UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission file number: 000-51837
OPTIONABLE, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 52-2219407
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
465 Columbus Avenue, Suite 280, Valhalla, NY 10595
----------------------------------------------------------------------
(Address of principal executive offices)
(914) 773-1100
----------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The total number of shares of the issuer's common stock, $.0001 par value,
outstanding at November 13, 2007 was 52,263,403.
Transitional Small Business Disclosure Format: Yes |_| No |X|
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
To the extent that the information presented in this Quarterly Report on Form
10-QSB for the quarter ended September 30, 2007 discusses financial projections,
information or expectations about our products or markets, or otherwise makes
statements about future events, such statements are forward-looking. We are
making these forward-looking statements in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Although we
believe that the expectations reflected in these forward-looking statements are
based on reasonable assumptions, there are a number of risks and uncertainties
that could cause actual results to differ materially from such forward-looking
statements. These risks and uncertainties are described, among other places in
this Quarterly Report, in "Management's Discussion and Analysis or Plan of
Operation".
In addition, we disclaim any obligations to update any forward-looking
statements to reflect events or circumstances after the date of this Quarterly
Report. When considering such forward-looking statements, you should keep in
mind the risks referenced above and the other cautionary statements in this
Quarterly Report.
2
OPTIONABLE, INC.
CONSOLIDATED BALANCE SHEET
September 30, 2007
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 11,072,464
Accounts receivable, net of allowance
for doubtful accounts of $30,819 5,106
Incentives receivable from stockholder,
net of allowance for doubtful account of $640,947 -
Prepaid income taxes 1,941,548
Other current assets 257,538
-------------
Total current assets 13,276,656
Property and equipment, net of
accumulated depreciation of $537,543 218,400
Other assets 19,900
-------------
Total assets $ 13,514,956
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 320,270
Due to stockholder, net of unamortized
discount of $3,034,704 2,009,806
Due to executive officer, net of
unamortized discount of $411,608 97,089
-------------
Total liabilities 2,427,165
Stockholders' Equity:
Preferred Stock; $.0001 par value,
5,000,000 shares authorized, none issued
and outstanding -
Common stock; $.0001 par value, 100,000,000
shares authorized, 52,428,203 issued and
52,423,403 outstanding 5,242
Additional paid-in capital 162,737,671
Treasury stock at cost, 4,800 shares (2,506)
Accumulated deficit (151,652,616)
-------------
Total stockholders' equity 11,087,791
-------------
Total liabilities and stockholders' equity $ 13,514,956
=============
See Notes to Unaudited Financial Statements.
3
OPTIONABLE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three-month period ended For the nine-month period ended
September 30, September 30,
--------------------------------------------- -----------------------------------------
2007 2006 2007 2006
-------------------- --------------------- ------------------- ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Brokerage fees $ 63,872 $ 2,592,877 $ 8,783,937 $ 5,354,724
Brokerage fees-related parties - 1,041,260 1,151,798 2,243,301
Incentives-stockholder - 892,830 3,285,058 1,639,602
-------------------- --------------------- ------------------- ------------------
Net revenues 63,872 4,526,967 13,220,793 9,237,627
Cost of revenues 34,688 1,514,037 7,860,987 3,215,843
Cost of revenues-related parties - 298,050 30,013 633,022
-------------------- --------------------- ------------------- ------------------
34,688 1,812,087 7,891,000 3,848,865
Gross profit 29,184 2,714,880 5,329,793 5,388,762
Operating expenses:
Selling, general and administrative 1,264,630 321,547 7,473,764 758,816
Impairment-consideration receivable
from stockholder - - 145,771,879 -
Impairment-intangible asset - - 1,085,610 -
Research and development 209,657 127,768 733,579 273,567
-------------------- --------------------- ------------------- ------------------
Total operating expenses 1,474,287 449,315 155,064,832 1,032,383
-------------------- --------------------- ------------------- ------------------
Operating income (1,445,103) 2,265,565 (149,735,039) 4,356,379
-------------------- --------------------- ------------------- ------------------
Other income (expense):
Interest income 88,581 26,239 285,895 53,336
Other income - - - -
Other expense (5,350) - (15,250) -
Interest expense to related parties (86,405) (76,679) (251,685) (701,134)
-------------------- --------------------- ------------------- ------------------
(3,174) (50,440) 18,960 (647,798)
-------------------- --------------------- ------------------- ------------------
Income before income tax (1,448,277) 2,215,125 (149,716,079) 3,708,581
Income tax benefit ( expense) 356,230 (24,052) (354,206) (24,052)
-------------------- --------------------- ------------------- ------------------
Net income $ (1,092,047) $ 2,191,073 $ (150,070,285) $ 3,684,529
==================== ===================== =================== ==================
Basic earnings per common share $ (0.02) $ 0.04 $ (2.87) $ 0.07
==================== ===================== =================== ==================
Diluted earnings per common share $ (0.02) $ 0.04 $ (2.87) $ 0.07
==================== ===================== =================== ==================
Basic weighted average common
shares outstanding 52,423,403 51,474,115 52,285,194 51,429,567
==================== ===================== =================== ==================
Diluted weighted average common
shares outstanding 52,423,403 51,680,993 52,285,194 51,688,736
==================== ===================== =================== ==================
See Notes to Unaudited Financial Statements.
4
OPTIONABLE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine-month period ended
September 30,
------------------------------------
2007 2006
---------------- ----------------
(Unaudited) (Unaudited)
Net (loss) income $ (150,070,285) $ 3,684,529
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation 80,339 21,107
Amortization of debt discount 251,685 701,134
Amortization of intangible asset 70,390 -
Amortization of consideration receivable from stockholder 3,312,997 -
Provision for doubtful accounts 642,073 1,255
Fair value of warrants and options 4,025,716 85,068
Fair value of shares issued to chief executive officer 181,987 140,072
Loss on sale of trading right 15,250 -
Impairment-consideration receivable from stockholder 145,771,879 -
Impairment- intangible asset 1,085,610 -
Changes in operating assets and liabilities:
Accounts receivable 2,094,573 (1,187,468)
Accounts receivable-related parties 182,338 -
Due from related party 488,273 (316,173)
Incentives receivable from stockholder 666,912 (597,424)
Other current assets (193,376) (25,499)
Other assets 150,000 -
Accounts payable and accrued expenses 127,277 (16,866)
Prepaid income taxes (3,395,794) 19,246
Accrued compensation (1,891,885) 1,235,206
---------------- ----------------
Net cash provided by operating activities 3,595,959 3,744,187
---------------- ----------------
Cash flows used in investing activities:
Acquisition of intangible asset (400,000) -
Acquisition of trading rights (1,180,250) -
Proceeds from disposition of trading right 1,165,000 -
Purchases of property and equipment (241,238) (22,817)
---------------- ----------------
Net cash used in investing activities (656,488) (22,817)
---------------- ----------------
Cash flows from financing activities:
Principal repayments of due to former chief executive officer - (558,697)
Principal repayments of due to executive officer - (200,000)
Principal repayments of due to former chairman of the board - (400,000)
Repurchase of shares of common stock - (2,506)
Proceeds from exercise of options 34,600 -
proceeds from exercise of warrants 185,000 -
---------------- ----------------
Net cash provided by (used in) financing activities 219,600 (1,161,203)
---------------- ----------------
Net increase in cash 3,159,071 2,560,167
Cash, beginning of period 7,913,393 1,811,453
---------------- ----------------
Cash, end of period $ 11,072,464 $ 4,371,620
================ ================
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 3,750,000 $ 4,806
================ ================
Cash paid for interest $ - $ -
================ ================
Noncash investing and financing activities:
Fair value of warrants issued in connection with the acquisition of
intangible asset $ 756,000 $ -
================ ================
See Notes to Unaudited Financial Statements.
5
OPTIONABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 1-Organization, Description of Business and Basis of Presentation
Optionable, Inc. (the "Company") was formed in Delaware in February 2000 and
offers trading and brokerage services to brokerage firms, financial
institutions, energy traders, and hedge funds nationwide. The Company's
operations are located in the New York metropolitan area. The Company offers its
services through an automated electronic trading platform.
Recent Developments
Several recent developments, such as a statement made by the Company's most
significant customer, such customer's suspension of its business relationship
with the Company, the matters discussed in Note 10, together with the combined
succession of events since then have had a significant adverse impact on our
business, including current and, likely, future results of operations and
financial condition and have impacted the Company's ability to continue to
operate as a brokerage services provider through traditional voice-brokerage and
on the floor of a US exchange. Consequently, we are formulating a revised
strategy to:.
1) emphasize the marketing of its automated electronic trading platform to
end-users through indirect channels, such as through other third-party
brokers and other exchanges;
2) develop and enhance its automated trading platform to end-users other
than those in the energy derivatives markets; 3) provide software
development services to third-party brokers and other exchanges.
The Company is also considering whether it would be more advantageous to sell
its intangible assets, including the technology it has developed.
The Company anticipates that revenue-generating agreements under its revised
strategy would take the form of licensing, royalty-based agreements and/or
software development and maintenance agreements.
The Company believes that revenues from its brokerage services will be minimal
under its existing structure. While the Company is not discontinuing its
brokerage services, it will most likely need to 1) acquire the operations of a
brokerage firm, or several brokerage firms, and hire their personnel, to expand
its current operations or 2)form a consortium of brokerage companies that would
jointly use the electronic platform.
The Company believes it has enough funds to meet its obligations, based on its
internal projections, for at least the next twelve months. However, the Company
cannot guarantee that it will do so. If there are unforeseen expenses or
financial obligations which occur during that period, the Company may not be
able to generate enough revenues to meet such obligations. Additionally, if the
Company acquires a brokerage firm or a technology company which could be
instrumental in the Company's long-term growth, this could hamper the Company's
ability to continue as going concern, both from a short-term or a long-term
perspective, and the Company would have to resort to financing, through either
debt or equity placements, for the funding of either such acquisitions or
unforeseen expenses or financial obligations.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and the footnotes required by generally accepted accounting principles for
6
OPTIONABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 1-Organization, Description of Business and Basis of Presentation-continued
complete financial statements. In the opinion of management, all adjustments,
consisting only of normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the nine months ended
September 30, 2007 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2007.
The accompanying consolidated financial statements include the results of
operations of Opex International, Inc. and Hydra Commodity Services, Inc. for
the nine-month period ended September 30, 2007. All material inter-company
accounts and transactions between the Company and its subsidiaries have been
eliminated in consolidation.
Note 2- Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Concentration of Credit Risks
The Company is subject to concentrations of credit risk primarily from cash and
cash equivalents.
The Company's cash and cash equivalents accounts are held at financial
institutions and are insured by the Federal Deposit Insurance Corporation
("FDIC") up to $100,000. During the nine months ended September 30, 2007, the
Company has reached bank balances exceeding the FDIC insurance limit. To reduce
its risk associated with the failure of such financial institutions, the Company
periodically evaluates the credit quality of the financial institutions in which
it holds deposits.
7
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 2- Summary of Significant Accounting Policies-Continued
Customer Concentration
One of the Company's customers accounted for approximately 24% and 22% of its
revenues during the nine-month periods ended September 30, 2007 and 2006,
respectively. During May 2007, this customer announced that it was suspending
its relationship with the Company and that customer has not used the Company's
services in connection with any additional transactions since that time.
Product Concentration
All of the Company's revenues are derived from fees earned from energy
derivatives transaction fees and related incentives provided by a United States
exchange.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, prepaid income taxes, and
accounts payable and accrued expenses approximate their fair value due to their
short-term maturities. The carrying amounts of due to former Chairman of the
Board and due to an executive officer approximate their fair value based on the
Company's incremental borrowing rate.
8
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 2- Summary of Significant Accounting Policies-Continued
Software Development Costs
Costs incurred in the research and development of software products are expensed
as incurred until technological feasibility has been established. After
technological feasibility is established, any additional costs are capitalized
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed". Costs of maintenance and customer support will be charged to expense
when related revenue is recognized or when those costs are incurred, whichever
occurs first. The Company believes that the current process for developing
software is essentially completed concurrently with the establishment of
technological feasibility; accordingly, no software development costs have been
capitalized at September 30, 2007.
