SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 For the fiscal year ended January 31, 2009
Commission file number 033-20966
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Finotec Group, Inc.
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(Exact name of registrant as specified in its charter)
Nevada 76-0251547
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(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
228 East 45th Street
Suite 1801
New York NY 10017
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(Address of principal executive offices)
Registrant's telephone number, including area code 718-513-3620
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock of $0.001 par value per share
Indicate by, check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(ss.232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes [_]
No [_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
[ ] Large accelerated filer [ ] Accelerated filer
[ ]Non-accelerated filer [x]Smaller reporting company
State Issuer's Revenues for its most recent fiscal year. $2,641,116
Aggregate market value of the voting stock held by non-affiliates of registrant:
Indicate the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 86,721,825 Common Series 0.001
par value
Documents incorporated by reference: None.
TABLE OF CONTENTS
PART I
PAGE
Item 1. Organization and Business 3
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security-Holders 24
PART II
Item 5. Market for the Registrant's Common Stock and 25
Related Stockholder Matters
Item 6. Management's Discussion and Analysis of Financial 26
Condition and Results of Operations
Item 7. Financial Statements and Supplementary Data 31
(Included in Item 14)
PART III
Item 8. Changes in and Disagreements with Accountants on 32
Accounting and Financial Disclosure
Item 8A. Controls and Procedures 32
Item 9. Directors and Executive Officers of the Registrant 35
Item 10. Management Remuneration 36
Item 11. Security Ownership of Certain Beneficial Owners and 36
Management
Item 12. Certain Relationships and Related Transactions 37
PART IV
Item 13. Exhibits, Financial Statements, Schedules and Reports 38
on Form 8-K
Item 1. Organization and Business
Item 1. Business
Finotec Group, Inc. (the "Company" or "Finotec") was formed under the laws
of Nevada on October 8, 1987, under the name "Condor West Corporation" for the
purpose of implementing an initial distribution of its stock and thereafter to
seek operating businesses as potential candidates for acquisition or other forms
of combination. The Company had no operations for a period of over three years
when it did a share for share merger and became Online International Corporation
in September, 1999. As Online International Corporation the Company was in the
business of designing, printing, and manufacturing lottery tickets and play
slips for automated on-line contractors and on track and off-track betting until
May 10, 2000 when the Board of Directors formalized its decision to discontinue
operations. On July 17, 2000 the Company sold all of its assets for a
combination of cash, notes and the assumption of debts by the purchasers. On
August 9, 2001, the Company purchased Finotec, Ltd. (formerly known as Priory
Marketing Ltd.) in exchange for 21,500,000 common shares, representing
approximately 62% of the Company's issued and outstanding voting shares. The
consideration paid by the Holding Company ("Finotec, Ltd.") in exchange for the
stock of the Registrant was all of the outstanding capital stock of Finotec,
Ltd., an Isle of Man company. Finotec, Ltd. owns 99.7% of the issued and
outstanding shares of capital stock of Forexcash Global Trading Ltd.
("Forexcash"), an Israeli company, which is the owner of certain software,
equipment, intellectual property and contracts. Via Forexcash, the Company is in
the business of developing and marketing software for electronic trading of
foreign currency through the Internet. In February, 2002, the Company changed
its name to Finotec Group, Inc. to better reflect its current business
operations.
The Company is fully reporting under The Securities Exchange Act of
1934. As a fully reporting company under The Securities Exchange Act of 1934,
the Company is required to file quarterly and annual and certain event triggered
reports with the Securities and Exchange Commission. These reporting
requirements add to the expense and timeliness of certain business transactions
which the Company may endeavor to undertake in the future -- such as a merger or
any other material business undertaking.
The Company's Common Stock trades on the OTCBB, under the trading
symbol "FTGI.OB."
The public may read and copy this document, and any other materials
the Company files with the Commission at the Commission's Public Reference Room,
450 Fifth Street, N.W., Washington, D.C. 20549. Information is available on the
operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. Additionally, the Commission maintains an internet site
(http://www.sec.gov) that contains all reports, proxy and information
statements, and other information regarding companies which file electronically.
3
Introduction
Finotec Group Inc. is a public company. The company, through its
subsidiary, Finotec Trading Inc. (and such entity's subsidiary, Finotec Trading
UK Limited), offers financial market trading to professional and retail clients
over its web-based live and real-time proprietary trading system. The state of
the art web-based live and real-time proprietary trading system was developed
for the company by its other subsidiary ForexCash Global Trading Ltd. The
group's website may be accessed on www.finotec.com.
Company Structure
Finotec Group Inc. is a holding company with no activities other than holding
two wholly owned companies Finotec Trading Inc. and Forexcash Global Trading
Ltd. These companies, directly and through their subsidiaries, deal primarily in
two distinct areas:
1. Finotec Trading Inc. - marketing, sales, market trading and
facilitation; and
2. Forexcash Global Trading Ltd - financial technology development.
Finotec Trading Inc. (New York), or Finotec Trading Inc., was established
in November 2001 with the express intent of providing retail customers access to
the largest financial market for online foreign currency trading. Finotec
Trading Inc. (New York) is the market-making arm of the corporation,
distributing the live and instantaneously executable trading prices in global
currencies, equities, indices, commodities and interest rate products through
the group's online trading system. The centralized dealing room services
clients, aggregates globally derived risk in real-time and hedges residual
market exposure with the underlying markets.
In 2005 Finotec Trading Inc. established its dealing room in Cyprus through
a wholly owned subsidiary Finotec Trading Cyprus Ltd. In 2007, the dealing room
was moved to the UK. Currently, the subsidiary in Cyprus engages primarily in
sales and marketing of the Company's products.
During 2007, Finotec Trading Inc. additionally established three wholly
owned subsidiaries:
o In the United Kingdom, Finotec Trading UK Limited, or Finotec UK, for
the purpose of obtaining the necessary authorization to act as a
market maker in Foreign Exchange and CFD's in the UK and Europe. In
November 2007, Finotec UK received such authorization from the UK
Financial Services Authority ("FSA"). Such authorization was
accompanied by approvals from the other European countries allowing
Finotec UK to offer cross-border investment services within their
borders.
o In the United States, Finotec USA, Inc., a Delaware corporation, for
the purpose of obtaining the necessary authorization from the National
Futures Association (NFA) to act as a market maker in Foreign Exchange
in the US.
4
o In Poland, Finotec Trading Polska S. A., for the purpose of obtaining
the necessary authorization to act as a market maker in Foreign
Exchange and CFD's in Poland and Eastern Europe. As a result of the
FSA approval received by Finotec UK, and the accompanying approvals in
other European countries, including Poland, the Company decided to
discontinue the authorization process in Poland. In November 2008,
this subsidiary has been sold.
On August 9, 2001 (the "Merger Date"), Finotec Group, Inc., formerly Online
International Corporation ("Finotec Group"), a Nevada corporation without
significant operations, acquired all of the outstanding shares of Finotec Ltd.
