared to $10,721 at July 31,2004.
Management anticipates that the cash
requirements of the Company for the next
twelve months will be met by increased
revenues, which will result from an
increased number of customers using the
Company's foreign currency trading system.
F-4
FINOTEC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
(Continued)
Use of Estimates The preparation of financial
statements in conformity with accounting
principles generally accepted in the United
States of America requires management to
make estimates and assumptions that affect
certain reported amounts and disclosures.
Actual results could differ from those
estimates.
Earning Per Common
Share Basic earnings per share is based on the
weighted effect of all common shares issued
and outstanding, and is calculated by
dividing net income (loss) by the weighted
average shares outstanding during the
period. Diluted earnings per share is
calculated by dividing net income (loss) by
the weighted average number of common shares
used in the basic earnings per share
calculation plus the number of common shares
that would be issued assuming exercise or
conversion of all stock options. The
dilutive effect of stock options was not
assumed for the three and six month periods
ended July 31, 2005 and 2004, because the
effect of these securities is antidilutive.
Recent Accounting
Pronouncements In January, 2003, the Securities and
Exchange Commission ("SEC") issued a final
rule requiring enhanced disclosure of
material off-balance sheet transactions,
arrangements, and other relationships with
unconsolidated entities that may have a
material current or future effect on
financial condition, changes in financial
condition, results of operations, liquidity,
capital expenditures, capital resources, or
significant components of revenue or
expenses. The rule also requires a tabular
disclosure of future payments due under
contractual commitments. The disclosure
requirements will become effective for the
Company's fiscal 2004 annual report on Form
10-K. The Company does not expect this
pronouncement to have a material impact on
its consolidated results of operations or
financial position.
F-5
FINOTEC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
2. Property and Equipment Property and equipment consist of the following:
Estimated Useful July 31, 2005 January 31,
Lives (Years) (Unaudited) 2005
- -------------------------------------------------------------------------------------------------------------------
Computer equipment 3 $ 191,379 189,287
Purchased software 3 135,115 139,522
Office furniture and
equipment 7 39,008 32,058
Leasehold improvements 10 73,385 75,779
--------------------------------------------------------------------------------
Total Property and
Equipment at Cost 438,887 436,646
Less accumulated depreciation
and amortization 236,972 208,823
--------------------------------------------------------------------------------
Property and Equipment - Net $ 201,915 $ 227,823
================================================================================
3. Comprehensive
Loss The Company's comprehensive income (loss) is
comprised of net income (loss) and foreign
currency translation adjustments.
Comprehensive income (loss) for the three
and six month periods ended July 31, 2005
and 2004 was as follows:
Three Months Ended Six Months Ended
July 31, July 31,
2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------
Comprehensive loss
Net income (loss) 277,036 $143,434 $238,345 $48,031
Foreign currency
translation 1,240 ( 8,708) ( 10,556) ( 9,616)
---------------------------------------------------------------------------------------
Comprehensive
Income (loss) $278,276 $134,726 $227,789 $38,415
F-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes to Consolidated Financial Statements of
Finotec Group, Inc. and its subsidiaries contained herein. The results of
operations for an interim period are not necessarily indicative of results for
the year, or for any subsequent period.
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDEDENDED JULY 31, 2005 AND 2004
NET GAINS FROM FOREIGN CURRENCY FUTURE OPERATIONS
Net gains from foreign currency future operations are comprised primarily
of spread-based brokerage fees earned from our clients' brokerage transactions.
Total net gains from foreign currency future operations were $1,021,685 for the
three months ended July 31, 2005, as compared to a net gain from foreign
currency future operations of $471,652 for the three months ended July 31, 2004,
an increase of $550,033 mostly due to the increase in trading by brokerage
clients. For the six months ended July 31, 2005, revenues from foreign currency
future operations were $1,452,546 compared to $746,536 for the same period last
year. The increase of $706,010 is due to the increase in trading by brokerage
clients.
The Company had a net gain of $277,036 for the three months ended July 31,
2005, as compared to net gain of $143,434 for the three months ended July 31,
2004, an increase of $133,602. This increase related primarily to an increase in
trading by brokerage clients.