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for
Income Taxes". SFAS No. 109 requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Measurement of
the deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases of
the Company's assets and liabilities result in a deferred tax asset, SFAS No.
109 requires an evaluation of the probability of being able to realize the
future benefits indicated by such assets. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some or all
deferred tax assets will not be realized.
Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates made by management include, but are not
limited to, the realization of receivables. Actual results will differ from
these estimates.
9
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 2- Summary of Significant Accounting Policies-Continued
Basic and Diluted Earnings per Share
Basic earnings per share are calculated by dividing income available to
stockholders by the weighted-average number of common shares outstanding during
each period. Diluted earnings per share are computed using the weighted average
number of common shares and dilutive common share equivalents outstanding during
the period. Dilutive common share equivalents consist of shares issuable upon
the exercise of stock options and warrants (calculated using the
modified-treasury stock method). The outstanding options amounted to 633,000 and
941,000 at September 30, 2007 and 2006, respectively. The outstanding warrants
amounted to 18,940,000 and 1,650,000 at September 30, 2007 and 2006,
respectively. The outstanding warrants at September 30, 2007 include 18,040,000
warrants sold to an investor but for which the Company has not received the
agreed consideration. The options and warrants outstanding at September 30, 2007
have been excluded from the computation of diluted earnings per share due to
their antidilutive effect.
The following sets forth the computation of basic and diluted earnings per share
for the nine-month periods ended September 30:
---------------------------- -------------------------- ------------------------
Nine-month period ended Three-month period ended
September 30, September 30,
---------------------------- -------------- ----------- ------------ -----------
2007 2006 2007 2006
---------------------------- -------------- ----------- ------------ -----------
Numerator:
---------------------------- -------------- ----------- ------------ -----------
Net loss income $(150,070,285) $3,684,529 $(1,092,047) $2,191,073
---------------------------- -------------- ----------- ------------ -----------
Denominator:
---------------------------- -------------- ----------- ------------ -----------
Denominator for basic
earnings per share-weighted
average shares outstanding 52,285,194 51,429,567 52,285,194 51,474,115
---------------------------- -------------- ----------- ------------ -----------
Effect of dilutive employee
stock options - 170,069 - 137,578
---------------------------- -------------- ----------- ------------ -----------
Effect of dilutive warrants - 89,100 - 69,300
---------------------------- -------------- ----------- ------------ -----------
Denominator for diluted
earnings per share-weighted
average shares outstanding 52,285,194 51,688,738 52,285,194 51,680,993
---------------------------- -------------- ----------- ------------ -----------
Basic earnings (loss)
per share $(2.87) $0.07 $(0.02) $0.04
---------------------------- -------------- ----------- ------------ -----------
Diluted earnings (loss)
per share $(2.87) $0.07 $(0.02) $0.04
---------------------------- -------------- ----------- ------------ -----------
10
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 2- Summary of Significant Accounting Policies-Continued
Revenue Recognition
Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with the Securities and Exchange Commission's ("SEC") Staff
Accounting Bulletin ("SAB") No. 104 "Revenue Recognition".
The Company generally invoices its customers monthly, for all transactions which
have been executed during such month. Revenues are recognized on the day of
trade-trade date basis. The Company's revenues derive from a certain
predetermined fixed fee of the transactions it executes on behalf of its
customers. The fee is based on the volume of financial instruments traded. The
Company bases its fees on oral and written contracts and confirms the fees in
writing upon the execution of each transaction.
The Company also receives incentives from a United States exchange for the
volume of transactions conducted by the Company using their platform. The
incentives are based on a percentage of the total revenues received by the
exchange attributable to the Company's volume of transactions submitted to the
exchange. The Company estimates monthly such incentives based on the volumes of
daily transactions submitted to the exchange using the day of trade-trade date
basis, and the exchange's published revenues by type of transactions. The
Company, pursuant to SAB 104, recognizes the incentive revenues realized or
realizable when all of the following criteria are met:
1) persuasive evidence of an arrangement exists. The exchange has publicly
published the terms of its incentive program in 2003 which is offered to all
intermediaries in the select transactions;
2) delivery has occurred or services have been rendered. Under arrangements with
the exchange, the incentives are earned on the day the Company submits
transactions to the exchange based on the revenues generated from such
transactions and are no longer subject to a minimum transaction volume. The
Company accounts for all transactions submitted to the exchange on a daily
basis. Accordingly, the Company is able to determine when the incentives are
11
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 2- Summary of Significant Accounting Policies-Continued
earned based on the date it submits transactions to the exchange. The Company
has no other obligations to the exchange to earn the incentives;
3) "seller's" price to the buyer is fixed or determinable. Based on the
incentive program terms of the exchange, its published prices for the type of
transactions the Company submits to it, and the Company's transactions records,
the Company is able to estimate the revenues the exchange earns in connection
with the transactions the Company submits, and accordingly, the amount, if any,
of the incentives the Company earns in connection with such transactions; and
4) collectibility is reasonably assured. The exchange has paid the Company
timely on incentives earned from 2004 through May 2007. The Company intends to
enforce the payment of any incentives receivable under the incentive program.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts may
not be recovered. In such circumstances, the Company will estimate the future
cash flows expected to result from the use of the asset and its eventual
disposition. Future cash flows are the future cash inflows expected to be
generated by an asset less the future outflows expected to be necessary to
obtain those inflows. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the asset, the
Company will recognize an impairment loss to adjust to the fair value of the
asset.
Share-Based Payments
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123(R), "Share-Based Payment," which replaces SFAS No. 123 and supersedes
APB Opinion No. 25. Under SFAS No. 123(R), companies are required to measure the
compensation costs of share-based compensation arrangements based on the
grant-date fair value and recognize the costs in the financial statements over
12
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 2- Summary of Significant Accounting Policies-Continued
the period during which employees are required to provide services. Share-based
compensation arrangements include stock options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase
plans. In March 2005, the SEC issued SAB 107. SAB 107 expresses views of the
staff regarding the interaction between SFAS No. 123(R) and certain SEC rules
and regulations and provides the staff's views regarding the valuation of
share-based payment arrangements for public companies. SFAS No. 123(R) permits
public companies to adopt its requirements using one of two methods. On April
14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS
123(R). Companies may elect to apply this statement either prospectively, or on
a modified version of retrospective application under which financial statements
for prior periods are adjusted on a basis consistent with the pro forma
disclosures required for those periods under SFAS 123. Effective January 1,
2006, the Company has fully adopted the provisions of SFAS No. 123(R) and
related interpretations as provided by SAB 107 prospectively. As such,
compensation cost is measured on the date of grant as its fair value. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company applies this statement prospectively.
The Company accounts for share-based payments awarded to the Investor pursuant
to FAS No. 123R and Emerging Issue Task Force Relase No.96-16, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services". Share-based payments awarded to
NYMEX Holdings, Inc. (the "Investor"), including those awarded by another holder
of an economic interest in the Company as compensation for services to the
Company, are share-based payments transactions. The Company measures the fair
value of the equity instruments to the Investor using the stock price and other
measurement assumptions as of the earlier of either of the following: 1) the
date at which a commitment for performance, as defined, by the counterparty to
earn the equity instruments is reached, or 2) the date at which the
counterparty's performance is complete. The fair value of the equity instruments
amounts to the carrying value of the consideration receivable from the Investor
and is recognized over the agreed-upon terms of the consideration, which is at
most 10 years. The Company evaluates the carrying value of the consideration
receivable from the Investor at each measurement date.
13
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 2- Summary of Significant Accounting Policies-Continued
Segment reporting
The Company operates in one segment, brokerage services. The Company's chief
operating decision-maker evaluates the performance of the Company based upon
revenues and expenses by functional areas as disclosed in the Company's
statement of operations.
Recent Pronouncements
In September 2006, the FASB issued FASB Statement No. 157 "Fair Value
Measurements". This Statement defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles
("GAAP"), and expands disclosures about fair value measurements. This statement
applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is a relevant measurement attribute. Accordingly,
this statement does not require any new fair value measurements. However, for
some entities, the application of this statement will change current practices.
This statement is effective for financial statements for fiscal years beginning
after November 15, 2007. Earlier application is permitted provided that the
reporting entity has not yet issued financial statements for that fiscal year.
Management believes this statement will have no impact on the financial
statements of the Company once adopted.
In February 2007, the FASB issued FASB Statement No. 159 "The Fair Value Option
for Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115". This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair value
measurement, which is consistent with the FASB's long-term measurement
objectives for accounting for financial instruments. This statement applies to
all entities, including not-for-profit organizations. Most of the provisions of
this statement apply only to entities that elect the fair value option. However,
the amendment to FASB Statement No. 115, Accounting for Certain Investments in
Debt and Equity Securities, applies to all entities with available-for-sale and
trading securities. Some requirements apply differently to entities that do not
report net income. Recognized financial assets and financial liabilities are
eligible items for the measurement option established by this Statement except:
o An investment in a subsidiary that the entity is required to
consolidate
o An interest in a variable interest entity that the entity is required
to consolidate
14
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 2- Summary of Significant Accounting Policies-Continued
o Employers' and plans' obligations (or assets representing net
overfunded positions) for pension benefits, other postretirement
benefits (including health care and life insurance benefits),
postemployment benefits, employee stock option and stock purchase
plans, and other forms of deferred compensation arrangements, as
defined in FASB Statements No. 35, "Accounting and Reporting by
Defined Benefit Pension Plans", No. 87, "Employers' Accounting for
Pensions", No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions", No. 112, "Employers' Accounting for
Postemployment Benefits", No. 123 (R) (revised December 2004),
"Share-Based Payment", No. 43, "Accounting for Compensated Absences",
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", and No. 158, "Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans", and APB Opinion No. 12,
"Omnibus Opinion--1967"
o Financial assets and financial liabilities recognized under leases as
defined in FASB Statement No. 13, "Accounting for Leases" (This
exception does not apply to a guarantee of a third-party lease
obligation or a contingent obligation arising from a cancelled lease.)
o Deposit liabilities, withdrawable on demand, of banks, savings and
loan associations, credit unions, and other similar depository
institutions
o Financial instruments that are, in whole or in part, classified by the
issuer as a component of shareholder's equity (including "temporary
equity"). An example is a convertible debt security with a
noncontingent beneficial conversion feature.
o Firm commitments that would otherwise not be recognized at inception
and that involve only financial instruments o Nonfinancial insurance
contracts and warranties that the insurer can settle by paying a third
party to provide those goods or services
o Host financial instruments resulting from separation of an embedded
nonfinancial derivative instrument from a nonfinancial hybrid
instrument.
The fair value option established by this Statement permits all entities to
choose to measure eligible items at fair value at specified election dates. A
business entity shall report unrealized gains and losses on items for which the
fair value option has been elected in earnings (or another performance indicator
if the business entity does not report earnings) at each subsequent reporting
date. A not-for-profit organization shall report unrealized gains and losses in
its statement of activities or similar statement.
The fair value option:
o May be applied instrument by instrument, with a few exceptions, such
as investments otherwise accounted for by the equity method
o Is irrevocable (unless a new election date occurs)
o Is applied only to entire instruments and not to portions of
instruments.
15
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 2- Summary of Significant Accounting Policies-Continued
FASB Statement No.115 is effective as of the beginning of an entity's first
fiscal year that begins after November 15, 2007. Early adoption is permitted as
of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of FASB Statement No.
157, "Fair Value Measurements". No entity is permitted to apply this Statement
retrospectively to fiscal years preceding the effective date unless the entity
chooses early adoption.
Note 3-Due from Related Party
In April 2004, under the Master Services Agreement, as amended on April 12,
2005, with a related party, Capital Energy Services, Inc., the Company agreed to
pay certain fixed and variable fees and support services to such related party
entity, partly owned by its former Chief Executive Officer and by an Executive
Officer in exchange for a share of revenues of the floor brokerage services of
the related party. The Company has agreed to pay a fixed fee in the amount of
$50,000 per year. This agreement was terminated on January 31, 2007.