("Finotec Ltd.") (formerly Priory Marketing Ltd.), an Isle of Man company. The
transaction was effected by the issuing of 21,500,000 shares of Finotec Group
common stock to the stockholders of Finotec Ltd. This resulted in the former
Finotec Ltd. stockholders owning approximately 61.5% of the outstanding shares
of Finotec Group. For financial reporting purposes, the transaction was recorded
as a recapitalization of Finotec Ltd., with Finotec Ltd. receiving the
$1,320,363 net assets (assets of $1,404,636, less liabilities of $84,273) of
Finotec Group as a capital contribution. Finotec Ltd. is the continuing
surviving entity for accounting purposes, but is adopting the capital structure
of Finotec Group, which is the continuing parent entity for legal purposes. All
references to common stock have been restated to reflect the equivalent number
of Finotec Group shares.
Finotec Ltd. was formed in December 2000, at which time it acquired 99.7%
of the outstanding stock of Forexcash Global Trading Ltd. ("Forexcash"), an
Israeli corporation, which had been incorporated on June 23, 1998. This
transaction is treated as a recapitalization of Forexcash with Forexcash as the
continuing accounting entity and Finotec Ltd. as the continuing parent for legal
purposes.
Finotec Group Inc. is traded on the OTC bulletin board under the symbol
FTGI.OB.
Customers can open accounts with Finotec Trading UK Ltd. by several methods;
1. Directly with Finotec Trading UK Ltd.
2. Via affiliates and Introducing Brokers ("IB's") that sign commission
sharing agreement with Finotec Trading UK Ltd.
As part of its code of conduct, all customer monies are segregated in
custodian accounts which have been set up in the United Kingdom and various
other countries.
Since its inception Finotec has secured a number of IB contracts, with
investment houses, financial institutions and high wealth individuals. Finotec's
website and trading system may be accessed on www.finotec.com. The system also
provides a `demo' trading system and an e-learning center that may be accessed
by registering on the website.
The Company currently develops, through its subsidiaries, markets and
operates a software system delivering foreign exchange, commodities, and futures
(CFDs) investment services to the public through the Internet. The Company also
operates an Internet-based brokerage firm for institutional, professional and
serious active individual traders in the financial instruments markets,
especially foreign currency and CFDs. The Company offers an electronic trading
platform which seamlessly integrates strategy trading tools, historical and
streaming real-time market data, and direct-access order-routing and execution.
In addition, the Company operates an internal risk management module that
guides the Company as to when to hedge positions or not and systems that provide
real time management of equity positions and margin requirements. The Company
also acts as a market maker in relevant jurisdictions.
5
Under our business model, we seek recurring revenues mainly by offering,
through use of a software system developed by its subsidiary, Forexcash, online
real-time trading in financial instruments. Forexcash is a front and back office
market maker application for online real-time trading in financial instruments.
We use our capabilities to provide strategy trading tools, and the unique
quality and functionality of those tools attracts our target customer base of
institutional, professional and serious active individual traders. We market our
services primarily through our subsidiaries that operate call centers and
Internet sites. The Company also intends to promote white-label systems directly
to financial institutions such as commercial banks. We also provide training in
online trading.
Recent Developments
In December 2008, the Company announced that it is implementing a new price
quoting method to allow its clients to be directly connected to market prices.
Under the method, instead of having quotes reflecting Finotec prices, clients
may now trade at market prices with the addition of a predefined and fixed
commission. This new method continues the Company's goal of providing its
clients with greater price transparency. Under the new price quoting method,
clients can be directly connected to very competitive market prices through
Finotec's trading platform which are available as a result of Finotec's high
monthly volume of trade - around 5 billion dollars per month - and its
relationship with 18 of the world's largest and most aggressive banks.
Industry Background
Over the past decade, the volume of trading in the world's foreign exchange
market has grown dramatically. The average daily trading volume is estimated to
be more than $3 trillion dollars. Recently, even more dramatic than the growth
in the foreign exchange markets, has been the explosive growth of direct-access
trading through electronic marketplaces. We believe that one of the reasons for
this explosive growth is the growing presence of direct-access trading
solutions.
We believe that technological innovation, including development of
sophisticated trading software tools, increased use of and reliance upon the
Internet, proliferation of online financial market data and information, and
market acceptance of electronic brokerage services, including direct-access
brokerage services, will continue to stimulate increased online trading
activity. We believe it to be inevitable that over time almost all trading will
be conducted electronically, in one form or another. We believe that direct
access is expected to become the industry standard for online trading. The
recent acquisitions by virtually every major online brokerage firm of
direct-access technology underscore this reality.
However, not all accounts are alike. Analysts have estimated that daily
online trading volume is highly concentrated in the most actively-traded online
accounts. The design of Forexcash has been focused on this "active trader"
market, as well as professional and institutional traders, such as small-sized
to mid-sized commercial banks.
With the proliferation of online brokerage services (and, now, the more
powerful and efficient direct-access online brokerage services), the increased
accessibility to market data, and the rapidly-growing capabilities of the
Internet, we believe that serious, active traders, professional and
non-professional, are demanding powerful, Internet-based, real-time strategy
trading platforms that are seamlessly integrated with the best-available order
execution technology and include analytical tools which support the design and
testing of custom trading strategies.
6
Products And Services
Finotec Group Inc. is a holding company with no activities other than
holding two wholly owned companies Finotec Trading Inc. and ForexCash Global
Trading Ltd. These companies deal in two distinct areas:
1. Finotec Trading Inc. - Market Trading and facilitation (brokerage); and
2. Forexcash Global Trading Ltd. - Financial Technology development
Brokerage Services
The Company, through its subsidiaries, offers online brokerage services, in
financial instruments (especially foreign currency and CFDs), using the
Forexcash trading platform. Finotec's targeted customer base for brokerage
services includes active individual, professional and institutional traders.
Finotec earns the spread between the Bid and Ask price when there is some
compensation inside the system, or the price difference between the customer's
transaction price and the bank price. Finotec also runs a small portfolio of
uncovered customer transactions.
In January 2002, the Company launched the Forexcash trading platform. The
Forexcash platform includes our strategy trading features and functions,
streaming real-time charts and quotes, streaming news, state-of-the-art
analytical charting, time and sales data, quote lists, option chains, market
leaders data, profit/loss tracking, and wireless access.
Sales And Marketing
Offline Marketing
The Company attempts to reach its target customers through advertising
campaigns for its products and services in local financial newspapers, articles
providing in-depth market commentary on the specific Company products, one-day
seminars, events and conventions. Finotec uses the services of various
advertising companies to reach targeted customers through advertising campaigns.
Online Marketing
Online marketing includes campaigns in Google, business portals, search
engines and other financial websites.
Call Center
Follow-up activities to the Company's marketing campaigns are performed by
the Company's multi-lingual call center that directly contacts potential
customers who have expressed an interest in the Company's products and services
and arranges meetings with account representatives, when appropriate.
7
Partnerships
The Company's marketing strategy includes the extension of its customer
base through partnerships with relevant players in the financial markets. These
partnerships include Franchising Agreements, Introducing Broker Agreements,
Affiliate Agreements, White Label Agreements and Licensing Agreements with
financial institutions whereby the institutions will refer clients to the
Company and receive a commission from the Company for such referrals.