3
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel costs associated with product development and management
of the brokerage products and services Finotec offers to its clients. Research
and development expenses for the three months ended July 31, 2005 were $20,571,
as compared to $20,579 for the three months ended July 31, 2004.
Research and development expenses also remained nearly unchanged for the
six month period ended July 31, 2005. Research and development expenses for the
six month period ended July 31, 2005 was $41,771 and $41,263 for the six month
period last year.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $728,495 for the three months ended July 31, 2005, as compared to
$360,970 for the three months ended July 31, 2004. This increase of $367,525 was
due to the increased administrative costs and increased marketing of Forexcash,
the Company's online trading platform.
Selling, general and administrative expenses for the six month period ended
July 31, 2005 increased by $530,981 from the same period last year. This
increase was due primarily to the costs associated with administering and
marketing the operations of Forexcash, the Company's online trading platform.
Selling, general
and administrative expenses for the six month period ended July 31, 2005 was
$1,184,315 and $653,334 for the six month period last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company increased its cash balance by $458,528 from a cash balance at
January 31, 2005 of $1,567,534 to $2,026,062 at July 31, 2005.
Net cash provided by operating activities amounted to $459,531 for the six
months ended July 31, 2005, compared to net cash provided by operating
activities of $576,864 for the six months ended July 31, 2004, a decrease of
$117,333. The decrease primarily resulted from a significantly smaller increase
in customers' deposits compared to the same period last year.
Net cash used in investing activities for the six months ended July 31,
2005, was $16,802 as compared to net cash provided by investing activities of
$42,384 for the six months ended July 31, 2004, a decrease of $59,186. This
decrease primarily resulted from a decrease in the collection of a note
receivable.
4
Future capital requirements and the adequacy of available funds will depend
on numerous factors, including the successful commercialization of our products,
competing technological and market developments, and the development of
strategic alliances for the development and marketing of our products. The
Company has sufficient funds to satisfy their cash requirements until July 2006
assuming the monthly expenses of the Company at $76,000. Of our $76,000 monthly
expense, we foresee $17,000 covering the salaries, management and administration
of the Company with $59,000 covering the activity and operation of the Company.
The Company intends to try to obtain additional funds when necessary through
equity or debt financing, strategic alliances with corporate partners and
others, or through other sources. In the event Finotec's plans change or its
assumptions change or prove to be inaccurate or the funds available prove to be
insufficient to fund operations at the planned level (due to further
unanticipated expenses, delays, problems or otherwise), Finotec could be
required to obtain additional funds earlier than expected. Finotec does not have
any committed sources of additional financing, and there can be no assurance
that additional funding, if necessary, will be available on acceptable terms, if
at all. If adequate funds are not available, we may be required to further
delay, scale-back, or eliminate certain aspects of our operations or attempt to
obtain funds through arrangements with collaborative partners or others that may
require us to relinquish rights to certain of our technologies, product
candidates, products, or potential markets. If adequate funds are not available,
Finotec's business, financial condition, and results of operations will be
materially and adversely affected.
We have no off balance sheet assets or liabilities.
We anticipate that our available cash resources and cash flows from
operations will be sufficient to meet our presently anticipated working capital
and capital expenditure requirements through the first quarter of 2006.
ISSUES, UNCERTAINTIES AND RISK FACTORS
The Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations in this report should
be read and evaluated together with the issues, uncertainties and risk factors
relating to our business described below. While we have been and continue to be
confident in our business and business prospects, we believe it is very
important that anyone who reads this report consider the issues, uncertainties
and risk factors described below, which include business risks relevant both to
our industry and to us in particular. These issues, uncertainties and risk
factors are not intended to be exclusive. This report also contains statements
that are forward-looking within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. When used in
this report, the words "believes," "plans," "estimates," "expects," "intends,"
"designed," "anticipates," "may," "will," "should," "could," "become,"
5
"upcoming," "potential," "pending," and similar expressions, if and to the
extent used, are intended to identify the forward-looking statements. All
forward-looking statements are based on current expectations and beliefs
concerning future events that are subject to risks and uncertainties. Actual
results may differ materially from the results suggested in this report. Factors
that may cause or contribute to such differences, and our business risks and
uncertainties generally, include, but are not limited to, the items described
below, as well as in other sections of this report and in our other public
filings and our press releases.
