UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
for the quarter ended April 30, 2009
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.)
228 East 45 Street, Suite 1801, New York, NY 10017
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(Address of principal executive offices and zip code)
718-513-3620
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(Registrant's telephone number, including area code)
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 suchfiling requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes [_] No [_]
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. (Check one):
Large accelerated filer [_] Accelerated filer [_]
Non-accelerated filer [_] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Class Outstanding at April 30, 2009
- ---------------------------------------- -----------------------------
Common Stock, par value $0.001 per share 89,921,825
1
FINOTEC GROUP, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
April 30, 2009 (unaudited) and April 30, 2008.........................3
Statements of Operations
Three Months ended
April 30, 2009 and 2008 (unaudited)...................................4
Statements of Cash Flows - Three Months ended
April 30, 2009and 2008
(unaudited)...........................................................6
Notes to Consolidated Financial Statements (unaudited)................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........14
Item 4T Controls and Procedures..............................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................16
Item 1A. Risk Factors ........................................................17
Item 2. Unregistered Sale of Equity Securities ..............................19
Item 6. Exhibits.............................................................20
Signature................................................................21
2
FINOTEC GROUP INC AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
====================================================================================================================================
U.S Dollars
---------------------------------------
April 30 April 30 January 31
---------------------------------------
2009 2008 2009
---------------------------------------
ASSETS
Current Assets
Cash and cash equivalents 4,612,310 6,561,749 5,108,144
Prepaid and other current assets 500,346 326,317 472,662
- ------------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 5,112,656 6,888,067 5,580,806
Property and Equipment, Net 537,179 839,226 599,879
Hedging - Receivable - 5,429 441,090
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets 5,649,835 7,732,722 6,621,776
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
short term bank credit 54,896 213,476 216
Accounts payable and accrued expenses 700,374 1,124,826 995,820
Customers deposits 4,324,687 5,606,614 4,924,316
Forward transaction-Customers and Hedging - 275,038 27,649
Provision for severance 255,342 198,913 261,063
- ------------------------------------------------------------------------------------------------------------------------------------
Total current Liabilities 5,335,299 7,418,867 6,209,064
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $0.001 par value, 100,000,000 shares authorized,
86,721,825 shares issued and outstanding 95,298 70,892 92,098
Treasury stock - (156,513) -
Additional paid-in capital 6,254,859 1,545,378 5,858,059
Foreign currency translation adjustment (640,006) (43,431) (732,344)
Retained earnings 0 (5,395,615) (1,102,471) (4,805,102)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 314,536 313,855 412,711
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity 5,649,835 7,732,722 6,621,776
====================================================================================================================================
See accompanying notes to consolidated financial statements.
3
FINOTEC GROUP INC AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
================================================================================
US Dollars
------------------------------------
April 30 April 30
-------- --------
2009 2008
------------------------------------
Revenues
Net (losses) gain from foreign currency future operations 684,781 (412,776)
Consulting 2,045 976
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Total Revenues 686,826 (411,800)
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Operating Expenses
Selling, General and Administrative 110,768 328,165
Salaries 516,981 835,008
Research and Development 51,691 109,655
Technology and computer 155,009 197,668
Commissions Brokers 0 34,421
Bonuses & cash back-Witholding 0 89,257
Marketing 125,050 595,923
Professional fees 57,585 195,791
Financial datas 19,259 79,305
Depreciation 57,034 49,306
Exceptional 0 0
Other expense 51,451 169,269
- ------------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,144,827 2,683,769
- ------------------------------------------------------------------------------------------------------------------------------------
Operating P&L (458,001) (3,095,569)
Financing Expenses
Interest (expense) income 6,857 158,777
Finance Charges (139,368) (10,639)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing P&L (132,511) 148,138
Exceptional Expenses
Exceptional (expense) - Previous years
Exceptional P&L
Profit&Loss before income taxes (590,512) (2,947,431)
Income tax expense 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) (590,512) (2,947,431)
====================================================================================================================================
Weighted average number of shares outstanding
Basic and Diluted 89,921,825 65,516,224
Net Income per common share- Basic and Diluted -$0.01 -$0.04
====================================================================================================================================
See accompanying notes to consolidated financial statements.