The Company's share of revenues of the floor brokerage services amounted to
approximately $901,000 and $2.2 million during the nine-month periods ended
September 30, 2007 and 2006, respectively. The Company's share of expenses of
the floor brokerage services amounted to approximately $15,000 and $510,000
during the nine-month periods ended September 30, 2007 and 2006, respectively.
The Company has received approximately $1,508,000 from the related party in
connection with such floor brokerage services during the nine-month period ended
September 30, 2007. Additionally, in April 2007, the Company reimbursed the
related party approximately $165,000 for commissions to a broker that such
related party paid on the Company's behalf.
16
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 3-Due from Related Party-continued
The Company recognized its share of revenues of the floor brokerage services
based on the commissions earned for such services which are recognized on the
day of the trade-trade date basis.
The father of the Company's former Chairman of the Board leases to the Company a
seat on the exchange through which Capital Energy maintains its floor
operations. The Company assumed the cost of the lease in April 2006 and renewed
it in December 2006 through June 2007. The Company terminated this agreement
effective April 1, 2007. The lease provided for monthly payments of $5,000
through June 30, 2007. The amount paid pursuant to the lease amounted to $15,000
during the nine-month period ended September 30, 2007.
Note 4-Trading rights
During March 2007, the Company acquired two trading rights for an aggregate
amount of approximately $1,180,250, allowing it to operate on the floor of a
United States exchange. The trading rights do not have a finite life. During
June and August 2007, the Company sold its trading rights for $1,165,000,
generating a loss of approximately $15,000 which is included in other expenses.
Note 5-Agreement with NYMEX Holding, Inc.
On April 10, 2007, the Company and its former Chairman of the Board, its former
Vice Chairman and Chief Executive Officer, and its President, (the "Founding
Stockholders") and NYMEX Holdings, Inc. (the "Investor") entered into a
definitive stock and warrant purchase agreement (the "Stock and Warrant Purchase
Agreement") and consummated the transactions contemplated thereby.
17
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 5-Agreement with NYMEX Holding, Inc.-continued
Pursuant to the terms of the Stock and Warrant Purchase Agreement, the Investor
purchased 10,758,886 shares of the Company's common stock ("Common Stock") from
the Founding Stockholders (the "Purchased Shares") representing 19% of the then
outstanding shares of common stock on a fully diluted basis (without giving
effect to the Warrant, as defined and discussed below). Additionally, pursuant
to the Stock and Warrant Purchase Agreement, the Company physically issued to
the Investor a Warrant, as defined and described below, in consideration of the
Investor's agreement (the "Consideration"):
1. to develop a marketing plan, which plan was to detail proposed
expenditures by the Investor and joint activities;
2. subject to regulatory requirements, to provide space for up to
twenty of the Company's brokers on the Investor's trading floor;
3. to host the Company's OPEX electronic trade matching and
brokerage system ("OPEX") in the Investor's data center and
provide the Company with computer and networking hardware,
software, bandwidth and ancillary infrastructure and services
reasonably necessary to interconnect OPEX with the Investor's
ClearPort market gateway to trading and clearing services; and
4. Additionally, the Company agreed to exclusively clear all
over-thecounter ("OTC") products through the Investor's NYMEX
ClearPort clearing system for a period of ten years (provided
that the Investor continues to offer clearance for a particular
product through the NYMEX ClearPort clearing system) in
consideration for additional fees to be paid by the Investor to
the Company.
The terms of the warrant issued by the Company (the "Warrant"), as contemplated
in the Stock and Warrant Purchase Agreement, permit the Investor to purchase a
number of shares of Common Stock sufficient to increase the Investor's ownership
of the Company's Common Stock to an amount not to exceed 40% of the Company's
then outstanding Common Stock on a fully diluted basis, based on the assumption
that the Investor has retained ownership of the Purchased Shares and any shares
of Common Stock previously issued to the Investor upon a partial exercise of the
Warrant. The Warrant could be exercisable at any time and from time to time
prior to October 10, 2008 at an exercise price per share equal to $4.30 (the
"Exercise Price"). The Warrant does not contain a cashless exercise feature. The
Exercise Price is subject to certain customary adjustments to protect against
dilution.
Following the occurrence of the events which are the subject of the matters
discussed in Note 10 "Litigation," the Company and the Investor have not agreed
upon the aforementioned joint marketing and technology initiatives.
Additionally, the Investor indicated in a Schedule 13D it filed with the SEC on
July 6, 2007, with respect to its holdings of equity securities of the Company,
that it was now re-considering its potential joint marketing and technology
initiatives with the Company. As a result, the Investor and the Company have not
developed the contemplated joint marketing and technology initiatives.
The Company is considering the effect of the failure of the Investor to provide
the Consideration for the Warrant upon the Company's obligations under the
Warrant.
18
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 5-Agreement with NYMEX Holding, Inc.-continued
The sale of the Purchased Shares from the Founding Stockholders in an agreement
in which the Company would benefit from the Consideration constitutes a
share-based payment transaction. As such, the Company established that the fair
value of the Purchased Shares is more reliably measurable than the Consideration
from the Investor.
The fair value of the Consideration attributable to the Purchased Shares
represents the difference between the market value of the Purchased Shares at
the date of the Stock and Warrant Purchase Agreement, as quoted on the
Over-the-Counter Bulletin Board, and the disposition proceeds of the Purchased
Shares. The fair value of the Consideration at April 10, 2007 amounted to
$49,490,876 and was initially recorded as capital contribution from the Founding
Stockholders.
The fair value of the Consideration attributable to the Warrant amounted to
$99,594,000. The fair value is based on the Black Scholes Model using the
following assumptions: exercise price: $4.30; market value: $7.29; term: 1.5
years; risk-free interest rate: 4.89%; expected volatility: 128%; expected
dividend rate: 0%.
The Company recognized an amortization expense of approximately $3.3 million in
connection with the Consideration during the nine-month period ended September
30, 2007.
However, at June 30, 2007, based upon the statements made by the Investor, the
Company was unable to assert that it will receive any of the benefits initially
contemplated by the Stock and Warrant Purchase Agreement. Accordingly, the
Company has recorded a charge to its statement of operations amounting to
approximately $145.8 million, for the nine-month period ended September 30,
2007.
The Company has also provided for an allowance for doubtful accounts for the
incentives receivable from the Investor of approximately $640,000 at September
30, 2007.
Note 6- Intangible Asset
During March 2007, the Company acquired the customer list of HQ Trading, an
energy derivatives brokerage firm, and assumed its continued operations. The
Company acquired such assets to expand its customer base and provide a critical
mass entry in the crude oil options market. The terms of the agreement provided,
among other things, the following:
o $400,000 payable to the owners of HQ Trading upon execution of
final agreement;
o $400,000 payable to the owners of HQ Trading in September 2008;
o $400,000 payable to the owners of HQ Trading in March 2010;
o 900,000 warrants with an exercise price of $5 per share and
expiring in March 2012, of which 300,000 are exercisable
immediately and 600,000 become exercisable in March 2008 if the
continued operations of HQ Trading generate revenues exceeding
$1.2 million for the 12-month period following the final
agreement.
19
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 6- Intangible Asset-continued
The aggregate value assigned to the consideration amounted to $1,156,000 and is
as follows:
o The cash consideration amounts to $400,000.
o The fair value of the 300,000 warrants exercisable at the date of
the agreement amounts to $756,000, based on the Black Scholes
Model, using the following assumptions: exercise price of $5,
market value of $5, risk-free interest rate of 4.54%, expected
volatility of 52%, expected dividend rate: 0%, term: 5 years
The expected volatility was based on the average historical volatility of
comparable publicly-traded companies considering the Company's period of
observable historical data is shorter than the terms of the warrants.
The fair value of the consideration was assigned to customer relationships and
was amortized over a period of three years. The Company recognized approximately
$70,000 as amortization expense during the nine-month period ended September 30,
2007 and is included as selling, general and administrative expenses in the
accompanying consolidated statement of income.
During May 2007, following the occurrence of the events which are the subject of
the matters discussed in Note 10, "Litigation", the former owners of HQ Trading
agreed to unwind the acquisition. As part of the unwinding, the former owners of
HQ Trading released the Company from its obligations related to the two payments
of $400,000 payable in September 2008 and March 2010 and agreed to the
cancellation of the 900,000 warrants. The former owners of HQ Trading retained
the $400,000 which was paid upon execution of the final agreement. Both parties
retained the right to use the HQ Trading customer list.
Accordingly, the Company will not be recognizing the fair value of the remaining
600,000 warrants and the two payments of aggregating $800,000.
Following the separation agreement with the former owners of HQ Trading
effective May 2007, the carrying value of the client list acquired in March 2007
has been impaired. The Company is currently unable to assert that it will derive
any benefit from this client list in the foreseeable future. Accordingly, it has
recorded a charge to its statement of operations amounting to the carrying value
during the nine-month period ended September 30, 2007, which amounted to
approximately $1.1 million.
20
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 7-Due to Related Parties
The terms and amounts of due to related parties at September 30, 2007 are as
follows:
Due to Stockholder and former Chairman of the Board, non-interest bearing,
unsecured, payable by March 12, 2014, if the Company obtains additional equity
or debt financing of at least $1,000,000 following the private placement which
closed in September 2004 ("Capital Raise"), the Company will repay its former
Chairman of the Board up to 39.33% of the Capital Raise, up to $2,810,877, with
the remaining balance and accrued interest of 4.68% from the date of the
Capital Raise due on March 12, 2014: $5,044,510
Discount, using initial implied rate of 12%: (3,034,704)
-----------
$2,009,806
===========
Due to Executive Officer, non-interest bearing, unsecured, payable by March 12,
2014, if the Company obtains additional equity or debt financing of at least
$1,000,000 following a Capital Raise, the Company will repay its Executive
Officer up to 5.3% of the Capital Raise, up to $381,250, with the remaining
balance and accrued interest of 4.68% from the date of the Capital Raise
due on March 12, 2014: $508,697
Discount, using initial implied rate of 12%: (411,686)
-----------
$ 97,011
===========
During April 2005, the Company modified the terms of its due to related parties.
The modified terms provide that, in the event of a Capital Raise, among other
things, the annual interest rate accrued after such event is reduced from 12% to
4.68%. Additionally, the modified terms provide that the Company may make
principal repayments towards the due to a stockholder and former Chairman of the
Board and the due to its Executive Officer amounting to approximately 25% of its
cash flows from operating cash flows less capital expenditures. During April
2006, the Company modified the terms of its due to related parties to allow the
Company to make principal repayments at its discretion.
21
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 7-Due to Related Parties-continued
As a condition to the Investor's obligation to consummate the transactions
contemplated by the Stock and Warrant Purchase Agreement, the Company's former
Chairman of the Board executed an agreement, dated April 10, 2007 (the
"Waiver"), waiving any obligation on the part of the Company to make any
prepayment of principal, or to begin paying interest upon amounts due to the
Company's former Chairman of the Board, under the Loan Agreement between him and
the Company, dated March 22, 2004, as a result of any exercise by the Investor
of the Warrant.
The Company satisfied its due to its former Chief Executive Officer during
fiscal 2006. The due to former Chief Executive Officer had the same terms as the
due to Executive Officer.
The amortization of the discount on the due to related parties amounted to
approximately $252,000 and $701,000 during the nine-month periods ended
September 30, 2007 and 2006, respectively.
During the nine-month period ended September 30, 2006, the Company made
principal repayments amounting to approximately $1.2 million towards its due to
related parties.
Note 8- Other Related Party Transactions
The Company provided administrative services to a related party, an entity owned
by the Company's former Chief Executive Officer and an Executive Officer. The
Company charged approximately $8,000 and $8,000 during the nine-month periods
ended September 30, 2007 and 2006, respectively. The related party satisfied its
obligations owed to the Company prior to September 30, 2007. This agreement was
terminated by both parties effective June 30, 2007.
