| In addition to the other information contained in this annual report, including reports we incorporate by reference, you should consider the following factors before investing in our securities |
| It is difficult to evaluate our business and prospects because we have a limited operating history |
| We began actively engaging in providing securities brokerage and investment banking services in January 2002 |
| This was an entirely new business for us, and was a complete break with our previous business, the bandwidth brokerage business |
| Accordingly, we have a limited operating history on which to base an evaluation of our business and prospects |
| Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by fast growing companies in their early stage of development |
| We cannot assure you that we will be successful in addressing these risks and our failure to do so could have a material adverse effect on our business and results of operations |
| We may not be able to maintain a positive cash flow and profitability |
| Our ability to maintain a positive cash flow and profitability depends on our ability to generate and maintain greater revenue while incurring reasonable expenses |
| This, in turn, depends, among other things, on the development of our securities brokerage and investment banking business, and we may be unable to maintain profitability if we fail to do any of the following: · establish, maintain and increase our client base; · manage the quality of our services; · compete effectively with existing and potential competitors; · further develop our business activities; · manage expanding operations; and · attract and retain qualified personnel |
| We cannot be certain that we will be able to sustain or increase a positive cash flow and profitability on a quarterly or annual basis in the future |
| Our inability to maintain profitability or positive cash flow could result in disappointing financial results, impede implementation of our growth strategy or cause the market price of our common stock to decrease |
| Accordingly, we cannot assure you that we will be able to generate the cash flow and profits necessary to sustain our business expectations, which makes our ability to successfully implement our business plan uncertain |
| Because we are a developing company, the factors upon which we are able to base our estimates as to the gross revenue and the number of participating clients that will be required for us to maintain a positive cash flow and any additional financing that may be needed for this purpose are unpredictable |
| For these and other reasons, we cannot assure you that we will not require higher gross revenue, and an increased number of clients, securities brokerage and investment banking transactions, and/or more time in order for us to complete the development of our business that we believe we need to be able to cover our operating expenses, or obtain the funds necessary to finance this development |
| It is more likely than not that our estimates will prove to be inaccurate because actual events more often than not differ from anticipated events |
| Furthermore, in the event that financing is needed in addition to the amount that is required for this development, we cannot assure you that such financing will be available on acceptable terms, if at all |
| 10 ______________________________________________________________________ The markets for securities brokerage and investment banking services are highly competitive |
| If we are not able to compete successfully against current and future competitors, our business and results of operations will be adversely affected |
| We are engaged in the highly competitive financial services and investment industries |
| We compete with large Wall Street securities firms, securities subsidiaries of major commercial bank holding companies, US subsidiaries of large foreign institutions, major regional firms, smaller niche players, and those offering competitive services via the Internet |
| Many competitors have greater personnel and financial resources than we do |
| Larger competitors are able to advertise their products and services on a national or regional basis and may have a greater number and variety of distribution outlets for their products, including retail distribution |
| Discount and Internet brokerage firms market their services through aggressive pricing and promotional efforts |
| In addition, some competitors have much more extensive investment banking activities than we do and therefore, may possess a relative advantage with regard to access to deal flow and capital |
| Increased pressure created by any current or future competitors, or by our competitors collectively, could materially and adversely affect our business and results of operations |
| Increased competition may result in reduced revenue and loss of market share |
| Further, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service or marketing decisions or acquisitions that also could materially and adversely affect our business and results of operations |
| We cannot assure you that we will be able to compete successfully against current and future competitors |
| In addition, new technologies and the expansion of existing technologies may increase the competitive pressures on us |
| We may experience reduced revenue due to declining market volume, securities prices and liquidity, which can also cause counterparties to fail to perform |
| Our revenue may decrease in the event of a decline in the market volume of securities transactions, prices or liquidity |
| Declines in the volume of securities transactions and in market liquidity generally result in lower revenue from trading activities and commissions |
| Lower price levels of securities may also result in a reduction in our revenue from corporate finance fees, as well as losses from declines in the market value of securities held by us in trading |
| Sudden sharp declines in market values of securities can result in illiquid markets and the failure of counterparties to perform their obligations, as well as increases in claims and litigation, including arbitration claims from customers |
| In such markets, we may incur reduced revenue or losses in our principal trading, market-making, investment banking, and advisory services activities |
| We may experience significant losses if the value of our marketable security positions deteriorates |
| We conduct securities trading, market-making and investment activities for our own account, which subjects our capital to significant risks |
| These risks include market, credit, counterparty and liquidity risks, which could result in losses for us |