4
FINOTEC GROUP INC AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
====================================================================================================================================
Common Stock
------------------- Accumulated Stock
Additional Other Subscrip-
Paid Deficit Comprehensive Treasury tion
Shares Amount in capital Accumulated income Stock Receivable Total
- ------------------------------------------------------------------------------------------------------------------------------------
Net Loss (246,443) (246,443)
Foreign currency translation (48,830) (48,830)
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Balance at Janaury 31, 2004 34,985,241 (1,465,466) (17,488) 97,409
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) 44,055 44,055
Foreign currency translation (16,858) (16,858)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Janaury 31, 2005 34,985,241 34,985 1,545,378 (1,421,411) (34,346) 0 124,606
====================================================================================================================================
Net Income (Loss) 888,462 888,462
Foreign currency translation 9,920 9,920
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at january 31, 2006 34,985,241 34,985 1,545,378 (532,949) (24,426) 0 1,022,988
====================================================================================================================================
Net Income (Loss) 2,478,870 2,478,870
Purchase of shares (2,687,500) 2,689 (169,813) (167,125)
Exercise of Options 33,018,483 33,018 33,018
Foreign currency translation 2,486 2,486
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at january 31, 2007 65,316,224 70,692 1,545,378 1,945,921 (21,940) (169,813) 0 3,370,238
====================================================================================================================================
Net Income (Loss) (100,961) (100,961)
Shares issued from Treasury stock 200,000 200 13,300 13,500
Purchase of shares 0
Foreign currency translation (137,976) (137,976)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 2008 65,516,224 70,892 1,545,378 1,844,960 (159,916) (156,513) 0 3,144,801
====================================================================================================================================
Net Income (Loss) (6,650,062) (6,650,062)
Shares issued 2,487,500 2,488 413,124 156,513 572,125
New shares issuing 18,718,101 18,718 3,899,557 3,918,275
Total issued 21,205,601
Foreign currency translation (572,428) (572,428)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 2009 86,721,825 92,098 5,858,059 (4,805,102) (732,344) 0 0 412,710
====================================================================================================================================
Net Income (Loss) (590,512) (590,512)
New shares issuing 3,200,000 3,200 396,800 400,000
Total issued 3,200,000
Foreign currency translation 92,338 92,338
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at April 30, 2009 89,921,825 95,298 6,254,859 (5,395,614) (640,006) 0 0 314,536
====================================================================================================================================
5
FINOTEC GROUP INC AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
================================================================================
US Dollars
---------------------------------
April 30 April 30
-------- --------
2009 2008
---- ----
Cash Flows from Operating Activities
Net Income ( Loss) (590,512) (2,947,431)
Adjustment to reconcile Net Loss to
Net cash Used in Operating Activities
Depreciation 57,034 (49,306)
Changes in Operating Assets and Liabilities
Decrease in prepaid and other current assets (27,684) (32,756)
Increase in accrued expenses (126,100) (7,364)
Decrease in other current liabilities (169,345) 187,039
Increase in accrued severance payable (5,725) 10,755
Increase in receivable forward Clients Trs 441,090 348,671
Increase (decrease) in payable forward Hedging Trs/option (27,649) (271,540)
Increase in marketable securities (0) 486,151
Increase in customers Deposits (599,629) (545,141)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) Operating Activities (1,048,521) (2,820,923)
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Cash Flows from Investing Activities
Purchase of fixed Assets (2,468) (60,389)
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Net cash provided by Investing Activities (2,468) (60,389)
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Cash Flows from Financing Activities
Short term bank credit 54,680 190,983
Stock issuance 400,000 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) Financing Activities 454,680 190,983
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of Foreign Currency Translation 100,472 116,485
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in Cash and Cash Equivalent (495,836) (2,573,843)
-------- ----------
Cash and Cash Equivalents- beginning of year 5,108,144 9,135,591
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents- Ending 4,612,307 6,561,748
====================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net
====================================================================================================================================
See accompanying notes to consolidated financial statements.
6
FINOTEC GROUP, INC.
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, 2009. 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 April 30, 2009, and
the results of their operations and their cash
flows for the three months ended April 30, 2009
and April 30, 2008. The results of interim periods
are not necessarily indicative of the results that
may be expected for the year ending January 31,
2010.