Distribution
In addition to its direct contacts with its customers, the Company
actively seeks brokerage firms and other financial institutions to whose
customers it can offer the ability to trade with Finotec's dealing room while
sharing the income generated from the trading activity of such customers. The
Company aims to further develop this system of forging relationships with
Introducing Brokers and Affiliates on an international level. This use of the
trading platform would allow Introducing Brokers to provide their customers
access to the foreign currency and other financial markets without the cost of
running a trading room and developing an electronic trading system themselves.
Customer Money
All customer money is deposited in the Company's custodian accounts in
banks in the United Kingdom and other countries. All money is managed by the
Company back office system in the Forexcash proprietary Customer Relationship
Management system.
In the US, HSBC holds client monies in trust in a segregated account and
in the UK, HSBC and Royal bank of Scotland do the same. In Cyprus, Finotec uses
Hellenic Bank and BNP Paribas bank as the client trust funds for clients all
over the world.
Forexcash
In January 2002, Finotec, via its subsidiary, Forexcash, launched the
Forexcash trading platform. The Forexcash service includes strategy trading
features and functions, streaming real-time charts and quotes, streaming news,
state-of-the-art analytical charting, time and sales data, quote lists, option
chains, market leaders data, profit/loss tracking, and wireless access.
Forexcash is a front and back office market maker and brokerage
application for online real-time trading in the financial instruments markets.
Forexcash gives spot and forward transaction prices with real-time execution
capabilities for most kinds of currency pairs as well as CFDs, commodities,
stocks and indices. Currently we have implemented the most liquid currency
pairs.
Forexcash's application servers were developed in Java Sun and PHP.
We believe that these technologies are compatible with most operating systems
and using them provides us the opportunity to offer numerous advantages, such as
ready-to-use software where no installation is necessary. Using well-accepted
Web technologies assists with the security of the data transfers, the offering
of real-time information and the technical analysis capabilities. The
communication in the system between the client systems and the servers are
encrypted with the RSA protocol based on an algorithm that was developed
internally.
Market data services.
The real-time market data included in Forexcash are licensed from
different content suppliers that include Reuters and various stock exchanges
around the world.
8
Technology Development
We believe that our success depends, in large part, on our ability to
offer unique, Internet-based strategy trading technologies with
state-of-the-art, intelligent direct-access order execution technologies, and
continuously enhance those technologies, as well as develop and implement a
well-designed and user-friendly all-in-one platform. We intend to consistently
improve our system and implement new features and protocols. For instance, we
are currently incorporating a new technology into our system that will give our
system the benefit of more design capabilities in addition to not requiring
downloads of plug-ins. By eliminating plug-ins, the customer will be able to
access the trading platform through firewalls on the computer.
We are also working to improve the style of the trading platform,
making it more user-friendly. A further technological development we have made
is adding chat capabilities to our system.
To date, we have relied primarily on internal development of our
products and services. We currently perform all quality assurance and develop
user education and other training materials internally. In the future, we may
continue to develop our technology internally or use outsourcing resources.
The market for strategy trading tools, streaming real-time market
data and news services, and online order execution services is characterized by:
rapidly changing technology; evolving industry standards in computer hardware,
programming tools and languages, operating systems, database technology and
information delivery systems; changes in customer requirements; and frequent new
product and service introductions and enhancements. Our success will depend in
part upon our ability to develop and maintain competitive technologies and to
develop and introduce new products, services and enhancements in a timely and
cost-effective manner that meets changing conditions such as evolving customer
needs, existing and new competitive product and service offerings, emerging
industry standards and changing technology. There can be no assurance that we
will be able to develop and market, on a timely basis, if at all, products,
services or enhancements that respond to changing market conditions or that will
be accepted by customers. Any failure by us to anticipate or to respond quickly
to changing market conditions, or any significant delays in the introduction of
new products and services or enhancements could cause customers to delay or
decide against the use of our products and services and could have a material
adverse effect on our business, financial condition and results of operations.
Customer Support and Training
We provide client services and support and product-use training in
the following ways:
CUSTOMER SERVICES AND SUPPORT. Finotec provides telephone customer
services to its brokerage customers through its dealing room as well as call
centers. Technical support to subscription and brokerage customers who use
Forexcash is provided by Finotec's technical support team via telephone,
electronic mail and fax.
PRODUCT-USE TRAINING. We consider user education important to try to
help our customers enhance their ability to use our products and services fully
and effectively. The majority of our training materials consist of extensive
online documentation and technical assistance information on our Web sites so
that our customers may learn to use and take full advantage of the sophisticated
technology of Forexcash.
9
Competition
The market for online brokerage services is intensely competitive and
rapidly evolving, and there appears to be substantial consolidation in the
industry of online brokerage services, Internet-based real-time market data
services, and trading analysis software tools. We believe that, due to the
current and anticipated rapid growth of the market for integrated trading tools,
real-time market data and online brokerage services, competition, as well as
consolidation, will substantially increase and intensify in the future. We
believe our ability to compete will depend upon many factors both within and
outside our control, including, but not limited to,: pricing; the timing and
market acceptance of new products and services and enhancements developed by us
and our competitors; technological developments; product content; our ability to
design and support efficient, materially error-free Internet-based systems;
market conditions, such as volatility in currency fluctuations, stock prices,
inflation and recession; product and service functionality; data availability;
ease of use; reliability; customer service and support; and sales and marketing
efforts.
We face direct competition from several publicly-traded and
privately-held companies, principally online brokerage firms, including
providers of direct-access order execution services. Our competitors include
many foreign exchange online brokerage firms currently active in the United
States and Europe. Many online brokerage firms currently offer direct-access
service.
Many of our existing and potential competitors, which include online
discount and traditional brokerage firms, and financial institutions that are
focusing more closely on online services, including direct-access services for
active traders, have longer operating histories, significantly greater
financial, technical and marketing resources, greater name recognition and a
larger installed customer base than we do. Furthermore, there is the risk that
larger financial institutions which offer online brokerage services as only one
of many financial services may decide to use extremely low pricing rates in the
foreign currency market to acquire and accumulate customer accounts and assets
to derive interest income and income from their other financial services. We do
not currently offer other financial services; therefore, such pricing
techniques, should they become common in our industry, could have a material,
adverse effect on our results of operations, financial condition and business
model.
Generally, competitors may be able to respond more quickly to new or
emerging technologies or changes in customer requirements or to devote greater
resources to the development, promotion and sale of their products and services
than we do. There can be no assurance that our existing or potential competitors
will not develop products and services comparable or superior to those developed
and offered by us or adapt more quickly than us to new technologies, evolving
industry trends or changing customer requirements, or that we will be able to
timely and adequately complete the implementation, and appropriately maintain
and enhance the operation, of our business model. Increased competition could
result in price reductions, reduced margins, failure to obtain any significant
market share, or loss of market share, any of which could materially adversely
affect our business, financial condition and results of operations. There can be
no assurance that we will be able to compete successfully against current or
future competitors, or that competitive pressures faced by us will not have a
material adverse effect on our business, financial condition and results of
operations.