| These activities often involve the purchase, sale or short sale of securities as principal in markets that may be characterized as relatively illiquid or that may be particularly susceptible to rapid fluctuations in liquidity and price |
| Trading losses resulting from such trading could have a material adverse effect on our business and results of operations |
| We may experience significant fluctuations in our quarterly operating results due to the nature of our business and therefore may fail to meet profitability expectations |
| Our revenue and operating results may fluctuate from quarter to quarter and from year to year due to a combination of factors, including: · the level of institutional brokerage transactions and the level of commissions we receive from those transactions; 11 ______________________________________________________________________ · the valuations of our principal investments; · the number of capital markets transactions completed by our clients, and the level of fees we receive from those transactions; and · variations in expenditures for personnel, consulting and legal expenses, and expenses of establishing new business units, including marketing and technology expenses |
| We record revenue from a capital markets advisory transaction only when we have rendered the services, the client is contractually obligated to pay and collection is probable; generally, most of the fee is earned only upon the closing of a transaction |
| Accordingly, the timing of our recognition of revenue from a significant transaction can materially affect our quarterly operating results |
| We have registered one of our subsidiaries as a securities broker-dealer and, as such, are subject to substantial regulations |
| If we fail to comply with these regulations, our business will be adversely affected |
| with the Securities and Exchange Commission, or SEC, and the National Association of Securities Dealers, Inc, or NASD, as a securities broker-dealer, we are subject to extensive regulation under federal and state laws, as well as self-regulatory organizations |
| The principal purpose of regulation and discipline of broker-dealers is the protection of customers and the securities markets rather than protection of creditors and stockholders of broker-dealers |
| The Securities and Exchange Commission is the federal agency charged with administration of the federal securities laws |
| Much of the regulation of broker-dealers, however, has been delegated to self-regulatory organizations, such as the NASD and national securities exchanges |
| The NASD is our primary self-regulatory organization |
| These self-regulatory organizations adopt rules, which are subject to SEC approval, that govern the industry and conduct periodic examinations of member broker-dealers |
| Broker-dealers are also subject to regulation by state securities commissions in the states in which they are registered |
| The regulations to which broker-dealers are subject cover all aspects of the securities business, including net capital requirements, sales methods, trading practices among broker-dealers, capital structure of securities firms, record keeping and the conduct of directors, officers and employees |
| The SEC and the self-regulatory bodies may conduct administrative proceedings, which can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees |
| If we fail to comply with these rules and regulations, our business may be materially and adversely affected |
| The regulatory environment in which we operate is also subject to change |
| Our business may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other United States or foreign governmental regulatory authorities or the NASD We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and the NASD Our business may suffer if we lose the services of our executive officers or operating personnel |
| We depend on the continued services and performance of D Jonathan Merriman, our Chairman and Chief Executive Officer, for our future success |
| We currently have an employment agreement with Mr |
| The agreement contains provisions that obligate us to make certain payments to Mr |
| Merriman and substantially reduce vesting periods of options granted to him if we should terminate him without cause or certain events resulting in a change of control of our Board were to occur |
| Merriman, we are currently managed by a small number of key management and operating personnel |
| Our future success depends, in part, on the continued service of our key executive, management and technical personnel, and our ability to attract highly skilled employees |
| From time to time we have experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees |
| Competition for employees in our industry is significant |
| If we are unable to retain our key employees or attract, integrate or retain other highly qualified employees in the future, such failure may have a material adverse effect on our business and results of operations |
| Our business is dependent on the services of skilled professionals, and may suffer if we can not recruit or retain such skilled professionals |
| We have a number of revenue producers employed by our securities brokerage and investment banking subsidiary |
| We do not have employment contracts with these employees |
| The loss of one or more of these employees could adversely affect our business and results of operations |
| Our compensation structure may negatively impact our financial condition if we are not able to effectively manage our expenses and cash flows |
| We are able to recruit and retain investment banking, research and sales and trading professionals, in part because our business model provides that we pay our revenue producing employees a percentage of their earned revenue |
| Compensation and benefits is our largest expenditure and this variable compensation component represents a significant proportion of this expense |
| Compensation for our employees is derived as a percentage of our revenue regardless of our profitability |
| Therefore, we may continue to pay individual revenue producers a significant amount of cash compensation as the overall business experiences negative cash flows and/or net losses |
| We may not be able to recruit or retain revenue producing employees if we modify or eliminate the variable compensation component from our business model |
| We may be dependent on a limited number of customers for a significant portion of our revenue |
| However, we have been dependent on one customer, or on a small number of customers, for a large percentage of our revenue at some times in the past and we cannot assure you that we will not become so dependent again in the future |
| If we do become dependent on a single customer or small group of customers, the loss of one or more large customers could materially adversely affect our business and results of operations |