Description of
Business Finotec Group, Inc. ("Finotec, Inc.), a Nevada
corporation, is principally engaged, through its
wholly-owned subsidiaries, in offering foreign
currency market trading to professionals and
retail clients over its web-based trading system.
Shares in Finotec began trading on the Over the
Counter Bulletin Board listings. (OTCBB: FTGI).
Finotec Group's United Kingdom subsidiary, Finotec
Trading UK, Limited, has been authorized by the
UK's Financial Services Authority (FSA) to act as
a Market Maker, as defined by the FSA, in the
United Kingdom. As of November 9, 2007, Finotec
Trading UK, Limited, is approved by the FSA as a
Market Maker and Principal, and thus Finotec
Trading UK, Limited, may now offer UK clients
certain regulated investment instruments such as
Commodity Futures, Commodity options and options
on commodity futures, Contract for Differences,
Futures, Options, Rights to or interests in
investments, Rolling spot forex contracts, and
Spread Bets.
Risk Management
These Finotec Group activities give rise to risks
which are monitored and managed as follows:
Credit risk
Clients are required to deposit cleared funds as
margin before they can trade. If the client margin
falls below the minimum required to maintain a
position, they will be notified that they are on
margin call and can only reduce their positions or
provide additional funds. At any time the client
is on margin call, the company may, at its
discretion, liquidate some or all of that client's
positions in order to bring them back into line
with their margin requirements.
The company also has potential credit risk
exposure to market counterparties with which it
hedges and with banks. The company has a defined
risk appetite for exposure to each market
counterparty and bank to which it has credit
exposure.
7
1. Summary of Significant Accounting Policies (Continued)
Liquidity risk
The company has significant net cash balances as
at the balance sheet date and continually monitors
its capital adequacy.
Foreign currency risk
The company has financial instruments which are
denominated predominantly in US dollars. The gains
and losses arising from the company's exposure are
recognised in the profit and loss account.
Market price risk
Market risk arises from open contracts with
customers and counterparties. Exposure to market
risk is closely monitored in accordance with
limits and reduced through hedging.
Principles of
Consolidation The consolidated financial statements include the
accounts of Finotec Inc. and its wholly owned
subsidiaries, Finotec Trading, Inc. ("Finotec
Trading") and its owned subsidiary Finotec Trading
Cyprus Ltd., Finotec Ltd., Finotec USA Inc.,.,
Finotec Trading UK Ltd, and Finotec Ltd.'s 99.7%
owned subsidiary, Forexcash Global Trading Ltd.
("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.
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 months ended
April 30, 2009 and 2008, because the effect of
these securities is antidilutive.
8
1. Summary of Significant Accounting Policies (Continued)
Marketable Securities Marketable securities consist principally of
corporate stocks. Management has classified the
Company's marketable securities as available for
sale securities in the accompanying consolidated
financial statements. Available-for-sale
securities are carried at fair value, with
unrealized gains and losses reported as a separate
component of stockholders' equity. Realized gains
and losses on available-for-sale securities are
included in interest income. Gains and losses,
both realized and unrealized, are measured using
the specific identification method. Market value
is determined by the most recently traded 9 the
market value of the security equals its cost.
2. Property and Equipment Property and equipment consist of the following:
Estimated Useful April 30, 2009
January 31, 2009
Lives (Years) (Unaudited)
----------------------------------------------------------------------------------------
Computer equipment 3 $ 847,370 862,272
Purchased software 3 218,579 222,647
Office furniture and
Equipment 7 232,997 234,909
Leasehold improvements 10 115,086 117,666
----------------------------------------------------------------------------------------
Total Property and
Equipment at Cost 1,414,032 1,437,494
Less accumulated depreciation
And amortization 876,853 837,615
----------------------------------------------------------------------------------------
Property and Equipment - Net $ 537,179 $ 599,879
3. Legal Proceedings In May, 2004, the Tel-Aviv Stock Exchange Ltd.
("the Stock Exchange") submitted a claim against
the Company for a permanent and temporary
restraining order to prevent the Company from
using the Tel-Aviv 25 Index and/or any other index
owned by the Stock Exchange as part of the
Company's online trading at its website. The
Company claimed that the Stock Exchange does not
have copyrights regarding the indexes and that it
did not mislead the public in any way. In
addition, the Company claims that it does not
actually use the said index in any way. The
Company answered the claim for a temporary
restraining order, and in June, 2004, the Court
accepted the Company's claim. In August, 2005, the
Stock Exchange appealed to the Supreme Court, and
thereafter the Company submitted its response to
the appeal. The Supreme Court accepted the
company's claim.