The Company has recognized revenues of approximately $250,000 and $4,000 during
the nine-month periods ended September 30, 2007 and 2006, respectively, from two
related parties, entities in which one of its stockholders and former Chairman
of the Board is also the managing director. Such related parties satisfied their
obligations to the Company at September 30, 2007.
22
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 9- Stockholders' Equity
During the nine-month periods ended September 30, 2007 and 2006, the Company
issued 30,689 and 216,943 shares of common stock, respectively, to its former
Chief Executive Officer. The fair value of the shares issued during the
nine-month periods ended September 30, 2007 and 2006 amounted to approximately
$182,000 and $140,000, respectively, based on the quoted price of the Company's
common stock at the date of issuance. The shares were issued pursuant to the
employment agreement between the Company and its former Chief Executive Officer.
Stock Compensation Plan
During November 2004, the Company adopted the 2004 Stock Option Plan ("2004
Plan"). The 2004 Plan allows for the grant of both incentive stock options and
nonstatutory stock options. The 2004 Plan may be administered, interpreted and
constructed by the Board of Directors or a compensation committee. The maximum
number of shares of common stock which may be issued pursuant to options granted
under the 2004 Plan may not exceed 7,500,000 shares. There are 633,000 options
outstanding at September 30, 2007. The outstanding options are exercisable at a
weighted average price per share of $0.79 per share. The Company granted
1,595,000 options during the nine-month period ended September 30, 2007. The
options outstanding vest over periods of up to three years.
During the nine-month periods September 30, 2007 and September 30, 2006, the
Company recorded share-based payment expenses amounting to approximately $3.9
million and $4,000, respectively, in connection with all options outstanding at
the respective measurement dates. The amortization of share-based payment were
recorded in cost of revenues.
23
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 9- Stockholders' Equity-continued
The share-based payment is based on the fair value of the outstanding options
amortized over the requisite period of service for optionholders, which is
generally the vesting period of the options.
The fair value of the options is based on the Black Scholes Model using the
following assumptions :
Exercise price : $0.20-$7.17
Market price at date of grant : $0.20-$7.17
Volatility : none-57%
Expected dividend rate : 0%
Risk-free interest rate : 2.78%-4.81%
The weighted-average grant-date fair value of options granted during the
nine-month period ended September 30, 2007 amounted to $2.44.
The total compensation cost related to nonvested awards not yet recognized
amounted to approximately $26,000 at September 30, 2007 and the Company expects
that it will be recognized over the following weighted-average period of 21
months.
If any options granted under the 2004 Plan expire or terminate without having
been exercised or cease to be exercisable, such options will be available again
under the 2004 Plan. All employees of the Company and its subsidiaries are
eligible to receive incentive stock options and nonstatutory stock options.
Non-employee directors and outside consultants who provided bona-fide services
not in connection with the offer or sale of securities in a capital raising
transaction are eligible to receive nonstatutory stock options. Incentive stock
options may not be granted below the fair market value of the Company's common
stock at the time of grant or, if to an individual who beneficially owns more
than 10% of the total combined voting power of all stock classes of the Company
or a subsidiary, the option price may not be less than 110% of the fair value of
the common stock at the time of grant. The expiration date of an incentive stock
option may not be longer than ten years from the date of grant. Option holders,
or their representatives, may exercise their vested options up to three months
after their employment termination or one year after their death or permanent
and total disability. The 2004 Plan provides for adjustments upon changes in
capitalization.
The Company's policy is to issue shares pursuant to the exercise of stock
options from its available authorized but unissued shares of common stock. It
does not issue shares pursuant to the exercise of stock options from its
treasury shares.
24
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 9- Stockholders' Equity-continued
Warrants
During February 2006, the Company issued 1,200,000 warrants to a company
wholly-owned by its former Chief Executive Officer. The exercise price of the
warrants is $0.95 per share. The warrants expire in February 2009. The warrants
become exercisable in tranches of up to 400,000 warrants beginning June 30,
2006, and every six months thereafter, upon reaching certain trading milestones
by two of the Company's customers. The Company recognizes the fair value of the
exercisable warrants when performance has occurred. The Company recognized an
expense of $120,000 and $81,000 during the nine-month periods ended September
30, 2007 and 2006, respectively, in connection with all warrants which became
exercisable during the respective periods.
The fair value of the warrants is based on their fair value at the time of
grant. The fair value of the warrants is based on the Black Scholes Model using
the following assumptions:
Exercise price : $0.95
Market price at date of grant: $0.95
Volatility: 57%
Expected dividend rate: 0%
Risk-free interest rate: 5.13%
During March 2007, the Company issued warrants to the owners of HQ Trading, in
connection with the Company's purchase of the HQ Trading customer relationships.
The terms of the warrants are as follows:
900,000 warrants with an exercise price of $5 per share and expiring in March
2012, of which 300,000 are exercisable immediately and 600,000 warrants become
exercisable in March 2008 if the continued operations of HQ Trading generate
revenues exceeding $1.2 million for the 12-month period following the final
agreement.
All of these warrants were cancelled in May 2007 in connection with the
unwinding of the HQ Trading transaction.
25
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 9- Stockholders' Equity-continued
Investor Rights and Registration Agreements
In connection with the consummation of the transactions contemplated by the
Stock and Warrant Purchase Agreement, the Company, the Investor and the Founding
Stockholders also entered into an Investor Rights Agreement, also dated April
10, 2007 (the "Investor Rights Agreement"), pursuant to which, for so long as
the Investor owns at least 5,379,443 shares of Common Stock:
(a) the Investor is entitled to designate one person (reasonably acceptable to
the Company) that the Company is required to nominate as a member of the
Company's board of directors (the "Investor Director");
(b) each of the Founding Stockholders are required to vote their shares in favor
of the election of the Investor's designee as a director of the Company;
(c) the Investor is required to vote its shares in favor of each individual
nominated for election as a member of the Company's board of directors by the
nominating committee of the Company;
(d) subject to certain permitted threshold amounts, the consent of the Investor
Director (which may not be unreasonably withheld) is required before the Company
may take certain actions, including (1) issuances of shares of a class of stock
ranking senior to the Common Stock, (2) acquisitions of businesses or assets,
(3) entry into related party transactions, (4) the declaration or payment of
dividends or distributions on or with respect to, or the optional redemption of,
capital stock or the issuance of debt and (5) entry into any business which is
not similar, ancillary or related to any of the businesses in which the Company
is currently engaged;
(e) each of the Founding Stockholders and the Investor have certain rights of
first refusal to purchase or subscribe for their pro rata percentage of shares
in certain subsequent sales by the Company of Common Stock and/or certain other
securities convertible into or exchangeable for Common Stock;
(f) each of the Founding Stockholders and the Investor have certain rights of
first refusal with respect to proposed sales of Common Stock by the others; and
26
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 9- Stockholders' Equity-continued
(g) before they may accept any offer by an independent third party to acquire
fifty percent (50%) or more of the total voting power of the Common Stock or
voting stock of the Company, the Founding Stockholders and the Company are
required to provide notice of such offer to the Investor and permit the Investor
a period of 10 days to make its own offer.
The Investor Rights Agreement additionally requires the Investor to refrain from
purchasing any additional shares of the Company's Common Stock, with certain
limited exceptions, until April 10, 2008.
The Company and the Investor also entered into a registration rights agreement,
dated April 10, 2007 (the "Registration Rights Agreement"), pursuant to which,
among other things, the Company has provided the Investor, subject to standard
exceptions, with (a) unlimited "piggyback" rights subject to standard
underwriter lock-up and cutback provisions and (b) the right to two demand
registrations for underwritten offerings or take downs off of a shelf
registration statement, provided that (i) a minimum of $5,000,000 of Common
Stock is offered in such demand registration or take down and (ii) the Company
will not be obligated to effectuate more than one underwritten offering pursuant
to a demand registration by the Investor in any six-month period. In addition,
if the Company is eligible to register its securities on Form S-3 (or any
successor form then in effect), the Investor will be entitled to unlimited
registrations on Form S-3 (or any successor form then in effect), including
shelf registrations, provided that (a) a minimum of $5,000,000 of Common Stock
is offered in the S-3 registration and (b) the Company will not be obligated to
effect more than two S-3 registrations in any twelve month period. An S-3
registration will not count as a demand registration, unless such registration
is for an underwritten offering or an underwritten take down off of an existing,
effective shelf registration statement.
On May 14, 2007, the Investor Director resigned and the Investor has stated that
it has no current plans to fill the vacancy created by the Investor Director's
resignation.
27
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 10- Litigation and Contingencies
On May 11, 2007, two lawsuits, captioned Alexander Fleiss v. Optionable Inc.,
Mark Nordlicht, Kevin Cassidy, Edward J. O'Connor, Albert Helmig and Marc-Andre
Boisseau, 07 CV 3753 (LAK) ("Fleiss") and Robert Rastocky v. Optionable, Inc.,
Kevin Cassidy and Edward O'Connor, 07 CV 3755 (LAK), were filed in the United
States District Court for the Southern District of New York. Subsequently, five
additional lawsuits were filed in the United States District Court for the
Southern District of New York as follows: one on May 16, 2007, Jagdish Patel v.
Optionable Inc., Kevin Cassidy, and Edward J. O'Connor, 07 CV 3845 (LAK)
("Patel"); two on May 17, 2007, Peters v. Optionable, Inc., Mark Nordlicht,
Kevin P. Cassidy, Edward J. O'Connor, Albert Helmig, and Marc-Andre Boisseau, 07
CV 3877 (LAK) ("Peters"); and Manowitz v. Optionable Inc., Kevin Cassidy, Edward
J. O'Conner, and Mark Nordlicht, 07 CV 3884 (UA) ("Manowitz"); one on May 24,
2007, Glaubach v. Optionable Inc., Kevin Cassidy, Mark Nordlicht, Edward J.
O'Connor, Albert Helmig, and Marc-Andre Boisseau; 07 CV 4085 (LAK) ("Glaubach");
and one on June 22, 2007, Bock v. Optionable Inc., Kevin Cassidy, Mark
Nordlicht, Edward J. O'Connor, Albert Helmig, and Marc-Andre Boisseau, 07 CV
5948 (LAK) ("Bock"). Each of the lawsuits names the Company as a defendant and
some of the lawsuits name as defendants all or certain of the directors and
officers of the Company during the time period referenced. The directors and
officers of the Company named as defendants include Mark Nordlicht, the former
Chairman of the Board of Directors of the Company; Kevin Cassidy, the former
Chief Executive Officer and Vice-Chairman of the Board of Directors of the
Company; Edward J. O'Connor, the President of the Company and member of the
Board of Directors; Albert Helmig, a member of the Board of Directors during the
relevant time period and now our Executive Chairman of the Board; and Marc-Andre
Boisseau, the Chief Financial Officer of the Company. By Order dated May 24,
2007, Rastocky was voluntarily dismissed.
The lawsuits seek unspecified damages arising from alleged violations of the
federal securities laws, including the Securities Exchange Act of 1934, 15
U.S.C. ss. 78a et seq., (the "Exchange Act"), the Securities Act of 1933, 15
U.S.C. ss. 77a et seq., and Rule 10b-5 under the Exchange Act, 17 C.F.R. ss.
240.10b-5. The lawsuits allege that, during various class periods ranging from
May 6, 2005 to May 14, 2007, defendants failed to disclose certain information
in public filings and statements, sold artificially inflated stock and engaged
in improper deals, had an improper relationship with Bank of Montreal ("BMO")
and understated the Company's reliance on its relationship with BMO. Plaintiffs
allege that while the Company's stock was trading at artificially inflated
prices, certain defendants, including Mark Nordlicht, Kevin Cassidy and Edward
O'Connor, sold roughly 10,758,886 shares of common stock of the Company, for
aggregate proceeds of approximately $28,941,403.