| We may suffer losses through our investments in securities purchased in secondary market transactions or private placements |
| Occasionally, our company, its officers and/or employees may make principal investments in securities through secondary market transactions or through direct investment in companies through private placements |
| In many cases, employees and officers with investment discretion on behalf of our company decide whether to invest in our company’s account or their personal account |
| It is possible that gains from investing will accrue to these individuals because investments were made in their personal accounts, and our company will not realize gains because it did not make an investment |
| Conversely, it is possible that losses from investing will accrue to our company, while these individuals do not experience losses in their personal accounts because the individuals did not make investments in their personal accounts |
| We may be unable to successfully integrate acquired businesses into our existing business and operations |
| On February 28, 2005, we acquired Catalyst Financial Planning & Investment Management, Inc, a registered investment advisor with over dlra100 million in assets under management at the time of acquisition |
| We may experience difficulty integrating the operations of Catalyst into our existing business and operations including our accounting, finance, compensation, information technology and management 13 ______________________________________________________________________ systems |
| We may not be able to retain the services of Catalyst employees |
| These factors could result in higher than anticipated costs associated with the Catalyst acquisition |
| Additionally, they may cause revenue from the Catalyst acquisition to be lower than forecast |
| If costs are higher or revenue lower than we expect, our business and results of operations could be materially adversely affected |
| Although we have no specific plans to do so at this time, we may buy one or more other businesses in the future |
| If we are unable to successfully integrate such businesses into our existing business and operations in the future, our business and results of operations could be materially adversely affected We may be unable to effectively manage rapid growth that we may experience, which could place a continuous strain on our resources and, accordingly, adversely affect our business |
| We plan to expand our operations |
| Our growth, if it occurs, will impose significant demands on our management, financial, technical and other resources |
| We must adapt to changing business conditions and improve existing systems or implement new systems for our financial and management controls, reporting systems and procedures and expand, train and manage a growing employee base in order to manage our future growth |
| We may not be able to implement improvements to our internal reporting systems in an efficient and timely manner and may discover deficiencies in existing systems and controls |
| We believe that future growth will require implementation of new and enhanced communications and information systems and training of our personnel to operate such systems |
| Furthermore, we may acquire existing companies or enter into strategic alliances with third parties, in order to achieve rapid growth |
| For us to succeed, we must make our existing business and systems work effectively with those of any strategic partners without undue expense, management distraction or other disruptions to our business |
| We may be unable to implement our business plan if we fail to manage any of the above growth challenges successfully |
| Our financial results may suffer and we could be materially and adversely affected if that occurs |
| Our business and operations would suffer in the event of system failures |
| Our success, in particular our ability to successfully facilitate securities brokerage transactions and provide high-quality customer service, largely depends on the efficient and uninterrupted operation of our computer and communications systems |
| Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunication failures, break-ins, earthquake and similar events |
| Despite the implementation of network security measures, redundant network systems and a disaster recovery plan, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss of data or the inability to accept and fulfill customer orders |
| Additionally, computer viruses may cause our systems to incur delays or other service interruptions, which may cause us to incur additional operating expenses to correct problems we may experience |
| Any of the foregoing problems could materially adversely affect our business or future results of operations |
| We are highly dependent on proprietary and third-party systems; therefore, system failures could significantly disrupt our business |
| Our business is highly dependent on communications and information systems, including systems provided by our clearing brokers |
| Any failure or interruption of our systems, the systems of our clearing broker or third party trading systems could cause delays or other problems in our securities trading activities, which could have a material adverse effect on our operating results |
| In addition, our clearing brokers provide our principal disaster recovery system |
| We cannot assure you that we or our clearing brokers will not suffer any systems failure or interruption, including one caused by an earthquake, fire, other natural disaster, power or telecommunications failure, act of God, act of war or otherwise, or that our or our clearing brokers’ back-up procedures and capabilities in the event of any such failure or interruption will be adequate |
| 14 ______________________________________________________________________ Our common stock price may be volatile, which could adversely affect the value of your shares |
| The market price of our common stock has in the past been, and may in the future continue to be, volatile |
| A variety of events may cause the market price of our common stock to fluctuate significantly, including: · variations in quarterly operating results; · our announcements of significant contracts, milestones, acquisitions; · our relationships with other companies; · our ability to obtain needed capital commitments; · additions or departures of key personnel; · sales of common stock, conversion of securities convertible into common stock, exercise of options and warrants to purchase common stock or termination of stock transfer restrictions; · general economic conditions, including conditions in the securities brokerage and investment banking markets; · changes in financial estimates by securities analysts; and · fluctuation in stock market price and volume |