A preliminary hearing was held in March 2008 with
another preliminary hearing in the case scheduled
for October 2008. The hearing scheduled for
October 2008 was postponed by the court. The
parties are considering a settlement agreement.
Management does not expect this claim to have a
material effect on the Company's financial
position or results of operations.
9
3. Legal Proceedings (Continued)
In November 2007 a Finotec customer filed a claim
for approx NIS 152 thousands for alleged trading
profits the company cancelled. The company claimed
there was no basis for the claim. At the
suggestion of the court the claim was settled in
March 2008 with the company making an NIS 25
thousand payment to the customer.
In February 2008, a shareholder of the Company
filed a claim against the Company in the District
Court of Clark County, Nevada, relating to the
requirement by the Company's transfer agent,
Standard Register and Transfer Company that such
shareholder provide collateral in order to replace
a stock certificate that shareholder claims to
have lost. The Company and the shareholder have
resolved the matter and signed a Settlement
Agreement.
Management does not expect either claim to have a
material effect on the Company's financial
position or results of operations.
4. Issuances of equity securities
On April 30, 2009 the Company entered into a
definitive agreement for the sale of 3,200,000
shares of Common Stock at a price of $0.125 per
share for a total of $400,000. As a part of the
transaction, the Company agreed to issue
accompanying warrants to purchase an aggregate of
2,000,000 shares of Common Stock at an exercise
price of $0.275 per share. The shares of Common
Stock sold in the private placement offering have
not been registered and may not be offered or sold
absent registration or an applicable exemption
from such registration requirements. All such
shares are subject as well to a registration
rights agreement. The transaction closed on April
30, 2009.
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.
BUSINESS OVERVIEW
Finotec Group
Finotec Group Inc. is a holding company with no activities other than
holding two wholly owned companies Finotec Trading Inc. and Forexcash Global
Trading Ltd. These companies, directly and through their subsidiaries, deal
primarily in two distinct areas:
1. Finotec Trading Inc. - marketing, sales, market trading and
facilitation; and
2. Forexcash Global Trading Ltd - financial technology development.
10
Finotec Trading Inc. (New York), or Finotec Trading Inc., was established
in November 2001 with the express intent of providing retail customers access to
the largest financial market for online foreign currency trading. Finotec
Trading Inc. (New York) is the market-making arm of the corporation,
distributing the live and instantaneously executable trading prices in global
currencies, equities, indices, commodities and interest rate products through
the group's online trading system. The centralized dealing room services
clients, aggregates globally derived risk in real-time and hedges residual
market exposure with the underlying markets.
In 2005 Finotec Trading Inc. established its dealing room in Cyprus through
a wholly owned subsidiary Finotec Trading Cyprus Ltd. In 2007, the dealing room
was moved to the UK. Currently, the subsidiary in Cyprus engages primarily in
sales and marketing of the Company's products.
During 2007, Finotec Trading Inc. additionally established three wholly
owned subsidiaries:
o In the United Kingdom, Finotec Trading UK Limited, or Finotec UK, for
the purpose of obtaining the necessary authorization to act as a
market maker in Foreign Exchange and CFD's in the UK and Europe. In
November 2007, Finotec UK received such authorization from the UK
Financial Services Authority ("FSA"). Such authorization was
accompanied by approvals from the other European countries allowing
Finotec UK to offer cross-border investment services within their
borders.
o In the United States, Finotec USA, Inc., a Delaware corporation, for
the purpose of obtaining the necessary authorization from the National
Futures Association (NFA) to act as a market maker in Foreign Exchange
in the US.
On August 9, 2001 (the "Merger Date"), Finotec Group, Inc., formerly Online
International Corporation ("Finotec Group"), a Nevada corporation without
significant operations, acquired all of the outstanding shares of Finotec Ltd.