Intellectual Property
Our success is and will be heavily dependent on proprietary software
technology, including certain technology currently in development. We view our
software technology as proprietary, and rely, and will be relying, on a
combination of trade secret and trademark laws, nondisclosure agreements and
other contractual provisions and technical measures to establish and protect our
proprietary rights.
10
Despite efforts to protect our proprietary rights, unauthorized
parties may copy or otherwise may obtain, use or exploit our software or
technology independently. Policing unauthorized use of our software technology
is difficult, and it is extremely difficult to determine the extent to which
piracy of software technology exists. Piracy can be expected to be a persistent
problem, particularly in international markets and as a result of the growing
use of the Internet. In addition, effective protection of intellectual property
rights may be unavailable or limited in certain countries, including some in
which we may attempt to expand sales efforts. There can be no assurance that the
steps taken by us to protect our proprietary rights will be adequate or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to ours.
There has been substantial litigation in the software industry
involving intellectual property rights. We do not believe that we are
infringing, or that any technology in development will infringe, the
intellectual property rights of others. The risk of infringement by us is
heightened with respect to our business model technology, as that technology has
not stood any significant test of time. There can be no assurance that
infringement claims would not have a material adverse effect on our business,
financial condition and results of operations. In addition, to the extent that
we acquire or license a portion of the software or data included in our products
or services from third parties (data is licensed from third parties), or market
products licensed from others generally, our exposure to infringement actions
may increase because we must rely upon such third parties for information as to
the origin and ownership of such acquired or licensed software or data
technology. In the future, litigation may be necessary to establish, define,
enforce and protect trade secrets, copyrights, trademarks and other intellectual
property rights. We may also be subject to litigation to defend against claimed
infringement of the rights of others or to determine the scope and validity of
the intellectual property rights of others. Any such litigation could be costly
and divert management's attention, which could have a material adverse effect on
our business, financial condition and results of operations. Adverse
determinations in such litigation could result in the loss of proprietary
rights, subject us to significant liabilities, require us to seek licenses from
third parties, which could be expensive, or prevent us from selling our products
or services or using our trademarks, any one of which could have a material
adverse effect on our business, financial condition and results of operations.
Government Regulation
In November 2007, Finotec UK received authorization from the FSA to
offer certain financial services in the UK. In connection therewith, Finotec has
received regulatory approval to offer cross border investment services in
various European countries, from its UK office.
In the Unites States, the Commodity Futures Trading Commission ("CFTC")
regulates the foreign currency futures market. Our subsidiary, Finotec USA, Inc.
has applied for registration with the National Futures Association ("NFA") as a
Futures Commission Merchant (FCM).
Finotec's mode of operation and profitability may be directly
affected by: additional legislation; changes in rules promulgated by the
Commodity Futures Trading Commission, the National Futures Association, the
Board of Governors of the Federal Reserve System, the FSA, the various stock and
futures exchanges and other self-regulatory organizations; and changes in the
interpretation or enforcement of existing rules and laws, particularly any
changes focused on online brokerage firms that target an active trader customer
base.
Governmental concern is focused in two basic areas: that the customer
has sufficient trading experience and has sufficient risk capital to engage in
active trading. Finotec requires a $200 opening balance to open an account with
us. We believe Finotec's minimum suitability requirements, as well as the
extensive user education documentation and tutorials offered on its Web site,
are consistent with the rules and regulations concerning active trading.
11
It is possible that other agencies will attempt to regulate our
current and planned online and other electronic service activities with rules
that may include compliance requirements relating to record keeping, data
processing, other operation methods, privacy, pricing, content and quality of
goods and services as the market for online commerce evolves. Because of the
growth in the electronic commerce market, Congress had held hearings on whether
to regulate providers of services and transactions in the electronic commerce
market. As a result, federal or state authorities could enact laws, rules or
regulations, not only with respect to online brokerage services, but other
online services we provide or may in the future provide. Such laws, rules and
regulations, if and when enacted, could have a material adverse effect on our
business, financial condition, results of operations and prospects. In addition,
since the Company's activities and customer base are international, regulatory
developments in other countries, including those of which the Company is
unaware, could have an effect on the Company and its operations.
Employees
As of January 31, 2009, we had 64 full-time employees. Our employees
are not represented by any collective bargaining organization, and we have never
experienced a work stoppage and consider our relations with our employees to be
good.
Our future success depends, in significant part, upon the continued
service of our key senior management, technology and sales and marketing
personnel. The loss of the services of one or more of these key employees could
have a material adverse effect on us. There can be no assurance that we will be
able to retain our key personnel. Departures and additions of personnel, to the
extent disruptive, could have a material adverse effect on our business,
financial condition and results of operations.
Item 1A. Risk Factors
FORWARD-LOOKING STATEMENTS; BUSINESS RISKS
This report contains statements that are forward-looking within the
meaning of Section 27A of the Securities Act of 1993, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. When used in this report, the words
"believes," "estimates," "plans," "expects," "intends," "anticipates,"
"contemplates," "may," "will," "shall," "assuming," "prospect," "should,"
"could," "would," "looking forward" and similar expressions, to the extent used,
are intended to identify the forward-looking statements. All forward-looking
statements are based on current expectations and beliefs concerning future
events that are subject to risks and uncertainties. Actual results may differ
materially from the results suggested in this report. Factors that may cause or
contribute to such differences, and our business risks generally, include, but
are not limited to, the items described below, as well as in other sections of
this report and in our other public filings and our press releases.
12
Our business and results of operations could be seriously harmed by any
of the following risks.
We have limited operating history upon which you may evaluate our
operations.
Our e-commerce marketplaces are in the early stages of their
development and we have limited operating history upon which you may evaluate
our business and prospects. Because our management team as a unit is relatively
new, it also has a very limited track record upon which you can make an
evaluation. In addition, our revenue model is evolving and because of our lack
of operating history, period-to-period comparisons of our results of operations
will not be meaningful in the short term and should not be relied upon as
indicators of future performance. Our business and prospects must be considered
in light of the risk, expense and difficulties frequently encountered by
companies in early stages of development, particularly companies in new and
rapidly evolving markets such as e-commerce. Our failure to address these risks
successfully could materially and adversely affect our business and operations.
We may have difficulty obtaining future funding sources, if
needed, and we might have to accept terms that would adversely affect
shareholders.
Instability in the Middle East region may adversely affect our business.
Political, economic and military conditions in Israel directly
affect the Company's operations. The Company could be adversely affected by
hostilities involving Israel, the interruption or curtailment of trade between
Israel and its trading partners, or a significant downturn in the economic or
financial condition of Israel. These conditions could disrupt the Company's
operations in Israel and its business, financial condition and results of
operations could be adversely affected.
The Company's costs of operations have at times been affected by
changes in the cost of its operations in Israel, resulting from changes in the
value of the Israeli shekel relative to the United States dollar, and from
difficulties in attracting and retaining qualified scientific, engineering and
technical personnel in Israel, where the availability of such personnel has at
times been severely limited. Changes in these cost factors have from time to
time been significant and difficult to predict, and could in the future have a
material adverse effect on the Company's results of operations.