| Any one of the factors noted herein could have an adverse effect on the value of our common stock |
| In addition, the stock market in recent years has experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many companies and that often have been unrelated to the operating performance of such companies |
| These market fluctuations have adversely impacted the price of our common stock in the past and may do so in the future |
| Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk |
| Our risk management strategies and techniques may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk |
| We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations |
| These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure, breach of contract or other reasons |
| We are also subject to the risk that our rights against third parties may not be enforceable in all circumstances |
| As a clearing member firm, we finance our customer positions and could be held responsible for the defaults or misconduct of our customers |
| Although we regularly review credit exposures to specific clients and counterparties and to specific industries and regions that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to detect or foresee |
| In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, which in turn could adversely affect us |
| If any of the variety of instruments, processes and strategies we utilize to manage our exposure to various types of risk are not effective, we may incur losses |
| We could be sued in a securities class action lawsuit |
| In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation often has been instituted against that company |
| Such litigation is expensive and diverts management’s attention and resources |
| We can not assure you that we will not be subject to such litigation |
| 15 ______________________________________________________________________ If we are subject to such litigation, even if we ultimately prevail, our business and financial condition may be adversely affected |
| Your ability to sell your shares may be restricted because there is a limited trading market for our common stock |
| Although our common stock is currently traded on the American Stock Exchange, an active trading market in our stock has been limited |
| Accordingly, you may not be able to sell your shares when you want or at the price you want |
| Anti-takeover provisions of the Delaware General Corporation Law could discourage a merger or other type of corporate reorganization or a change in control even if it could be favorable to the interests of our stockholders |
| The Delaware General Corporation Law contains provisions that may enable our management to retain control and resist our takeover |
| These provisions generally prevent us from engaging in a broad range of business combinations with an owner of 15prca or more of our outstanding voting stock for a period of three years from the date that such person acquires his or her stock |
| Accordingly, these provisions could discourage or make more difficult a change in control or a merger or other type of corporate reorganization even if it could be favorable to the interests of our stockholders |
| Because our Board of Directors can issue common stock without stockholder approval, you could experience substantial dilution |
| Our Board of Directors has the authority to issue up to 300cmam000cmam000 shares of common stock and to issue options and warrants to purchase shares of our common stock without stockholder approval in certain circumstances |
| Future issuance of additional shares of our common stock could be at values substantially below the price at which you may purchase our stock and, therefore, could represent substantial dilution |
| In addition, our Board of Directors could issue large blocks of our common stock to fend off unwanted tender offers or hostile takeovers without further stockholder approval |
| Our ability to issue additional preferred stock may adversely affect your rights as a common stockholder and could be used as an anti take-over device |
| Our Articles of Incorporation authorize our Board of Directors to issue up to an additional 27cmam450cmam000 shares of preferred stock, without approval from our stockholders |
| If you hold our common stock, this means that our Board of Directors has the right, without your approval as a common stockholder, to fix the relative rights and preferences of the preferred stock |
| This would affect your rights as a common stockholder regarding, among other things, dividends and liquidation |
| We could also use the preferred stock to deter or delay a change in control of our company that may be opposed by our management even if the transaction might be favorable to you as a common stockholder |
| Our officers and directors exercise significant control over our affairs, which could result in their taking actions of which other stockholders do not approve |
| Our executive officers and directors, and entities affiliated with them, currently control approximately 23prca of our outstanding common stock including exercise of their options and warrants |
| These stockholders, if they act together, will be able to exercise substantial influence over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions |
| This concentration of ownership may also have the effect of delaying or preventing a change in control of us and might affect the market price of our common stock |
| 16 ______________________________________________________________________ Any exercise of outstanding stock options and warrants will dilute then-existing stockholders’ percentage of ownership of our common stock |
| We have a significant number of outstanding stock options and warrants |
| During 2005, shares issuable upon the exercise of these options and warrants, at prices ranging currently from approximately dlra0dtta05 to dlra1dtta24 per share, represent approximately 15prca of our total outstanding stock on a fully diluted basis using the treasury stock method |
| The exercise of the outstanding options and warrants would dilute the then-existing stockholders’ percentage ownership of our common stock |
| Any sales resulting from the exercise of options and warrants in the public market could adversely affect prevailing market prices for our common stock |
| Moreover, our ability to obtain additional equity capital could be adversely affected since the holders of outstanding options and warrants may exercise them at a time when we would also wish to enter the market to obtain capital on terms more favorable than those provided by such options and warrants |
| We lack control over the timing of any exercise or the number of shares issued or sold if exercises occur |