("Finotec Ltd.") (formerly Priory Marketing Ltd.), an Isle of Man company. The
transaction was effected by the issuing of 21,500,000 shares of Finotec Group
common stock to the stockholders of Finotec Ltd. This resulted in the former
Finotec Ltd. stockholders owning approximately 61.5% of the outstanding shares
of Finotec Group. For financial reporting purposes, the transaction was recorded
as a recapitalization of Finotec Ltd., with Finotec Ltd. receiving the
$1,320,363 net assets (assets of $1,404,636, less liabilities of $84,273) of
Finotec Group as a capital contribution. Finotec Ltd. is the continuing
surviving entity for accounting purposes, but is adopting the capital structure
of Finotec Group, which is the continuing parent entity for legal purposes. All
references to common stock have been restated to reflect the equivalent number
of Finotec Group shares.
Finotec Ltd. was formed in December 2000, at which time it acquired 99.7%
of the outstanding stock of Forexcash Global Trading Ltd. ("Forexcash"), an
Israeli corporation, which had been incorporated on June 23, 1998. This
transaction is treated as a recapitalization of Forexcash with Forexcash as the
continuing accounting entity and Finotec Ltd. as the continuing parent for legal
purposes.
Finotec Group Inc. is traded on the OTC bulletin board under the symbol
FTGI.OB.
Operations
Customers can open accounts with Finotec Trading UK Ltd. by several methods;
1. Directly with Finotec Trading UK Ltd.
2. Via affiliates and Introducing Brokers ("IB's") that sign commission
sharing agreement Finotec Trading UK Ltd.
As part of its code of conduct, all customer monies are segregated in
custodian accounts which have been set up in the United Kingdom and various
other countries.
11
Since its inception Finotec has secured a number of IB contracts, with
investment houses, financial institutions and high wealth individuals. Finotec's
website and trading system may be accessed on www.finotec.com. The system also
provides a `demo' trading system and an e-learning center that may be accessed
by registering on the website.
The Company currently develops, through its subsidiaries, markets and
operates a software system delivering foreign exchange, commodities, and futures
(CFDs) investment services to the public through the Internet. The Company also
operates an Internet-based brokerage firm for institutional, professional and
serious active individual traders in the financial instruments markets,
especially foreign currency and CFDs. The Company offers an electronic trading
platform which seamlessly integrates strategy trading tools, historical and
streaming real-time market data, and direct-access order-routing and execution.
In addition, the Company operates an internal risk management module that
guides the Company as to when to hedge positions or not and systems that provide
real time management of equity positions and margin requirements. The Company
also acts as a market maker in relevant jurisdictions.
Under our business model, we seek recurring revenues mainly by offering,
through use of a software system developed by its subsidiary, Forexcash, online
real-time trading in financial instruments. Forexcash is a front and back office
market maker application for online real-time trading in financial instruments.
We use our capabilities to provide strategy trading tools, and the unique
quality and functionality of those tools attracts our target customer base of
institutional, professional and serious active individual traders. We market our
services primarily through our subsidiaries who operate call centers and
Internet sites. The Company also intends to promote white-label systems directly
to financial institutions such as commercial banks. We also provide training in
online trading.
Recent Developments
In December 2008, the Company announced that it is implementing a new price
quoting method to allow its clients to be directly connected to market prices.
Under the method, instead of having quotes reflecting Finotec prices, clients
may now trade at market prices with the addition of a predefined and fixed
commission. This new method continues the Company's goal of providing its
clients with greater price transparency. Under the new price quoting method,
clients can be directly connected to very competitive market prices through
Finotec's trading platform which are available as a result of Finotec's high
monthly volume of trade - around 10 billion dollars per month - and its
relationship with 18 of the world's largest and most aggressive banks.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2009 AND 2008
NET GAINS (LOSSES) 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 gain from foreign currency future operations was $ 684,781 for the
three months ended April 30, 2009, as compared to a net loss from foreign
currency future operations of $ 412,776 for the three months ended April 30,
2008. This increase of $1,097,758 is attributable to a variety of factors
including an increase in trading by brokerage clients.
The Company had net losses of $590,512 for the three months ended April 30,
2009, as compared to a net loss of $2,947,431 for the three months ended April
30, 2008, a decrease of $2,356,919. This decrease is primarily attributable to a
decrease in marketing costs, salaries and general and administrative costs..