THERE ARE SEVERAL FACTORS THAT MAY CAUSE FLUCTUATIONS IN OUR QUARTERLY OPERATING
RESULTS, WHICH WOULD LIKELY RESULT IN SIGNIFICANT VOLATILITY IN OUR STOCK PRICE
Causes of such significant fluctuations may include, but are not limited to:
o cash flow problems that may occur;
o the quality and success of, and potential continuous changes in, sales
or marketing strategies (which have undergone significant change
recently and are expected to continue to evolve) and the costs
allocated to marketing campaigns and the timing of those campaigns;
o the timing, completion, cost and effect of our development and launch
of planned enhancements to the Finotec trading platform;
o the size and frequency of any trading errors for which we ultimately
suffer the economic burden, in whole or in part;
o changes in demand for our products and services due to the rapid pace
in which new technology is offered to customers in our industry;
o costs or adverse financial consequences that may occur with respect to
regulatory compliance or other regulatory issues, particularly
relating to laws, rules or regulations that may be enacted with a
focus on the active trader market; and
o general economic and market factors that affect active trading,
including changes in the securities and financial markets.
6
CONDITIONS IN THE SECURITIES AND FINANCIAL MARKETS MAY AFFECT OUR RATES OF
CUSTOMER ACQUISITION, RETENTION AND TRADING ACTIVITY
Our products and services are, and will continue to be, for customers who
trade actively in the securities and financial markets. There has been for the
past 2 1/2 years, and continues to be, unfavorable conditions in the securities
and financial markets. To the extent that interest in active trading has
decreased or in the future decreases due to low trading volumes, lack of
volatility, or significant downward movement in the securities or financial
markets, such as has recently occurred, or future tax law changes, recessions,
depressions, wars, terrorism (including "cyberterrorism"), or otherwise, our
business, financial condition, results of operations and prospects could be
materially adversely affected. Also, unfavorable market conditions may result in
more losses for our clients, which could result in increases in quantity and
size of errors or omissions claims that may be made against us by frustrated
clients. We do not currently carry any errors or omissions insurance that might
cover, in part, some of those kinds of potential claims.
INSTABILITY IN THE MIDDLE EAST REGION MAY ADVERSELY AFFECT OUR BUSINESS.
Political, economic and military conditions in Israel directly affect the
Company's operations. Since the establishment of the State of Israel in 1948, a
number of armed conflicts have taken place between Israel and its Arab
neighbors, and the continued state of hostility, varying in degree and
intensity, has led to security and economic problems for Israel. Since October
2000, there has been a significant increase in violence, primarily in the West
Bank and Gaza Strip, and more recently Israel has experienced terrorist
incidents within its borders. As a result, negotiations between Israel and
representatives of the Palestinian Authority have been sporadic and have failed
to result in peace. The Company could be adversely affected by hostilities
involving Israel, the interruption or curtailment of trade between Israel and
its trading partners, or a significant downturn in the economic or financial
condition of Israel. In addition, the sale of products manufactured in Israel
may be adversely affected in certain countries by restrictive laws, policies or
practices directed toward Israel or companies having operations in Israel. The
continuation or exacerbation of violent conflicts involving Israel and other
nations may impede the Company's ability to sell its products in certain
countries. In addition, some of the Company's employees in Israel are subject to
being called upon to perform military service in Israel, and their absence may
have an adverse effect upon the Company's operations. Generally, unless exempt,
male adult citizens and permanent residents of Israel under the age of 54 are
obligated to perform up to 36 days of military reserve duty annually.
Additionally, all such residents are subject to being called to active duty at
any time under emergency circumstances. These conditions could disrupt the
Company's operations in Israel and its business, financial condition and results
of operations could be adversely affected.