The Company is closed during the Jewish Sabbath from Friday evening to Saturday
evening and during all Jewish holidays which in certain events may adversely
affect our business
The Company is closed on the Jewish Sabbath and during Jewish
holidays from on the eve of the Shabbat or eves of holidays, as of two hours
before the onset of Shabbat or the holiday, as well as during Shabbat and
holidays. During these times there is either a limited amount of employees or no
employees in the Company's offices. In the event of a power outage or any
disruption of services during these times there would be no employee available
to respond to the problem until the end of the Sabbath or Jewish holiday which
could have a material adverse affect on the Company's operations. A serious
disruption during such a time could disrupt the Company's operations and its
business, financial condition and results of operations could be adversely
affected.
13
Our success is dependent on retaining our current key personnel and attracting
additional key and other personnel, particularly in the areas of management,
technical services and customer support.
We believe that our success will depend on continued employment of
our senior management team and key technical personnel for the development of
our services. Their experience is important to the establishment of our
business. The loss of any one of our key personnel could disrupt and negatively
affect our business and operations. Our success also depends on having highly
trained technical and customer support personnel.
We have had and may continue to have difficulty attracting and
employing additional members to our senior management team and sufficient
technical and customer support personnel to keep up with our growth needs. This
shortage could limit our ability to increase sales and to sell services.
Competition for personnel is intense. If we cannot hire and retain suitable
personnel to meet our growth needs, our business and operations will be
negatively affected.
Our success is dependent upon our receipt and maintenance of regulatory
approvals in the major customer markets around the world.
The Company believes that its success, in large part, depends upon its
ability to receive and retain regulatory approvals in the major markets around
the world. Such approvals both expand the variety of services which the Company
can offer and bolster the Company's reputation among potential customers.
In November 2007, Finotec UK received authorization from the FSA to
offer certain financial services in the UK. In connection therewith, Finotec has
received regulatory approval to offer cross border investment services in the
various European countries, from its UK office. In order to retain its FSA
authorization, the Company must comply with numerous requirements, including
financial covenants as well as those related to its ongoing operations. The
Company's failure to meet these ongoing obligations could lead to the loss of
its FSA authorization which would have a material adverse effect on the Company
and its operations.
In addition, in the United States, Finotec USA Inc. has applied for
registration with the National Futures Association ("NFA") as a Futures
Commission Merchant (FCM). Such application is currently pending. Failure to
receive such authorization could have a material adverse effect on the Company's
ability to expand its operations. In addition, if such authorization is
received, in order to retain its NFA authorization, the Company must comply with
numerous requirements, including financial covenants as well as those related to
its ongoing operations.
Fluctuations in our quarterly results may adversely affect our
stock price.
Our quarterly operating results will likely vary in the future.
Our operating results will likely fall below the expectations of securities
analysts or investors in some future quarter or quarters. Our failure to meet
these expectations would likely adversely affect the market price of our common
stock.
14
Our quarterly operating results may vary depending on a number of
factors, including:
o demand of buyers and sellers to use and transact business on our
platform
o actions taken by our competitors, including new product
introductions, fee schedules, pricing policies and enhancements;
o cash flow problems that may occur;
o the quality and success of, and potential continuous changes in, sales
or marketing strategies (which have undergone significant changes
recently and are expected to continue to evolve) and the costs
allocated to marketing campaigns and the timing of those campaigns;
o the timing, completion, cost and effect of our development and launch
of planned enhancements to the Finotec trading platform;
o the size and frequency of any trading errors for which we ultimately
suffer the economic burden, in whole or in part;
o changes in demand for our products and services due to the rapid pace
in which new technology is offered to customers in our industry;
o costs or adverse financial consequences that may occur with respect to
regulatory compliance or other regulatory issues, particularly
relating to laws, rules or regulations that may be enacted with a
focus on the active trader market; and
o general economic and market factors that affect active trading,
including changes in the securities and financial markets.
our industry is intensely competitive, which makes it difficult to attract and
retain customers
The markets for online brokerage services, client software and
Internet-based trading tools, and real-time market data services are intensely
competitive and rapidly evolving, and there has been substantial consolidation
of those three products and services occurring in the industry. We believe that
competition from large online brokerage firms and smaller brokerage firms
focused on active traders, as well as consolidation, will substantially increase
and intensify in the future. Competition may be further intensified by the size
of the active trader market,. We believe our ability to compete will depend upon
many factors both within and outside our control. These include: price pressure;
the timing and market acceptance of new products and services and enhancements
developed by us and our competitors; the development and support of efficient,
materially error-free Internet-based systems; product and service functionality;
data availability and cost; clearing costs; ease of use; reliability; customer
service and support; and sales and marketing decisions and efforts.
Copyright and patent risks; software license risks.
While we seek to protect our technology, it is not possible for us
to detect all possible infringements of our software, text, designs and other
works of authorship. Also, copyright protection does not extend to functional
features of software and will not be effective to prevent third parties from
duplicating our software's capabilities through engineering research and
development. In addition, our technology and intellectual property may receive
limited or no protection in some countries, and the global nature of the
Internet makes it impossible to control the ultimate destination of our work.
15
We have not conducted searches to determine if our software
infringes on any patents of third parties. If our software is found to infringe
on the copyrights or patents of a third party, the third party or a court or
other administrative body could require us to pay royalties for past use and for
continued use, or to modify or replace the software to avoid infringement. We
cannot assure you that we would be able to modify or replace the software.
Any of these claims, with or without merit, could subject us to
costly litigation, divert our technical and management personnel and materially
and adversely affect our business and operations.
Trademarks and service marks risks.
Proprietary rights are important to our success and our
competitive position. Our actions may be inadequate to protect any trademarks
and other proprietary rights or to prevent others from claiming violations of
their trademarks and other proprietary rights. We may not be able to protect our
domain names for our websites as trademarks because those names may be too
generic or perceived as describing a product or service or its attributes rather
than serving a trademark function.
If we are unable to protect our proprietary rights in trademarks,
service marks and other indications of origin, competitors will be able to use
names and marks that are identical to ours or sufficiently similar to ours to
cause confusion among potential customers. This confusion may result in the
diversion of business to our competitors, the loss of customers and the
degradation of our reputation. Litigation against those who infringe upon our
service marks, trademarks and similar rights may be expensive. Because of the
difficulty in proving damages in trademark litigation, it may be very difficult
to recover damages.
Except for a search for the names Finotec Group and Finotec
Trading, we have not conducted searches to determine whether our service marks,
trademarks and similar items may infringe on the rights of third parties.
Despite having searched a mark, there may be a successful assertion of claims of
trademark or service mark infringement. If a third party successfully asserts
claims of trademark, service mark or other infringement, the third party or a
court or other administrative body may require us to change our service marks,
trademarks, company names, the design of our sites and materials and our
Internet domain name (web address), as well as to pay damages for any
infringement. A change in service marks, trademarks, company names, the design
of our sites and materials and Internet domain names may cause difficulties for
our customers in locating us or cause them to fail to connect our new names and
marks with our prior names and marks, resulting in loss of business.