The lawsuits further allege that on April 27, 2007, BMO announced that it had
lost millions of dollars on trades executed through the Company. Plaintiffs
allege that the market price of the Company's common stock price dropped further
in response to this disclosure. According to complaints, the market price of the
Company's common stock continued to decline as investors learned that: BMO was
suspending its business with the Company; NYMEX Holdings, Inc. had resigned its
representation on the Company's Board of Directors; Kevin Cassidy had resigned
as Vice Chairman and Chief Executive Officer of the Company; and Kevin Cassidy
had been convicted in 1997 of credit card fraud and in 1993 of income tax
evasion. Plaintiffs claim that defendants' alleged misrepresentations, omissions
28
OPTIONABLE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
Note 10- Litigation and contingencies-continued
and fraudulent conduct deceived the market, artificially inflated the price of
the Company's common stock and allegedly caused plaintiffs to suffer an
unspecified amount of damages.
By Orders dated June 20, 2007 and July 3, 2007, Fleiss, Patel, Peters, Manowitz
and Glaubach were consolidated under In re Optionable Securities Litigation, 07
CV 3753 (LAK). It is likely that Bock will also be consolidated. On July 10,
2007, several plaintiffs, including some not previously identified, filed
motions seeking to become lead plaintiff and to have their lawyers approved as
lead counsel in the consolidated action. After lead plaintiff is appointed and
lead counsel is approved, it is anticipated plaintiffs will file a consolidated,
amended class action complaint.
The actual costs that will be incurred in connection with these actions cannot
be quantified at this time and will depend upon many unknown factors.
On October 15, 2007, the Company received a letter from the Company's former
Chief Executive Officer in which he states, among other things, that the Company
is in breach of certain obligations pursuant to an Amended and Restated
Employment Agreement, dated April 10, 2007, and the Company should:
1) continue to pay him his base salary, amounting to $25,000 per
month for fiscal 2007, $325,000 for fiscal 2008, and $350,000 for
fiscal 2009;
2) continue to pay him a cash consideration equal to 5% of the
Company's revenues and a stock consideration equal to 2% of the
Company's revenues. The aggregate value of the unpaid
consideration based on the Company's revenues amounted to
approximately $289,000 at September 30, 2007;
3) Continue to provide to him health, welfare, and pension plan
benefits as well as the payment of an annual premium for his life
insurance through October 2009.
While the Company intends to vigorously defend these matters, there exists the
possibility of adverse outcomes that the Company cannot determine. These matters
are subject to inherent uncertainties and management's view of these matters may
change in the future.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW OF RECENT DEVELOPMENTS
On April 10, 2007, we, Mark Nordlicht, our former Chairman of the Board, Kevin
Cassidy, our former Vice Chairman and Chief Executive Officer, Edward O'Connor,
our President, (together with Mr. Nordlicht and Mr. Cassidy, the "Founding
Stockholders"), and NYMEX Holdings, Inc. (the "Investor") entered into a
definitive stock and warrant purchase agreement (the "Stock and Warrant Purchase
Agreement").
Pursuant to the terms of the Stock and Warrant Purchase Agreement, Mr.
Nordlicht, Mr. Cassidy and Mr. O'Connor sold to the Investor, 7,000,000,
1,905,000 and 1,853,886 shares, respectively, of common stock of the Company.
This aggregate of 10,758,886 shares of common stock (the "Purchased Shares")
represented 19% of the then outstanding shares of common stock on a fully
diluted basis (without giving effect to the Warrant, as defined and discussed
below). The purchase price paid by the Investor for the Purchased Shares was
$2.69 per share. Additionally, pursuant to the Stock and Warrant Purchase
Agreement, we physically issued to the Investor the Warrant, as defined and
described below, in consideration of the Investor's agreement (i) to develop
with us a marketing plan, which plan will detail proposed expenditures by the
Investor and joint activities; (ii) subject to regulatory requirements, to
provide space for up to twenty of the our brokers on the Investor's trading
floor; and (iii) to host our electronic trading platform, OPEX, in the
Investor's data center and provide us with computer and networking hardware,
software, bandwidth and ancillary infrastructure and services reasonably
necessary to interconnect OPEX with the Investor's clearing system market
gateway to trading and clearing services. Additionally, we agreed to exclusively
clear all OTC products through the Investor's clearing system for a period of
ten years (provided that the Investor continues to offer clearance for a
particular product through its clearing system) in consideration for additional
fees to be paid by the Investor to us.
The warrant issued by us (the "Warrant") permits the Investor to purchase a
number of shares of common stock sufficient to increase the Investor's ownership
of the Company's common stock to an amount not to exceed 40% of the Company's
then outstanding common stock on a fully diluted basis, based on the assumption
that the Investor has retained ownership of the Purchased Shares and any shares
of common stock previously issued to the Investor upon a partial exercise of the
Warrant. The Warrant is exercisable at any time and from time to time prior to
October 10, 2008 at an exercise price per share equal to $4.30 (the "Exercise
Price"). The Warrant does not contain a cashless exercise feature. The Exercise
Price is subject to certain customary adjustments to protect against dilution.
In connection with the consummation of the transactions contemplated by the
Stock and Warrant Purchase Agreement , the Company, the Investor and the
Founding Stockholders also entered into an Investor Rights Agreement, also dated
April 10, 2007 (the "Investor Rights Agreement"), pursuant to which, for so long
as the Investor owns at least 5,379,443 shares of common stock:
(a) the Investor is entitled to designate one person (reasonably acceptable to
the Company) that we are required to nominate as a member of the our board of
directors (the "Investor Director");
(b) each of the Founding Stockholders are required to vote their shares in favor
of the election of the Investor's designee as one our directors;
(c) the Investor is required to vote its shares in favor of each individual
nominated for election as a member of our board of directors by our nominating
committee;
(d) subject to certain permitted threshold amounts, the consent of the Investor
Director (which may not be unreasonably withheld) is required before we may take
certain actions, including (1) issuances of shares of a class of stock ranking
senior to the common stock, (2) acquisitions of businesses or assets, (3) entry
into related party transactions, (4) the declaration or payment of dividends or
distributions on or with respect to, or the optionable redemption of, capital
stock or the issuance of debt and (5) entry into any business which is not
similar, ancillary or related to any of the businesses in which we are currently
engaged;
30
(e) each of the Founding Stockholders and the Investor have certain rights of
first refusal to purchase or subscribe for their pro rata percentage of shares
in certain subsequent sales by us of common stock and/or certain other
securities convertible into or exchangeable for common stock;
(f) each of the Founding Stockholders and the Investor have certain rights of
first refusal with respect to proposed sales of our common stock by the others;
and
(g) before they may accept any offer by an independent third party to acquire
fifty percent (50%) or more of the total voting power of our common stock, the
Founding Stockholders and we are required to provide notice of such offer to the
Investor and permit the Investor a period of 10 days to make its own offer.
The Investor Rights Agreement additionally requires the Investor to refrain from
purchasing any additional shares of our common stock, with certain limited
exceptions, until April 10, 2008.
The Company and the Investor also entered into a registration rights agreement,
dated April 10, 2007 (the "Registration Rights Agreement"), pursuant to which,
among other things, we have provided the Investor, subject to standard
exceptions, with (a) unlimited "piggyback" rights subject to standard
underwriter lock-up and cutback provisions and (b) the right to two demand
registrations for underwritten offerings or take downs off of a shelf
registration statement, provided that (i) a minimum of $5,000,000 of our common
stock is offered in such demand registration or take down and (ii) we will not
be obligated to effectuate more than one underwritten offering pursuant to a
demand registration by the Investor in any six-month period. In addition, if we
are eligible to register our securities on Form S-3 (or any successor form then
in effect), the Investor will be entitled to unlimited registrations on Form S-3
(or any successor form then in effect), including shelf registrations, provided
that (a) a minimum of $5,000,000 of common stock is offered in the S-3
registration and (b) we will not be obligated to effect more than two S-3
registrations in any twelve month period. An S-3 registration will not count as
a demand registration, unless such registration is for an underwritten offering
or an underwritten take down off of an existing, effective shelf registration
statement.
As a condition to the Investor's obligation to consummate the transactions
contemplated by the Stock and Warrant Purchase Agreement, Mr. Nordlicht executed
an agreement, dated April 10, 2007 (the "Waiver"), waiving any obligation on the
part of the Company to make any prepayment of principal, or to begin paying
interest upon amounts due to Mr. Nordlicht, under the Loan Agreement between him
and the Company, dated March 2004, as a result of any exercise by the Investor
of the Warrant. Also as a condition to the Investor's obligation to consummate
the transactions contemplated by the Stock and Warrant Purchase Agreement, Mr.
Cassidy and the Company entered into an Amended and Restated Employment
Agreement and Mr. O'Connor entered into a Non-Competition Agreement, dated April
10, 2007, with the Company, pursuant to which Mr. O'Connor agreed not to
disclose or use the Company's confidential information and, for a period of nine
months following the termination of Mr. O'Connor's employment, not to compete
with the Company or solicit certain customers of the Company.
Pursuant to our final agreements with the Investor in April 2007, we physically
issued to the Investor warrants which will permit the Investor to purchase a
number of shares of common stock sufficient to increase its ownership to an
amount not to exceed 40% of our then outstanding common stock on a fully diluted
basis, based on the assumption that the Investor has retained ownership of the
Purchased Shares and any shares of common stock previously issued to the
Investor upon a partial exercise of the Warrant. The Warrant will be exercisable
from time to time for a period of 18 months from the closing date of the final
agreement at an exercise price per share equal to $4.30 (the "Exercise Price").
The Exercise Price will be subject to certain customary adjustments to protect
against dilution.
31
The number of warrants issued to NYMEX may increase or decrease from time to
time until October 2008, depending on whether we issue additional shares,
options, and warrants, repurchase treasury shares, or certain outstanding
options and warrants expire or become unexercisable. Because the number of
shares will vary from time to time, the fair value of the warrants issued
pursuant to our agreement and the related amortization may also vary from time
to time, until October 2008.
Following the occurrence of the events which are subject of the matters
discussed in Item 1 of Part II of this Report "Legal Proceedings," we have not
agreed with the Investor on the joint marketing and technology initiatives
discussed, above. Additionally, the Investor indicated in a Schedule 13D it
filed with the SEC on July 6, 2007, with respect to its holdings of equity
securities of the Company, that it was now re-considering its potential joint
marketing and technology initiatives with the Company. As a result, the Investor
and the Company have not developed the contemplated joint marketing and
technology initiatives.
The Company is considering the effect of the failure of the Investor to provide
the consideration for the Warrant upon the Company's obligations under the
Warrant.
On May 1, 2007, Mark Nordlicht resigned as a member of the Company's Board and
Albert Helmig was designated as Chairman of the Board.
On May 8, 2007, BMO Financial Group ("BMO") issued a statement indicating that
BMO was suspending its business relationships with us, as well as all
derivatives trading through us, pending the results of an ongoing external
review of certain commodity trading losses incurred by BMO. BMO has accounted
for a significant portion of the Company's revenues. Since that time, BMO has
not explained its action to the Company and has not resumed its business
relationships with us.
On May 11, 2007, Albert Helmig was designated as our Executive Chairman of the
Board.
On May 12, 2007, Mr. Kevin Cassidy resigned as our Chief Executive Officer and
as a director.
On May 14, 2007, Benjamin Chesir, the Investor Director resigned as one of our
directors. The Investor has issued a statement that they do not have current
plans to fill the vacancy created by Mr. Chesir's resignation.
The statement issued by BMO, the related suspension of their business
relationship with us, the matters discussed in Item 1 of Part II of this Report
"Legal Proceedings" together with the combined succession of events since then
have had a significant adverse impact on our business, including current and,
likely, future results of operations and financial condition. Consequently, we
are formulating a revised strategy.
We launched our electronic trading system, OPEX, in 2006 and we have continued
to enhance its features and functionalities during the first half of 2007. Users
of OPEX can now execute on the platform mostly energy-related derivative trades.