12
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 April 30, 2009 were $51,691,
as compared to $109,655 for the three months ended April 30, 2008, a decrease of
$57,964.
OPERATING EXPENSES. Operating expenses were $1,144,827 for the three months
ended April 30, 2009, as compared to $2,683,769 for the three months ended April
30, 2008, a decrease of $1,538,942. This decrease was due to a decrease in
marketing costs, slaries and general and administrative costs.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $110,768 for the three months ended April 30, 2009, as compared to
$328,165 for the three months ended April 30, 2008. a decrease of $217,397. This
decrease was due to decreased marketing costs and general expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance decreased by $495,836 from a cash balance at
January 31, 2009 of $5,108,144 to $4,612,307 at April 30, 2009. This decrease is
primarily attributable to the Company's losses during the three months ended
April 30, 2009.
Net cash used in operating activities amounted to $1,048,521 for the three
months ended April 30, 2009 compared to net cash used by operating activities of
$2,820,923 for the three months ended April 30, 2008, a decrease of $1,772,402.
This decrease is attributable to a variety of factors, including the reduction
of general and ongoing expenses and the decrease in net loss compared to the
same period last year.
Net cash used in investing activities for the three months ended April 30,
2009 was $2,468 as compared to net cash used in investing activities of $60,389
for the three months ended April 30, 2008, a decrease of $57,921. This decrease
primarily resulted from a decrease in the acquisition of property and equipment
and a sale of fixed assets.
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 is actively seeking financings to satisfy its ongoing cash requirements.
The Company has implemented further cost-cutting measures during this quarter.
Such action may have a material adverse effect on the Company's operations and
results.
The funds received from investors will be used for working capital purposes and
further expansion of the Company's marketing strategy.
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
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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.
During the six months ended January 31, 2009, the Company experienced a
significant increase in the number of new client accounts opened as well as an
increase in the level of gross new client deposits. The current quarter has
similarly seen a further increase in the level of gross new client deposits.
However, there can be no assurance that such factors will necessarily have a
positive effect on future results of operations.
In addition, the Company has announced several new product offerings,
including a white label online trading platform.
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 in our other public filings with the SEC,
including our annual report filed on Form 10-KSB. 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," "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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to the registrant as a smaller reporting company.
ITEM 4T. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Management of the Company, with the participation of the Chief Executive Officer
(who also serves as the Chief Financial Officer), evaluated the effectiveness of
the design and operation of the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), as of April 30,
2009. Based upon this evaluation, the Chief Executive Officer (who also serves
as the Chief Financial Officer) has concluded that the Company's disclosure
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controls and procedures were not effective as of April 30, 2009 due to the
material weaknesses in internal control over financial reporting as described
below.
(b) Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rule 13a-15(f)
of the Exchange Act. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
A material weakness represents a significant deficiency (as defined in the
Public Company Accounting Oversight Board's Auditing Standard No. 5), or a
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis.
Management conducted an assessment of the effectiveness of the Company's
internal control over financial reporting as of April 30, 2009 based on the
framework published by the Committee of Sponsoring Organizations of the Tread
way Commission, Internal Control -- Integrated Framework. Management has
identified the following material weaknesses in the Company's internal control
over financial reporting as of April 30, 2009.
Material weaknesses identified in Finotec Group, Inc are as follows:
Entity Level Controls:
o The Audit Committee is inactive.
o There is no internal audit function.
o Management does not perform a periodic check of the access rights
of all users to ensure that their access is suitable to their
positions and functions.
o Remediation Plan: The Audit Committee will be activated.
o The Company will implement an internal audit function.
o The CFO will extract from the information system an access list
for all employees and ensure that each function, screen and field
is suitable to the employee's job description.
o The CFO will ensure that the access rights are adequately
segregated.
Financial Statements:
o Lack of documentation at the financial statement preparation
process creates the potential of the occurrence of a material
error occurring in the financial statements.
Remediation Plan:
o The Company will retain evidence of all the controls performed in
the financial statement preparation process.
Treasury and Cash Management:
o Lack of documentation in the Treasury and Cash Management process
creates the potential of the occurrence of a material error
occurring in the financial statements.