7
The Company's costs of operations have at times been affected by changes in
the cost of its operations in Israel, resulting from changes in the value of the
Israeli shekel relative to the United States dollar, and from difficulties in
attracting and retaining qualified scientific, engineering and technical
personnel in Israel, where the availability of such personnel has at times been
severely limited. Changes in these cost factors have from time to time been
significant and difficult to predict, and could in the future have a material
adverse effect on the Company's results of operations.
OUR INDUSTRY IS INTENSELY COMPETITIVE, WHICH MAKES IT DIFFICULT TO ATTRACT AND
RETAIN CUSTOMERS
The markets for online brokerage services, client software and
Internet-based trading tools, and real-time market data services are intensely
competitive and rapidly evolving, and there has been substantial consolidation
of those three products and services occurring in the industry. We believe that
competition from large online brokerage firms and smaller brokerage firms
focused on active traders, as well as consolidation, will substantially increase
and intensify in the future. Competition may be further intensified by the size
of the active trader market, which is generally thought to be comprised of less
than 10% of all online brokerage accounts. We believe our ability to compete
will depend upon many factors both within and outside our control. These
include: price pressure; the timing and market acceptance of new products and
services and enhancements developed by us and our competitors; the development
and support of efficient, materially error-free Internet-based systems; product
and service functionality; data availability and cost; clearing costs; ease of
use; reliability; customer service and support; and sales and marketing
decisions and efforts.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR PRESERVE OUR RIGHTS IN INTELLECTUAL
PROPERTY
Our success is and will continue to be heavily dependent on proprietary
technology, including existing trading-tool, Internet, Web-site and
order-execution technology, and those types of technology currently in
development. We view our technology as proprietary, and rely, and will be
relying, on a combination of trade secret and trademark laws, nondisclosure
agreements and other contractual provisions and technical measures to protect
our proprietary rights. Policing unauthorized use of our products and services
8
is difficult, however, and we may be unable to prevent, or unsuccessful in
attempts to prevent, theft, copying or other unauthorized use or exploitation of
our product and service technologies. There can be no assurance that the steps
taken by us to protect (or defend) our proprietary rights will be adequate or
that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technologies or products and
services.
THE NATURE OF OUR BUSINESS RESULTS IN POTENTIAL LIABILITY TO CUSTOMERS
Many aspects of the securities brokerage business, including online trading
services, involve substantial risks of liability. In recent years there has been
an increasing incidence of litigation involving the securities brokerage
industry, including class action and other suits that generally seek substantial
damages, including in some cases punitive damages. In particular, our
proprietary order routing technology is designed to automatically locate, with
immediacy, the best available price in completing execution of a trade triggered
by programmed market entry and exit rules. There are risks that the electronic
communications and other systems upon which these products and services rely,
and will continue to rely, or our products and services themselves, as a result
of flaws or other imperfections in their designs or performance, may operate too
slowly, fail or cause confusion or uncertainty to the user. Major failures of
this kind may affect all customers who are online simultaneously. Any such
litigation could have a material adverse effect on our business, financial
condition, results of operations and prospects.
WE DO NOT HAVE A LONG OPERATING HISTORY AS AN ONLINE BROKERAGE FIRM.
We launched the Forexcash direct access online trading platform during the
2002 first quarter. Prior to that, our operations consisted mainly of developing
the software and technology. Accordingly, the online brokerage business, as
currently conducted, has a very short operating history. This lack of operating
history, and our lack of historical profitable results, should be taken into
account when evaluating our financial condition and results of operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the three months ended July 31, 2005, there were no legal
proceedings against the Company.
9
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(A) SALES OF UNREGISTERED SECURITIES
There were no sales of unregistered securities in the quarter ended July 31,
2005
ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders in the
quarter ended July 31, 2005.
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(A) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
31.1 Section 302 certification
32.1 Section 906 certification
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Finotec Group, Inc.
Registrant
Date: January 19, 2006 /s/ Didier Essemini
--------------------------
Didier Essemini
Chief Executive Officer
10