A significant portion of the contracts executable on OPEX are those offered by
NYMEX, a US exchange. However, we believe that OPEX features and functionalities
can be ported to other derivatives as well, such as credit default swaps,
interest-related derivatives, metals and other commodities. We are currently
working on an OPEX enhancement to complete an interface which could permit
execution of transactions with the Chicago Mercantile Exchange. However, we
believe that OPEX, with appropriate enhancements, may be able to execute
transactions offered by other exchanges as well.
The Company is revising its strategy to:
32
4) emphasize the marketing of its automated electronic trading platform to
end-users through indirect channels, such as through other third-party
brokers and other exchanges;
5) develop and enhance its automated trading platform to end-users other
than those in the energy derivatives markets; 6) provide software
development services to third-party brokers and other exchanges.
The Company is also considering whether it would be more advantageous to sell
its intangible assets, including the technology it has developed.
The Company anticipates that revenue-generating agreements under its revised
strategy would take the form of licensing, royalty-based agreements and/or
software development and maintenance agreements.
The Company believes that revenues from its brokerage services will be minimal
under its existing structure. While the Company is not discontinuing its
brokerage services, it will most likely need to 1) acquire the operations of a
brokerage firm, or several brokerage firms, and hire their personnel, to expand
its current operations or 2) form a consortium of brokerage companies that would
jointly use the electronic platform.
The Company believes it has enough funds to meet its obligations, based on its
internal projections, for at least the next twelve months. However, the Company
cannot guarantee that it will do so. If there are unforeseen expenses or
financial obligations which occur during that period, the Company may not be
able to generate enough revenues to meet such obligations. Additionally, if the
Company acquires a brokerage firm or a technology company which could be
instrumental in the Company's long-term growth, this could hamper the Company's
ability to continue as going concern, both from a short-term or a long-term
perspective, and the Company would have to resort to financing, through either
debt or equity placements, for the funding of either such acquisitions or
unforeseen expenses or financial obligations. There can be no assurance that any
such financing would be available on acceptable terms, or at all.
As a result of the factors discussed above, we believe that our revenues for the
remainder of 2007 will decrease when compared to fiscal 2006. We believe that
revenues we traditionally generated from OPEX, voice-brokerage and our floor
operations will be minimal for the remainder of 2007 unless we are able to hire
more brokers or we acquire a brokerage firm or firms.
We expect that our research and development expenses to enhance features and
functionalities of OPEX will exceed $1 million during 2007.
We expect that our cost of revenues for the remainder of 2007 will also
decrease, commensurate with an expected decrease in revenues, unless we make an
acquisition which could change our business model.
We acquired the intangible assets of HQ Trading in March 2007. This transaction
resulted in our recording intangible assets of approximately $1.1 million which
was written-off upon the unwinding of the transaction in May 2007.
The sale of the Purchased Shares by the Founding Stockholders in an agreement in
which the Company would benefit from the Consideration constitutes a
shared-based payment transaction. As such, the Company established that the fair
value of the Purchased Shares is more reliably measurable than the Consideration
from the Investor.
The fair value of the Consideration attributable to the Purchased Shares
represents the difference between the market value of the Purchased Shares at
the date of the Stock and Warrant Purchase Agreement, as quoted on the
Over-the-Counter Bulletin Board, and the disposition proceeds of the Purchased
Shares. The fair value of the Consideration at April 10, 2007 amounted to
$49,490,876 and was initially recorded as capital contribution from the Founding
Stockholders.
33
The fair value of the Consideration attributable to the Warrant amounted to
$99,594,000.
However, at June 30, 2007, based upon the statements made by the Investor, the
Company is unable to assert that it will receive any of the benefits initially
contemplated by the Stock and Warrant Purchase Agreement. Accordingly, the
Company has recorded a charge to its statement of operations amounting to
approximately $145.8 million, at June 30, 2007.
This discussion and analysis of our financial condition should be read in
connection with our financial statements and accompanying notes thereto for the
fiscal year ended December 31, 2006, including without limitation the
information set forth under the heading "Critical Accounting Policies and
Estimates".
34
RESULTS OF OPERATIONS
Results of Operations
(Unaudited)
For the nine-month period ended Increase/ Increase/
September 30, (Decrease) (Decrease)
-------------------------------- in $ 2007 in % 2007
2007 2006 vs 2006 vs 2006
-------------- -------------- -------------- ------------
Brokerage fees $ 8,783,937 $ 5,354,724 $ 3,429,213 $ 64.0%
Brokerage fees-related parties 1,151,798 2,243,301 (1,091,503) -48.7%
Incentives 3,285,058 1,639,602 1,645,456 100.4%
-------------- -------------- -------------- ------------
Net revenues 13,220,793 9,237,627 3,983,166 43.1%
Cost of revenues 7,860,987 3,215,843 4,645,144 144.4%
Cost of revenues-related parties 30,013 633,022 (603,009) -95.3%
-------------- -------------- -------------- ------------
7,891,000 3,848,865 4,042,135 105.0%
Gross profit 5,329,793 5,388,762 (58,969) -1.1%
Operating expenses:
Selling, general and administrative 7,473,764 758,816 6,714,948 NM
Impairment-considerable receivable
from stockholder 145,771,879 - 145,771,879 NM
Impairment-intangible asset 1,085,610 - 1,085,610 NM
Research and development 733,579 273,567 460,012 168.2%
-------------- -------------- -------------- ------------
Total operating expenses 155,064,832 1,032,383 154,032,449 NM
Operating income (149,735,039) 4,356,379 (154,091,418) NM
Other income (expense):
Interest income 285,895 53,336 232,559 NM
Other expense (15,250) - 15,250 NM
Interest expense-related parties (251,685) (701,134) (449,449) -64.1%
-------------- -------------- -------------- ------------
18,960 (647,798) NM
Net income before income tax (149,716,079) 3,708,581 (153,424,660) NM
Income tax benefit ( expense) (354,206) (24,052) 330,154 NM
-------------- -------------- -------------- ------------
Net income $(150,070,285) $ 3,684,529 $(153,754,814) NM
============== ============== ============== ============
NM: Not meaningful
35
Revenues consist primarily of fees earned from natural gas derivatives
transactions and related incentive arrangements.
The increase in brokerage fees during the nine-month period ended September 30,
2007 when compared to the prior year period is primarily due to an increase in
the brokerage fees resulting from increased volume of transactions of natural
gas derivatives traded on the OTC market on behalf of existing clients.
The decrease in brokerage fees-related party during the nine-month period ended
June 30, 2007 when compared to the prior year period is primarily due to the
fact that our agreement with Capital Energy Services, Inc., a related party, was
effective for nine months during the nine-month period ended September 30, 2006
and during one month (i.e. January 2007) during the nine month period ended
September 30, 2007, offset by an increase in fees resulting from increased
monthly volume of transactions of natural gas derivatives traded on the futures
market on behalf of existing clients during January 2007.
The increase in incentives earned pursuant to agreement with a US exchange, the
Investor, was due to a higher volume of cleared OTC transactions handled by us
on such exchange.
These increases related primarily to transactions which occurred prior to the
events described above and in Item 1 of Part II of this Report. The volume of
transactions following those events has declined significantly.
The Company anticipates that revenue-generating agreements under its revised
strategy would take the form of licensing, royalty-based agreements and/or
software development and maintenance agreements.
The Company believes that revenues from its brokerage services will be minimal
under its existing structure. While the Company is not discontinuing its
brokerage services, it will most likely need to 1) acquire the operations of a
brokerage firm, or several brokerage firms, and hire their personnel, to expand
its current operations or 2) form a consortium of brokerage companies that would
jointly use the electronic platform.
As a result of the factors discussed above, we believe that our revenues for the
remainder of 2007 will decrease when compared to fiscal 2006. We believe that
revenues we traditionally generated from OPEX, voice-brokerage and our floor
operations will be minimal for the remainder of 2007 unless we are able to hire
more brokers or we acquire a brokerage firm or firms.
36
Cost of revenues
Cost of revenues consists primarily of compensation of personnel directly
associated with handling the natural gas derivative transactions on behalf of
our clients as well as expenses associated with our floor brokerage operations.
The increase in cost of revenues during the nine-month period ended September
30, 2007 when compared to the prior year period is primarily attributable to the
fair value of options and warrants we issued to brokers and expensed during the
nine-month period ended September 30, 2007 which amounted to approximately $4.0
million, compared to approximately $85,000 during the nine-month period ended
September 30, 2006. The increase in amortization of the fair value of options
results from the issuance of 1,595,000 options during the nine-month period
ended September 30, 2007, which were fully expensed pursuant to the termination
of the employment of certain grantees. The Company did not issue any options to
its brokers during the nine-month period September 30, 2006.
We expect that our cost of revenues for the remainder of 2007 will also
decrease, commensurate with an expected decrease in revenues, unless we make an
acquisition which could change our business model.
Selling, general, and administrative expenses
Selling, general, and administrative expenses consists primarily of legal fees,
incurred in connection with the Company's attention to certain allegations made
recently and to our responses to and compliance with requests for documents and
information received from the United States Commodity Futures Trading Commission
(the "CFTC"), the United States Securities and Exchange Commission (the "SEC"),
the United States Department of Justice (the "DOJ") and a grand jury subpoena
received from the New York County District Attorney's office (the "District
Attorney's Office"),or to handle certain matters which occur during the course
of our operations, and compensation of personnel supporting our operations. The
increase in selling, general, and administrative expenses during the nine-month
period ended September 30, 2007, when compared to the prior period is primarily
due to the following:
o one-time amortization of the Consideration receivable from the
Investor of approximately $3.3 million;
o increased legal fees of approximately $2.1 million, primarily
incurred in connection with our our attention to certain
allegations made recently, our responses to, and compliance with
the governmental requests described above, and in connection with
the NYMEX transaction;
o one-time provision in June 2007 of approximately $640,000 in
connection with our estimated incentives receivable from the
Investor ;
o increased investor relation fees in connection with increased
efforts to position our company before the investors community;
37
As a result of the matters discussed above and in Item 1 of Part II of this
Report, we believe that our legal fees for the remainder of the year will
increase on an annualized basis from the level of such expenses reached during
fiscal 2006.
Impairment- Consideration receivable from Investor and Impairment- Intangible
Asset
The impairment- consideration receivable from Investor and impairment-
intangible asset consists of one-time losses attributable to the lack of
perceived likely benefits from 1) the consideration the Investor had agreed to
provide to the Company pursuant to the Stock and Warrant Purchase Agreement and
2) the constructive rescission of the HQ Trading acquisition. The Stock and
Warrant Purchase Agreement and the HQ Trading acquisition both took place during
the nine-month ended September 30, 2007 and no similar expenses occurred during
the nine-month period ended September 30, 2006.
Research and development
Research and development expenses consist primarily of compensation of personnel
and consultants associated with the development and testing of our automated
electronic trading system. The increase in research and development expenses
during the nine-month period ended September 30, 2007 when compared to the prior
year period is primarily due to the following:
o increased compensation and related benefits for additional
software engineers and quality and assurance personnel we hired
to enhance our electronic platform, OPEX.
We expect that our research and development expenses to enhance features and
functionalities of OPEX will exceed $1 million during 2007.
Interest income
Interest income consists primarily of interest earned on interest-bearing cash
and cash equivalents. The increase in interest income during the nine-month
period ended September 30, 2007 when compared to the prior year period is
primarily due to an increase in our cash and cash equivalents' interest bearing
balances.
Interest expense to related parties
Interest expense to related parties consists of interest charges associated with
amounts due to related parties, Mark Nordlicht, our former Chairman, Kevin
Cassidy, our former Chief Executive Officer, and Edward O'Connor, our President.
The decrease in interest expense to related parties during the nine-month period
ended September 30, 2007 when compared to the prior year period is primarily due
to the accelerated amortization of debt discount associated with the amount due
to Kevin Cassidy during the nine-month period ended September 30, 2006. We have
accelerated the amortization discount on this debt since we reimbursed the debt
at a faster rate than initially contemplated during the nine-month period ended
September 30, 2006. The debt to Kevin Cassidy was fully repaid in 2006. We did
not make any debt repayment during the nine-month period ended September 30,
2007 which would have triggered an acceleration of the amortized discount on the
debt.