The nature of our business results in potential liability to customers
Many aspects of the securities brokerage business, including online trading
services, involve substantial risks of liability. In recent years there has been
an increasing incidence of litigation involving the securities brokerage
industry, including class action and other suits that generally seek substantial
damages, including in some cases punitive damages. In particular, our
proprietary order routing technology is designed to automatically locate, with
immediacy, the best available price in completing execution of a trade triggered
by programmed market entry and exit rules. There are risks that the electronic
communications and other systems upon which these products and services rely,
16
and will continue to rely, or our products and services themselves, as a result
of flaws or other imperfections in their designs or performance, may operate too
slowly, fail or cause confusion or uncertainty to the user. Major failures of
this kind may affect all customers who are online simultaneously. Any such
litigation could have a material adverse effect on our business, financial
condition, results of operations and prospects.
We may not be able to make future acquisitions and new strategic
alliances, and, even if we do, such acquisitions and alliances may disrupt or
otherwise negatively affect our business.
Our business plan contemplates that we may make investments in
complementary companies, technologies and assets. Future acquisitions are
subject to the following risks:
o we may not be able to agree on the terms of the acquisition or
alliance, such as the amount or price of our acquired interest;
o acquisitions and alliances may cause a disruption in our ongoing
business, distract our relatively new management team and make it
difficult to implement or maintain our systems, controls and
procedures;
o we may acquire companies or make strategic alliances in markets
in which we have little experience;
o we may not be able successfully to integrate the services,
products and personnel of any acquisition or new alliance into
our operations;
o we may be required to incur debt or issue equity securities to
pay for acquisitions, which may be dilutive to existing
shareholders, or we may not be able to finance the acquisitions
at all; and
o our acquisitions and strategic alliances may not be successful,
and we may lose our entire investment.
In addition, we face competition from other parties, including
large public and private companies, venture capital firms, and other companies,
in our search for suitable acquisitions and alliances. Many of the companies we
compete with for acquisitions have substantially greater name recognition and
financial resources than we have, which may limit our opportunity to acquire
interests in new companies, technologies and assets or create strategic
alliances. Even if we are able to find suitable acquisition candidates or
develop acceptable strategic alliances, doing so may require more time and
expense than we expect because of intense competition.
We must maintain positive brand name awareness.
We believe that establishing and maintaining our brand names is
essential to expanding business. We also believe that the importance of brand
name recognition will increase in the future because of the growing number of
online companies that will need to differentiate themselves. Promotion and
enhancement of our brand names will depend largely on our ability to provide
consistently high quality software and related technology. If we are unable to
provide software and technology of comparable or superior quality to those of
our competition, the value of our brand name may suffer.
17
The international nature of our business adds additional
complexity and risks to our business.
The nature of the foreign currency business brings us into contact
with different countries and markets. We hope to expand further in international
markets. Our international business may be subject to a variety of risks,
including:
o market risk or loss of uncovered transactions;
o governmental regulation and political instability;
o collecting international accounts receivable and income;
o the imposition of barriers to trade and taxes; and
o difficulties associated with enforcing contractual obligations
and intellectual property rights.
These factors may have a negative effect on any future
international operations and may adversely affect our business and operations.
The interests of our significant shareholders may conflict with our
interests and the interests of our other shareholders.
Directors, officers and holders of more than 5% of the outstanding
shares of Finotec common stock collectively own a significant share of the
outstanding common stock. As a result of their stock ownership, one or more of
these shareholders may be in a position to affect significantly our corporate
actions, including, for example, mergers or takeover attempts, in a manner that
could conflict with the interests of our public shareholders.
Anti-takeover provisions and our right to issue preferred stock could
make a third party acquisition of us difficult.
Finotec is a Nevada corporation. Anti-takeover provisions of
Nevada law may make it difficult for a third party to acquire control of us,
even if a change in control would be beneficial to our shareholders. In
addition, our board of directors may issue preferred stock with voting or
conversion rights that may have the effect of delaying, deferring or preventing
a change of control. Preventing a change of control could adversely affect the
market price of Finotec common stock and the voting and other rights of holders
of Finotec common stock.
Our common stock price is likely to be highly volatile.
The market price of our common stock is likely to be highly
volatile, as the stock market in general, and the market for Internet-related
and technology companies in particular, has been highly volatile. Our
shareholders may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to this
volatility.
Factors that could cause this volatility may include, among other
things:
o announcements of technological innovations and the creation and
failure of B2B marketplaces;
o actual or anticipated variations in quarterly operating results;
o new sales formats or new products or services;
18
o changes in financial estimates by securities analysts;
o conditions or trends in the Internet, B2B and other industries;
o changes in the market valuations of other Internet companies;
o announcements by us or our competitors of significant
acquisitions, strategic partnerships or joint ventures;
o changes in capital commitments;
o additions or departures of key personnel;
o sales of our common stock; and
o general market conditions.
Many of these factors are beyond our control.
Service of process and enforcement of civil liabilities on us and our officers
may be difficult to obtain.
We are organized under the laws of the State of Nevada and will be
subject to service of process in the United States. However, most of our assets
are located outside the United States. In addition, certain of our directors and
officers are residents of Israel.
There is doubt as to the enforceability of civil liabilities under the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, in original actions instituted in Israel. As a result, it may not be
possible for investors to enforce or effect service of process upon these
directors and executive officers or to judgments of U.S. courts predicated upon
the civil liability provisions of U.S. laws against our assets, as well as the
assets of these directors and executive officers. In addition, awards of
punitive damages in actions brought in the U.S. or elsewhere may be
unenforceable in Israel.
Risks Relating to Our E-Commerce Marketplaces
Our success depends on the development of the e-commerce market, which is
uncertain.
We rely on the Internet for the success of our businesses, as do
other e-commerce marketplaces. The development of the e-commerce market is in
its early stages. Our long-term success depends on widespread market acceptance
of B2B e-commerce. A number of factors could prevent such acceptance, including
the following:
o the unwillingness of business to shift from traditional
processes to e-commerce processes;
o the necessary network infrastructure for substantial growth in
usage of e-commerce may not be adequately developed;
o increased governmental regulation or taxation may adversely
affect the viability of e-commerce;
o insufficient availability of telecommunication services or
changes in telecommunication services could result in slower
response time for users of e-commerce; and
o concern and adverse publicity with respect to, and failure of,
security of e-commerce.
19
We may not be able to compete effectively with other providers of
e-commerce services.
Competition for Internet products and services and e-commerce
business is intense. If the market for e-commerce grows, we expect that
competition will intensify, and Finotec will continue to compete with other
technology companies and traditional service providers that seek to integrate
on-line business technologies with their traditional service mix. Barriers to
entry into the e-commerce environment are minimal, and competitors can launch
websites and offer products and services at relatively low costs. The companies
with which Finotec competes often have significantly greater name recognition
and financial, marketing and other resources than Finotec which may place our
e-commerce marketplaces at a disadvantage in responding to competitors' pricing
strategies, technological advances, advertising campaigns, strategic
partnerships and other initiative. If Finotec fails to differentiate itself from
other Internet industry participants, the value of its brand name could decline,
it may be unable to attract a critical mass of buyers and sellers, and its
prospects for future growth would diminish, which could materially and adversely
affect our business and operations.
Concerns regarding security of transactions and transmitting
confidential information over the Internet may adversely affect our e-commerce
business.