Remediation Plan:
o The Company will retain evidence of all the controls performed in
the process.
Revenue:
o Lack of documentation in the Order to Cash process creates the
potential of the occurrence of a material error occurring in the
financial statements.
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Remediation Plan:
o The Company will retain evidence of all the controls performed in
the process.
Human Resources & Payroll:
o Lack of documentation in the human resources and payroll
processes creates the potential of the occurrence of a material
error occurring in the financial statements.
Remediation Plan:
o The Company will retain evidence of all the controls performed in
the process.
Information Technology:
o The Company does not have a permission and access right table
specifying group authorizations. Some employees have more
authorizations than their role definition. There is no
authorization procedure.
o The Company does not have password complexity procedure. User
passwords do not require any complexity, and there is no
requirement for password change.
o No Formal system development, acquisition and program change
policies and procedures exist for development/acquisitions of new
systems and changes to existing systems.
o The developers have access to the production.
Remediation Plan:
o The Company will examine and minimize user rights and will
prepare permissions table and access rights that includes group
permissions and prepare access to programs and data procedures.
o The Company will prepare "Access to Programs and Data" procedure.
Passwords to the database will be managed and complex.
o The Company will write a methodology for system development,
acquisitions and change management.
o The Company will prevent the developers from accessing the
production environment.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. In May, 2004, the Tel-Aviv Stock Exchange Ltd. (the "Stock Exchange")
submitted a claim against the Company for a permanent and temporary restraining
order to prevent the Company from using the Tel-Aviv 25 Index and/or any other
index owned by the Stock Exchange as part of the Company's online trading at its
website. The Company claimed that the Stock Exchange does not have copyrights
regarding the indexes and that it did not mislead the public in any way.
The Company answered the claim for a temporary restraining order, and in June,
2004, the Court accepted the Company's claim. In August, 2005, the Stock
Exchange appealed to the Supreme Court, and thereafter the Company submitted its
response to the appeal. The Supreme Court accepted the Company's claim. The case
is scheduled for a pre-trial meeting on June 22, 2008.
2. In February 2008, a shareholder of the Company filed a claim against the
Company in the District Court of Clark County, Nevada, relating to the
requirement by the Company's transfer agent, Standard Register and Transfer
Company that such shareholder provide collateral in order to replace a stock
certificate that shareholder claims to have lost. The shareholder claims that
the Company has instructed its transfer agent to require a high amount of
collateral. The Company and shareholder have entered into a Settlement
Agreement.
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3. Customer v. Finotec Trading UK Limited (in arbitration; previously before the
Tel Aviv Magistrates Court): This is a case in which a former customer of
Finotec Trading UK Limited ("Finotec UK"), has sued for $41,973.00. The customer
asserts that Finotec UK's cancelation of certain trades in April and June 2008
was unlawful and that he is entitled to lost profits. In February 2009, at the
suggestion of the court, the parties agreed to submit the dispute to
arbitration. Two arbitration hearings were held in March 2009, and customer's
attorney has filed his written summations. We expect to file our written
summations within approximately three weeks. In connection with the agreement to
arbitrate, in the spring of 2009, Finotec deposited, in an attorney escrow
account, the amount claimed in the Action.?? Finotec UK intends to defend the
matter vigorously.
4. Customer v. Finotec Trading Ltd. (Tel Aviv Magistrates Court): This is a case
in which a customer of Finotec Trading Ltd. ("Finotec Israel"), has sued Finotec
Israel for NIS 154,000. The customer alleges that Finotec Israel acted
negligently in (a) recommending that he execute trades through a third-party,
and (b) failing to oversee such third party. Finotec Israel filed its statement
of defense in December 2008, and it intends to defend the case vigorously.
Customer's questionnaire and document demand were received on May 4, 2009.
5. Potential Claim of Customer: On or about Nov. 16, 2008, Finotec Israel
received a letter from counsel to a customer, concerning an alleged claim of
customer, who has been a customer of Finotec Israel. The essence of the claim in
the letter is that Finotec Israel unlawful cancelled certain trades of customer
in October 2007. The letter is not clear as to the amount of damages allegedly
owed to customer. The letter refers to customer's right to reinstate a
transaction in the amount of $5,000, and it also asserts that customer is
entitled to damages of NIS 2,000. To the best of our knowledge, no lawsuit has
been filed by customer (or on his behalf) against any Finotec entity.