Income tax
Income tax expense consists of federal and state current and deferred income tax
based on our net income. The increase in income tax expense during the
nine-month period ended September 30, 2007 when compared to the comparable prior
year period is primarily due to our utilization of net operating loss
carryforwards during the nine-month period ended September 30, 2006, which were
completely used by the end of fiscal 2006.
38
LIQUIDITY AND CAPITAL RESOURCES
For the last three fiscal years, we have generated cash flows from our operating
activities. Our cash balance as of September 30, 2007 amounts to approximately
$11.1 million.
During the nine-month period ended September 30, 2007, we generated cash from
operating activities of approximately $3.6 million, primarily resulting from:
o net loss of approximately $150.1 million, adjusted for the
impairment of the consideration receivable from the Investor and,
the amortization of the consideration receivable from the
Investor, and the fair value of warrants, options and shares
issued during the period aggregating approximately $145.8
million, $3.3 million, and $4.0 million, respectively;
o a decrease in accounts receivable and accounts receivable-related
party of approximately $2.3 million, a decrease in incentive
receivables from Investor of approximately $667,000 and a
decrease in accrued compensation $1.9 million due to a recent
decline in revenues and associated expenses since May 2007; and
o an increase in prepaid tax assets of $3.4 million resulting from
the payment of estimated income taxes offset by a reduction of
the anticipated income tax liability.
During the nine-month period ended September 30, 2007, we used our cash
generated from operating activities to acquire the customer relationship of HQ
Trading, a crude oil broker, for $400,000, acquired trading rights on the NYMEX
floor for $1.2 million, and incurred capital expenditures aggregating
approximately $241,000. We also disposed of a trading right for $1,165,000.
During the nine-month period ended September 30, 2007, we generated gross
proceeds from the exercise of certain warrants and options aggregating
approximately $220,000.
During the nine-month period ended September 30, 2006, we generated cash from
operating activities of approximately $3.7 million, primarily resulting from:
o net income of approximately $3.7 million, adjusted for non-cash
interest expense of approximately $701,000; and
o an increase in accounts receivable, incentive receivables from
stockholder, due from related party, and accrued compensation of
approximately $1.2 million, $597,000, $316,000 and $1.2 million,
respectively, resulting from an increase in related revenues as
well as increased commission related to such revenues.
We used our cash generated from operating activities to make principal
repayments of approximately $300,000, $100,000 and $200,000 on amounts due to
Kevin Cassidy, our former Chief Executive Officer, Edward O'Connor, our
President, and Mark Nordlicht, our former Chairman of the Board, respectively.
On May 30, 2006, our Board of Directors authorized us to repurchase such number
of shares of our common stock that have an aggregate purchase price not in
excess of $200,000 at the rate of up to $50,000 worth of common stock each
quarter. The Company repurchased 4,800 shares at a cost aggregating $2,506 since
the commencement of the share repurchase program. We did not repurchase any
shares during the nine month period ended September 30, 2007.
The Company believes it has enough funds to meet its obligations, based on its
internal projections, for at least the next twelve months. However, the Company
cannot guarantee that it will do so. If there are unforeseen expenses or
financial obligations which occur during that period, the Company may not be
able to generate enough revenues to meet such obligations. Additionally, if the
Company acquires a brokerage firm or a technology company which could be
instrumental in the Company's long-term growth, this could hamper the Company's
ability to continue as going concern, both from a short-term or a long-term
perspective, and the Company would have to resort to financing, through either
debt or equity placements, for the funding of either such acquisitions or
unforeseen expenses or financial obligations.
39
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A summary of significant accounting policies is included in Note 3 of the
audited financial statements included in our Annual Report on Form 10-KSB for
the year ended December 31, 2005. There have been no changes in our critical
accounting policies since the date of such audited financial statements.
Management believes that the application of these policies on a consistent basis
enables us to provide useful and reliable financial information about our
operating results and financial condition. Our financial statements and
accompanying notes are prepared in accordance with U.S. GAAP. Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue, and expenses. These
estimates and assumptions are affected by management's application of accounting
policies. Critical accounting policies for us include revenue recognition.
Revenue recognition
Revenue is recognized when earned. Our revenue recognition policies are in
compliance with the SEC's Staff Accounting Bulletin ("SAB") No. 104 "Revenue
Recognition". The application of SAB No. 104 requires us to apply our judgment,
including whether our clients receive services over a period of time.
We generally invoice our clients monthly, for all transactions which have been
executed during such month. Revenues are recognized on the day of trade-trade
date basis. Our revenues derive from a certain predetermined fixed fee of the
transactions we execute on behalf of our clients. The fee is based on the volume
of financial instruments traded. We base our fees on oral and written contracts
and confirm the fees in writing upon the execution of each transaction.
We also receive incentives from the New York Mercantile Exchange for the volume
of OTC transactions we submit to their clearing platforms on behalf of our
clients. The incentives are based on a percentage of the total revenues received
by the exchange attributable to our volume of transactions submitted to the
respective exchanges. We also apply our judgment when making estimates monthly
of such incentives based on the volumes of transactions submitted to the
respective exchanges and the exchanges' published revenues by type of
transaction.
We, pursuant to SAB 104, realize the incentive revenues realized or realizable
when all of the following criteria are met:
1) Persuasive evidence of an arrangement exists. We have a written separate
agreement with an exchange which has publicly published the initial terms of its
incentive program in 2003 which it modified in 2005 and is which is offered to
all intermediaries in the select transactions;
2) Delivery has occurred or services have been rendered. Under arrangements with
the exchange, the incentives are earned on the day we submit transactions to the
respective exchanges based on the revenues generated from such transactions and
are no longer subject to minimum volume of transactions to the exchange. We
account for all transactions submitted to each exchange on a daily basis.
Accordingly, we are able to determine when the incentives are earned based on
the date we submit transactions to the exchange. We have no other obligations to
the exchange to earn the incentives;
40
3) "Seller's" price to the buyer is fixed or determinable. Based on the
incentive program terms of each exchange, their published prices for the type of
transactions we submit to them, and our transactions records, we are able to
determine an estimate for the revenues each exchange earns in connection with
the transactions it submits, and accordingly, the amount, if any of the
incentives we earn in connection with such transactions; and
4) Collectibility is reasonably assured. The exchange has paid us timely on
incentives earned from 2004 through May 2007. The Company intends to enforce the
payment of any incentives receivable
Accounts and incentive receivable and related allowance for doubtful accounts.
Accounts receivable and incentive receivable are reported at net realizable
value. We have established an allowance for doubtful accounts based upon factors
pertaining to the credit risk of specific customers, historical trends, and
other information. Delinquent accounts are written-off when it is determined
that the amounts are uncollectible.
Share-based payment
We account for share-based payments in accordance with SFAS No. 123(R),
Share-Based Payment. Under the fair value recognition provisions of this
statement, share-based compensation cost is measured at the grant date based on
the value of the award and is recognized as expense over the vesting period.
Determining the fair value of share-based awards at the grant date requires
judgment, including estimating expected volatility. In addition, judgment is
also required in estimating the amount of share-based awards that are expected
to be forfeited. If actual results differ significantly from these estimates,
stock-based compensation expense and our results of operations could be
materially impacted.
Impairment of intangible assets
SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill be
tested for impairment on an annual basis and between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of an intangible asset below its carrying value. These events or
circumstances could include a significant change in the relationship with the
contracting party, business climate, legal factors, operating performance
indicators, or competition. Application of the intangible asset impairment test
requires judgment, including the determination of the fair value of each
intangible asset. The fair value of each intangible asset is estimated based on
the consideration given by us to acquire the intangible asset(s). This requires
significant judgment including the estimation of expected volatility if the
Company issued common share equivalent as consideration. Changes in our
estimates of undiscounted cash flows related to each intangible asset could
materially affect the determination of the impairment for each intangible asset.
Contingencies
The outcomes of legal proceedings and claims brought against us are subject to
significant uncertainty. SFAS No. 5, Accounting for Contingencies, requires that
an estimated loss from a loss contingency such as a legal proceeding or claim
should be accrued by a charge to income if it is probable that an asset has been
impaired or a liability has been incurred and the amount of the loss can be
reasonably estimated. Disclosure of a contingency is required if there is at
least a reasonable possibility that a loss has been incurred. In determining
whether a loss should be accrued we evaluate, among other factors, the degree of
probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. Changes in these factors could materially impact
our financial position or our results of operations.
Subsequent Events
On November 6, 2007, Optionable, Inc. (the "Company") and Albert Helmig agreed
that Mr. Helmig would cease to be a Director and Executive Chairman of the
Company effective November 6, 2007 (the "Termination Date") and entered into a
letter agreement (the "Separation and Release Letter") specifying the terms of
Mr. Helmig's separation from the Company. The Separation and Release Letter
provides, in part, that (i) Mr. Helmig will receive a lump-sum cash payment of
$141,000 in lieu of any payments otherwise due to Mr. Helmig, including but not
limited to, any payment due under any agreement between Mr. Helmig and the
Company; (ii) Mr. Helmig will not be eligible for any Company-sponsored benefits
after the Termination Date; (iii) the Company will indemnify and hold Mr. Helmig
harmless to the full extent permitted by the by-laws of the Company in effect on
the Termination Date in respect of certain proceedings; (iv) Mr. Helmig agreed
to waive any and all claims against the Company and release and discharge the
Company from liability for any and all claims or damages that Mr. Helmig had,
has or may have against the Company as of the Termination Date; (v) each option,
warrant or other right of Mr. Helmig to acquire shares of common stock or other
securities from the Company which has an expiration date that occurs after
November 7, 2014 is amended such that its expiration date is November 7, 2014;
and (vi) following the Termination Date, Mr. Helmig will be subject to certain
non-disclosure, non-competition and non-solicitation restrictions. Edward
O'Connor, the Company's President, will serve as the Company's interim Principal
Executive Officer until a permanent Principal Executive Officer is appointed.
41
RISK FACTORS
The following risk factors update, and should be read in conjunction with, the
risk factors discussed in Part II, Item 6 "Management's Discussion and Analysis
of Financial Condition or Plan of Operation Overview and Plan of Operations" of
our Annual Report on Form 10-KSB for the year ended December 31, 2006.
As a result of the apparent loss of our most significant customer, a decline in
business from other brokerage customers and the mutually agreed departures of
floor brokerage personnel, we are attempting to revise our strategy. There can
be no assurance that these efforts will be successful.
Several recent developments, including (i) the apparent loss of our most
significant customer, (ii) a decline in business from other brokerage customers
and (iii) the mutually agreed departures of our floor brokerage personnel, among
other things, have adversely affected our ability to operate as a brokerage
services provider through traditional voice-brokerage and on the floor of the
Investor. In response, we are attempting to revise our strategy to emphasize the
marketing of OPEX to end-users through indirect channels, such as through
third-party brokers and other exchanges, and the development and enhancement of
OPEX for use by end-users in additional markets (i.e., other then solely the
energy derivatives markets). With our reduced brokerage personnel, we will most
likely need to acquire the operations of a brokerage firm, or firms, if we are
to expand our current level of brokerage operations.
Historically, we engaged primarily in voice-brokerage and had only recently
introduced our OPEX platform. Although the initial results of OPEX were
promising, it had not yet reached full market acceptance in the energy
derivatives market. Our revised strategy will rely on continued and expanded
market acceptance of OPEX in the energy derivatives market and in additional
markets. There is no assurance that we will be able to effectively market OPEX
to end-users through indirect channels. There is also no assurance that we will
be able to develop the enhancements to OPEX necessary to make it suitable for
use by end-users in additional markets or, even if we do develop the necessary
enhancements, that end-users in those additional markets will accept OPEX.
There is no assurance that we will be able to identify potential acquisitions,
negotiate acquisitions on terms acceptable to us, or at all, or obtain the
necessary financing for any potential acquisitions that we may identify. If we
do make acquisitions or enter into joint ventures as part of our revised
strategy, such transactions will involve significant risks and challenges,
including risks that we may experience difficulty in the integration of the new
businesses, technologies and employees with our own, that the new businesses may
divert management's attention from other pressing matters and that we may not
realize a satisfactory return on any investment we may make in them.