We believe that concern regarding the security of confidential
information transmitted over the Internet, including, for example, business
requirements, credit card numbers and other forms of payment methods, prevents
many potential customers from engaging in online trading. If we do not add
sufficient security features to future product releases, our services may not
gain market acceptance or we may face additional legal exposure.
Despite the measures we have taken in the areas of encryption and
password or other authentication software devices, our infrastructure, like
others, is potentially vulnerable to physical or electronic break-ins, computer
viruses, hackers or similar problems caused by employees, customers or other
Internet users. If a person circumvents our security measures, that person could
misappropriate proprietary information or cause interruptions in our operations.
Security breaches that result in access to confidential information could damage
our reputation and expose us to a risk of loss or liability. These risks may
require us to make significant investments and efforts to protect against or
remedy security breaches, which would increase the costs of maintaining our
websites.
Our e-commerce capability depends on real-time accurate product
information.
We may be responsible for loading information into our database
and categorizing the information for trading purposes. This process entails a
number of risks, including dependence on our suppliers both to provide us in a
timely manner with accurate, complete and current information and to update this
information promptly when it changes. If our suppliers do not provide us in a
timely manner with accurate, complete and current information, our database may
be less useful to our customers and users and may expose us to liability. We
cannot guarantee that the information available in our database will always be
accurate, complete and current or comply with governmental regulations either
due to third-party or internal errors. This could expose us to liability or
result in decreased acceptance of our products and services, which could have a
material and adverse affect on our business and operations. We are aware of
cases in which the data provided to us by third parties has not been
consistently accurate and, as a result of which, we have experienced customer
dissatisfaction and lawsuits by customers. In addition, our contracts with the
third-party data suppliers must be renewed on a regular basis and the costs for
such information may increase, with the Company having little or no negotiating
influence in such a situation.
20
Our market is characterized by rapid technological change, and we may
not be able to keep up with such change in a cost-effective way.
The e-commerce market is characterized by rapid technological
change and frequent new product announcements. Significant technological changes
could render our existing technology obsolete. If we are unable to respond
successfully to these developments or do not respond in a cost-effective way,
our business and operations will suffer. To be successful, we must adapt to our
rapidly changing market by continually improving the responsiveness, services
and features of our products and services, by developing or acquiring new
features to meet customer needs and by successfully developing and introducing
new versions of our Internet-based e-commerce business software on a timely
basis. The life cycles of the software used to support our e-commerce services
are difficult to predict because the market for our e-commerce is new and
emerging and is characterized by changing customer needs and industry standards.
The introduction of on-line products employing new technologies and industry
standards could render our existing system obsolete and unmarketable. If a new
software language becomes the industry standard, we may need to rewrite our
software to remain competitive, which we may not successfully accomplish in a
timely and cost-effective manner.
In addition, as traffic in our e-commerce business increases, we
may need to expand and upgrade our technology, transaction processing systems
and network hardware and software. We may not be able to project accurately the
rate of growth in our on-line businesses. We also may not be able to expand and
upgrade our systems and network hardware and software capabilities to
accommodate increased use of our on-line businesses, which would have a material
and adverse affect on our business and operations.
An unexpected event, such as a power or telecommunications
failure, fire or flood, or physical or electronic break-in at any of our
facilities or those of any third parties on which we rely, could cause a loss of
critical data and prevent us from offering services. If our hosting and
information technology services were interrupted, including from failure of
other parties' software that we integrate into our technology, our business and
the businesses of our e-commerce marketplaces using these services would be
disrupted, which could result in decreased revenues, lost customers and impaired
business reputation for us and them. As a result, we could experience greater
difficulty attracting new customers. A failure by us or any third parties on
which we rely to provide these services satisfactorily would impair our ability
to support the operations of our services and could subject us to legal claims.
In addition, to a large extent, the Company's profits are dependent
upon the operation of its internal risk management system. There is no guarantee
that such system will operate successfully in every eventuality.
Limited Internet infrastructure may affect service.
The accelerated growth and increasing volume of Internet traffic
may cause performance problems, slowing the adoption of our Internet-based
services. The growth of Internet traffic due to very high volumes of use over a
relatively short period of time has caused frequent periods of decreased
Internet performance, delays and, in some cases, system outages. This decreased
performance is caused by limitations inherent in the technology infrastructure
supporting the Internet and the internal networks of Internet users. In
addition, recently, there have been several instances of entire countries losing
Internet access as a result of natural disasters or accidents. If Internet usage
continues to grow rapidly, the infrastructure of the Internet and its users may
be unable to support the demands of growing e-commerce usage, and the Internet's
performance and reliability may decline. If our existing or potential customers
21
experience frequent or continuing outages or delays on the Internet, the
adoption or use of our Internet-based products and services may grow more slowly
than we expect or even decline. Our ability to increase the speed and
reliability of our Internet-based business model is limited by and depends upon
the reliability of both the Internet and the internal networks of our existing
and potential customers. As a result, if improvements in the infrastructure
supporting both the Internet and the internal networks of our customers and
suppliers are not made in a timely fashion, we may have difficulty obtaining new
customers, or maintaining our existing customers, either of which could reduce
our potential revenues and have a negative impact on our business and
operations.
Internet governance, regulation and administration are uncertain and
may adversely affect our business.
The future success of our business is dependent on our ability to
use the Internet to implement our e-commerce growth strategy. Because the
original role of the Internet was to link the government's computers with
academic institutions' computers, the Internet was historically administered by
organizations that were involved in sponsoring research. Over time, private
parties have assumed larger roles in the enhancement and maintenance of the
Internet infrastructure. Therefore, it is unclear what organization, if any,
will govern the administration of the Internet in the future, including the
authorization of domain names.
The lack of an appropriate organization to govern the
administration of the Internet infrastructure and the legal uncertainties that
may follow pose risks to the commercial Internet industry and our specific
website business. In addition, the effective operation of the Internet and our
business is also dependent on the continued mutual cooperation among several
organizations that have widely divergent interests, including the government,
Internet service providers and developers of system software and software
language. These organizations may find that achieving a consensus may become
difficult, impossible, time-consuming and costly.
Changes in the regulatory environment governing the Internet, either in
the US or abroad, could have a significant effect on our business.
We cannot predict whether or to what extent any new regulation
affecting e-commerce will occur. New regulations could increase our costs or
restrict our activities in a materially adverse manner. One or more states or
countries may seek to impose sales tax collection obligations on
out-of-state/foreign companies like ours that engage in or facilitate
e-commerce. A successful assertion by one or more states or any foreign country
that we should collect sales and other taxes on our system could increase costs
that we could have difficulty recovering from users of our websites.
Governmental agencies and their designees regulate the acquisition
and maintenance of web addresses generally. For example, in the United States,
the National Science Foundation had appointed Network Solutions, Inc. as the
exclusive registrar for the ".com," ".net" and ".org" generic top-level
addresses. Although Network Solutions no longer has exclusivity, it remains the
dominant registrar. The regulation of web addresses in the United States and in
foreign countries is subject to change. As a result, we may not be able to
acquire or maintain relevant web addresses in all countries where we conduct
business that are consistent with our brand names and marketing strategy.