Management does not expect any of these claims to have a material effect on
the Company's financial position or results of operations.
ITEM 1A. RISK FACTORS
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 changes 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 demand of customers to transact business on our platform;
o actions taken by our competitors, including new product
introductions, fee schedules, pricing policies and enhancements;
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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.
OUR SUCCESS IS DEPENDENT UPON OUR RECEIPT AND MAINTENANCE OF REGULATORY
APPROVALS IN THE MAJOR CUSTOMER MARKETS AROUND THE WORLD.
The Company believes that its success, in large part, depends upon its ability
to receive and retain regulatory approvals in the major markets around the
world. Such approvals both expand the variety of services which the Company can
offer and bolster the Company's reputation among potential customers.
In November 2007, Finotec UK received authorization from the FSA to offer
certain financial services in the UK. In connection therewith, Finotec has
received regulatory approval to offer cross border investment services in the
various European countries, from its UK office. In order to retain its FSA
authorization, the Company must comply with numerous requirements, including
financial covenants as well as those related to its ongoing operations. The
Company's failure to meet these ongoing obligations could lead to the loss of
its FSA authorization which would have a material adverse effect on the Company
and its operations.
In addition, in the United States, Finotec USA Inc. has applied for registration
with the National Futures Association ("NFA") as a Futures Commission Merchant
(FCM). Failure to receive such authorization could have a material adverse
effect on the Company's ability to expand its operations. In addition, if such
authorization is received, in order to retain its NFA authorization, the Company
must comply with numerous requirements, including financial covenants as well as
those related to its ongoing operations. The Company's failure to meet these
ongoing obligations could lead to the loss of its NFA authorization which would
have a material adverse effect on the Company and its operations.
WE MUST MAINTAIN POSITIVE BRAND NAME AWARENESS.
We believe that establishing and maintaining our brand names is essential
to expanding business. We also believe that the importance of brand name
recognition will increase in the future because of the growing number of online
companies that will need to differentiate themselves. Promotion and enhancement
of our brand names will depend largely on our ability to provide consistently
high quality software and related technology. If we are unable to provide
software and technology of comparable or superior quality to those of our
competition, the value of our brand name may suffer.
THE INTERNATIONAL NATURE OF OUR BUSINESS ADDS ADDITIONAL
COMPLEXITY AND RISKS TO OUR BUSINESS.
The nature of the foreign currency business brings us into contact with
different countries and markets. We hope to expand further in international
markets. Our international business may be subject to a variety of risks,
including:
o market risk or loss of uncovered transactions;
o governmental regulation and political instability;
o collecting international accounts receivable and income;
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o the imposition of barriers to trade and taxes; and
o difficulties associated with enforcing contractual obligations and
intellectual property rights.
These factors may have a negative effect on any future international
operations and may adversely affect our business and operations.
INSTABILITY IN THE MIDDLE EAST REGION MAY ADVERSELY AFFECT OUR BUSINESS
Political, economic and military conditions in Israel directly affect the
Company's operations. 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. These conditions could disrupt the Company's operations in
Israel and its business, financial condition and results of operations could be
adversely affected.
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. 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(A) SALES OF UNREGISTERED SECURITIES
On April 30, 2009, the Company received funds for the sale of 3,200,000
shares of Common Stock at a price of $0.125 per share. As a part of the
transaction, the Company agreed to issue accompanying warrants to purchase
2,000,000 shares of Common Stock at an exercise price of $0.275 per share. Three
investors subscribed to the investment. The offering closed on April 30, 2009.
The shares of Common Stock sold in the private placement offering were not
registered under the Securities Act of 1933, as amended, and may not be offered
or sold absent registration or an applicable exemption from such registration
requirements. All such shares are subject as well to a registration rights
agreement.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
31.1 Section 302 certification
31.2 Section 302 certification
32.1 Section 906 certification
32.2 Section 906 certification
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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: June 15, 2009 /s/ Didier Essemini
-------------------
Didier Essemini
Chief Executive Officer and Chief Financial
Officer
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