42
Our revised strategy is still in the early stages of development and there is no
assurance that it will be successful.
Our pricing model for OPEX services, under our revised strategy, is unproven and
revenues may prove to be less than anticipated, which may harm our gross
margins. The pricing model of our OPEX services will most likely change under
our revised strategy and may be lower than expected as a result of competitive
pricing pressures, promotional programs and clients who negotiate price
reductions in exchange for longer term purchase commitments, negotiated
licensing or royalty-based agreements, or otherwise. Our actual pricing model
for OPEX under our revised strategy will depend on the specific requirements of
the end-user or the third-party which will market OPEX, customer purchase
volumes, contracted sales and service support and other contractual agreements.
We expect to experience pricing pressure and anticipate that the average selling
prices and gross margins for our products may decrease over product life cycles.
Our relationship with the Investor has been adversely affected by recent
developments and we may not realize the benefits that we had expected from the
Stock and Warrant Purchase Agreement. In addition, the incentive revenues that
we receive from the Investor may decline.
We had expected to derive substantial benefits from the consideration which the
Investor agreed to provide to us under the Stock and Warrant Purchase Agreement,
including the development of joint marketing plans and technology initiatives
and space for our brokers on the Investor's trading floor. Following the
occurrence of certain of the events discussed above and discussed in Part II,
Item 1 "Legal Proceedings" of this Report, we have not agreed with the Investor
on the joint marketing and technology initiatives provided for in the Stock and
Warrant Purchase Agreement. Additionally, the Investor has indicated in a
Schedule 13D it filed with the SEC with respect to its holdings of our equity
securities that it is now re-considering its potential joint marketing and
technology initiatives with us. As a result, the contemplated joint marketing
and technology initiatives have not been developed.
If the Investor cannot agree with us on joint marketing and technology
initiatives with us, we will not realize the benefits that we had expected to
obtain under the Stock and Warrant Purchase Agreement which would have a
materially adverse effect on our business. In addition, we receive significant
incentive revenues from the Investor. If the deterioration in our relationship
with the Investor were to lead to a refusal by the Investor to continue those
incentives, it would have a materially adverse effect on our business.
Under the Investor Rights Agreement, the consent of a director designated by the
Investor may be required before we may take certain actions, including
acquisitions of businesses or assets. The failure of the the Investor designee
to consent to certain actions could affect our ability to develop and implement
our revised strategy.
Under the Investor Rights Agreement, the consent of a director designated by the
Investor may be required before we may take certain actions, including
acquisitions of businesses or assets. Although the Investor's designee on our
Board of Directors has resigned and the Investor has stated that it has no
current plans to fill the vacancy created by the resignation, if the Investor
were to elect to designate a director pursuant to the Investor Rights Agreement,
the failure of that designee to consent to certain actions, such as a proposed
acquisition of a brokerage firm among others, could adversely impact our ability
to develop and implement our revised strategy.
43
A number of our executive officers and key employees have recently departed. Our
success in the future will be dependent upon our ability to attract and retain
skilled replacements.
Mark Nordlicht, our former Chairman of the Board, Kevin Cassidy, our former Vice
Chairman of the Board and Chief Executive Officer, and a number of our brokerage
personnel have recently departed. Although Albert Helmig, a member of our Board
of Directors has accepted the position of Executive Chairman of the Board, we
have not yet replaced the other personnel who have resigned. Certain of the
departed employees, including and particularly Kevin Cassidy, have accounted, in
the past, for a significant amount of our revenues. If we are unable to find
suitable replacements for the departed employees our business will be materially
adversely affected.
We are the subject of several legal proceedings brought by shareholders alleging
violations of federal securities laws by us and certain of our former and
current directors and officers. We are unable to predict the outcome of these
proceedings and can give no assurance that the outcome of these proceedings will
not have a material adverse effect on us or that other proceedings will not be
initiated.
44
Since May 2007, we have been served as a defendant in a number of shareholder
derivative actions by shareholders naming us and several of our current and
former officers and directors as defendants. These actions allege, among other
things, violations of the Securities and Exchange Act of 1934, the Securities
Act of 1933 and Rule 10b-5, relating to alleged misstatements and omissions in
public filings by the Company and other allegedly fraudulent conduct, which the
plaintiffs claim deceived the market, inflated the price of the Company's common
stock and caused plaintiffs to suffer unspecified damages.
We are unable to predict the outcome of any of these proceedings at this time
and can give no assurance that the outcome of these proceedings will not have a
material adverse effect on us or that there will not be other proceedings
arising from these matters.
The members of our management team and other employees have been and will be
required to devote a significant amount of time to matters relating to
litigation and responding to governmental inquiries.
Our management team and employees have devoted a significant amount of time to
matters relating to the shareholder litigation which was recently instituted
against us and to requests for documents and information received from the CFTC,
the SEC, the DOJ and the District Attorney's Office. In addition, the current
members of our Board of Directors and senior management are named as defendants
in most of the shareholder proceedings which allege, among other things, federal
securities law violations. Defending these actions and responding to the
government requests for documents and information has required, and will
continue to require, significant time and attention from members of our current
senior management team and our Board of Directors. If the amount of time that
our senior management team is able to devote to running our ongoing business
operations and developing and implementing our revised strategy is significantly
reduced as a result of these matters, it may have a material adverse effect on
our business.
We have incurred losses through fiscal 2004 and during the second quarter of
fiscal 2007 and we may incur losses in the future, which may cause us to curtail
our operations and our development of OPEX.
We incurred losses through fiscal 2004 and incurred losses again during the
second quarter of fiscal 2007. We may operate at a loss in the future and we
cannot assure you that we will be successful in maintaining positive cash flow
and profitable operations. Accordingly, our ability to operate under our revised
strategy and enhance and market OPEX may be hampered by negative cash flows and
liquidity problems in the future, and the value of our stock may decline as a
result. For example, in the past, we suspended the development and
implementation of OPEX for a year, in part because of our negative cash flow.
45
ITEM 3. CONTROLS AND PROCEDURES
Our executive chairman of the board and our chief financial officer (the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for our Company. Such officers have concluded
(based upon their evaluations of these controls and procedures as of the end of
the period covered by this report) that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in this
report is recorded, processed, summarized, and reported in a timely manner.
The Certifying Officers have also indicated that there were no significant
changes in our internal controls over financial reporting that occured during
the period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Our management, including the Certifying Officers, does not expect that our
disclosure controls or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls is also based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Because of these inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 11, 2007, two lawsuits, captioned Alexander Fleiss v. Optionable Inc.,
Mark Nordlicht, Kevin Cassidy, Edward J. O'Connor, Albert Helmig and Marc-Andre
Boisseau, 07 CV 3753 (LAK) ("Fleiss") and Robert Rastocky v. Optionable, Inc.,
Kevin Cassidy and Edward O'Connor, 07 CV 3755 (LAK), were filed in the United
States District Court for the Southern District of New York Subsequently, five
additional lawsuits were filed in the United States District Court for the
Southern District of New York as follows: one on May 16, 2007, Jagdish Patel v.
Optionable Inc., Kevin Cassidy, and Edward J. O'Connor, 07 CV 3845 (LAK)
("Patel"); two on May 17, 2007, Peters v. Optionable, Inc., Mark Nordlicht,
Kevin P. Cassidy, Edward J. O'Connor, Albert Helmig, and Marc-Andre Boisseau, 07
CV 3877 (LAK) ("Peters"); and Manowitz v. Optionable Inc., Kevin Cassidy, Edward
J. O'Conner, and Mark Nordlicht, 07 CV 3884 (UA) ("Manowitz"); one on May 24,
2007, Glaubach v. Optionable Inc., Kevin Cassidy, Mark Nordlicht, Edward J.
O'Connor, Albert Helmig, and Marc-Andre Boisseau; 07 CV 4085 (LAK) ("Glaubach");
and one on June 22, 2007, Bock v. Optionable Inc., Kevin Cassidy, Mark
Nordlicht, Edward J. O'Connor, Albert Helmig, and Marc-Andre Boisseau, 07 CV
5948 (LAK) ("Bock"). Each of the lawsuits names the Company as a defendant and
some of the lawsuits name all or certain of the directors and officers of the
Company during the time period referenced. The directors and officers of the
Company named as defendants include Mark Nordlicht, the former Chairman of the
Board of Directors of the Company; Kevin Cassidy, the former Chief Executive
Officer and Vice-Chairman of the Board of Directors of the Company; Edward J.
O'Connor, the President of the Company and member of the Board of Directors;
Albert Helmig, a member of the Board of Directors during the relevant time
period and now our Executive Chairman of the Board; and Marc-Andre Boisseau, the
Chief Financial Officer of the Company. By Order dated May 24, 2007, Rastocky
was voluntarily dismissed.
46
The lawsuits seek unspecified damages arising from alleged violations of the
federal securities laws, including the Securities Exchange Act of 1934, 15
U.S.C. ss. 78a et seq., (the "Exchange Act"), the Securities Act of 1933, 15
U.S.C. ss. 77a et seq., and Rule 10b-5 under the Exchange Act, 17 C.F.R. ss.
240.10b-5. The lawsuits allege that, during various class periods ranging from
May 6, 2005 to May 14, 2007, defendants failed to disclose certain information
in public filings and statements, sold artificially inflated stock and engaged
in improper deals, had an improper relationship with Bank of Montreal ("BMO")
and understated the Company's reliance on its relationship with BMO. Plaintiffs
allege that while the Company's stock was trading at artificially inflated
prices, certain defendants, including Mark Nordlicht, Kevin Cassidy and Edward
O'Connor, sold roughly 10,758,886 shares of common stock of the Company, for
aggregate proceeds of approximately $28,941,403.
The lawsuits further allege that on April 27, 2007, BMO announced that it had
lost millions of dollars on trades executed through the Company. Plaintiffs
allege that the market price of the Company's common stock price dropped further
in response to this disclosure. According to complaints, the market price of the
Company's common stock continued to decline as investors learned: that BMO was
suspending its business with the Company; NYMEX Holdings, Inc. had resigned its
representation on the Company's Board of Directors; Kevin Cassidy had resigned
as Vice Chairman and Chief Executive Officer of the Company; and Kevin Cassidy
had been convicted in 1997 of credit card fraud and in 1993 of income tax
evasion. Plaintiffs claim that defendants' alleged misrepresentations, omissions
and fraudulent conduct deceived the market, and artificially inflated the prices
of the Company's common stock and allegedly caused plaintiffs to suffer an
unspecified amount of damages.
By Orders dated June 20, 2007 and July 3, 2007, Fleiss, Patel, Peters, Manowitz
and Glaubach were consolidated under In re Optionable Securities Litigation, 07
CV 3753 (LAK). It is likely that Bock will also be consolidated. On July 10,
2007, several plaintiffs, including some not previously identified, filed
motions seeking to become lead plaintiff and to have their lawyers approved as
lead counsel in the consolidated action. After lead plaintiff is appointed and
lead counsel is approved, it is anticipated plaintiffs will file a consolidated,
amended class action complaint.
Other Matters
Since May 2007, the Company has received requests for documents and information
from the FTC, the SEC and the DOJ and the District Attorney's Office. Since that
time, the Company has complied, and continues to comply, with these several
requests for documents and information.
47
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit
Number Description of Document
------- -----------------------
31.1 Certification of the Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant
to U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant
to U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on the 13th day of November 2007.
OPTIONABLE, INC.
By: /s/ Edward O'Connor
----------------
Name: Edward O'Connor
Title: President
By: /s/ Marc-Andre Boisseau
-----------------------
Name: Marc-Andre Boisseau
Title: Chief Financial Officer
48
EXHIBIT INDEX
Exhibit
Number Description of Document
------- -----------------------
31.1 Certification of the Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant
to U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant
to U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
49