Furthermore, the relationship between regulations governing website addresses
and laws protecting trademarks is unclear.
22
We may be subject to legal liability for publishing or distributing
content over the Internet.
Our e-commerce businesses may be subject to legal claims relating
to the content of our on-line websites, or the distribution of content.
Providers of Internet products and services have been sued in the past,
sometimes successfully, based on the content of material. The representations as
to the origin and ownership of licensed content that we generally obtain may not
adequately protect us.
In addition, we draw some of the content provided in our on-line
business communities from data compiled by other parties. This data may have
errors. If our content is improperly used or if we supply incorrect information,
it could result in unexpected liability. Our insurance may not cover claims of
this type or may not provide sufficient coverage. We are aware of cases in which
the data provided to us by third parties has not been consistently accurate and,
as a result of which, we have experienced customer dissatisfaction and lawsuits
by customers. Costs from these claims could damage our business and limit our
financial resources. In addition, there can be no assurance that we will not
make internal errors that could result in liability.
Item 2. Properties
The Company's UK subsidiary and dealing room is located at 68 Great Eastern
Street, 3rd Floor, London EC2A 3JT, England, UK. There the Company rents 800
square feet of office space.
The company also has marketing and technology offices in Jerusalem at the Malha
Technology Park, Building 8, Jerusalem 96951, Israel. There, via an agreement by
Forexcash Global Trading Ltd. (which is a 99.7% owned subsidiary of the Company)
the Company rents approximately 1186 square meters of office space.
The Company also rents 197 square meters of offices in Limassol, Cyprus at 1
Griva Digheni& Chrysanthou Street.
Rent expense for the fiscal year ended January 31, 2009 was approximately
$255,054.
Item 3. Legal Proceedings
1. In May, 2004, the Tel-Aviv Stock Exchange Ltd. (the "Stock Exchange")
submitted a claim against the Company for a permanent and temporary restraining
order to prevent the Company from using the Tel-Aviv 25 Index and/or any other
index owned by the Stock Exchange as part of the Company's online trading at its
website. The Company claimed that the Stock Exchange does not have copyrights
regarding the indexes and that it did not mislead the public in any way.
The Company answered the claim for a temporary restraining order, and in June,
2004, the Court accepted the Company's claim. In August, 2005, the Stock
Exchange appealed to the Supreme Court, and thereafter the Company submitted its
response to the appeal. The Supreme Court accepted the Company's claim. The case
is scheduled for a pre-trial meeting on June 22, 2008.
2. In February 2008, a shareholder of the Company filed a claim against the
Company in the District Court of Clark County, Nevada, relating to the
requirement by the Company's transfer agent, Standard Register and Transfer
Company that such shareholder provide collateral in order to replace a stock
certificate that shareholder claims to have lost. The shareholder claims that
the Company has instructed its transfer agent to require a high amount of
collateral. The Company and shareholder have entered into a ettlement Agreement.
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3. Customer v. Finotec Trading UK Limited (in arbitration; previously before the
Tel Aviv Magistrates Court): This is a case in which a former customer of
Finotec Trading UK Limited ("Finotec UK"), has sued for $41,973.00. The customer
asserts that Finotec UK's cancelation of certain trades in April and June 2008
was unlawful and that he is entitled to lost profits. In February 2009, at the
suggestion of the court, the parties agreed to submit the dispute to
arbitration. Two arbitration hearings were held in March 2009, and customer's
attorney has filed his written summations. We expect to file our written
summations within approximately three weeks. In connection with the agreement to
arbitrate, in the spring of 2009, Finotec deposited, in an attorney escrow
account, the amount claimed in the Action. Finotec UK intends to defend the
matter vigorously.
4. Customer v. Finotec Trading Ltd. (Tel Aviv Magistrates Court): This is a case
in which a customer of Finotec Trading Ltd. ("Finotec Israel"), has sued Finotec
Israel for NIS 154,000. The customer alleges that Finotec Israel acted
negligently in (a) recommending that he execute trades through a third-party,
and (b) failing to oversee such third party. Finotec Israel filed its statement
of defense in December 2008, and it intends to defend the case vigorously.
Customer's questionnaire and document demand were received on May 4, 2009.
5. Potential Claim of Customer: On or about Nov. 16, 2008, Finotec Israel
received a letter from counsel to a customer, concerning an alleged claim of
customer, who has been a customer of Finotec Israel. The essence of the claim in
the letter is that Finotec Israel unlawful cancelled certain trades of customer
in October 2007. The letter is not clear as to the amount of damages allegedly
owed to customer. The letter refers to customer's right to reinstate a
transaction in the amount of $5,000, and it also asserts that customer is
entitled to damages of NIS 2,000 To the best of our knowledge, no lawsuit has
been filed by customer (or on his behalf) against any Finotec entity.
Management does not expect these claims to have a material effect on the
Company's financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
On June 16, 2008, the Company entered into definitive agreements for the sale of
4,347,824 shares of Common Stock at a price of $0.23 per share. As a part of the
transaction, the Company agreed to issue accompanying warrants to purchase an
aggregate of 10,000,000 shares of Common Stock at an exercise price of $0.50 per
share. Four investors subscribed to the investment. The shares of Common Stock
sold in the private placement offering have not been registered and may not be
offered or sold absent registration or an applicable exemption from such
registration requirements. All such shares are subject as well to a registration
rights agreement. The transaction closed in mid-June 2008. 2,487,500 treasury
shares were issued as part of the 4,347,824 shares issued thereunder.
24
On July 29, 2008, the Company entered into a definitive agreement for the sale
of 3,333,333 shares of Common Stock at a price of $0.30 per share for a total of
$1 million. As a part of the transaction, the Company agreed to issue
accompanying warrants to purchase an aggregate of 1,428,571 shares of Common
Stock at an exercise price of $0.70 per share. The shares of Common Stock sold
in the private placement offering have not been registered and may not be
offered or sold absent registration or an applicable exemption from such
registration requirements. All such shares are subject as well to a registration
rights agreement. The transaction closed on July 31, 2008.
On October 31, 2008, the Company entered into definitive agreements and received
funds for the sale of 12,724,444 shares of Common Stock at a price of $0.18 per
share and 800,000 shares of Common Stock at a price of $0.25 per share. As a
part of the transaction, the Company agreed to issue accompanying warrants to
purchase 5,777,776 shares of Common Stock at an exercise price of $0.45 per
share and warrants to purchase 400,000 shares of Common Stock at an exercise
price of $0.50. Five new investors subscribed to the investment. The shares of
Common Stock sold in the private placement offering were not registered under
the Securities Act of 1933, as amended, and may not be offered or sold absent
registration or an applicable exemption from such registration requirements. All
such shares are subject as well to a registration rights agreement. The offering
closed on November 2, 2008.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
(a) The Company's Common Stock is quoted on the OTC Bulletin Board )OTCBB(
under the symbol "FTGI.OB" The following table sets forth the high and low
bid prices as reported by the National Association of Securities Dealers
(NASD) for the periods ending January 31, 2009. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions, and
may not reflect actual transactions.
High Low
---- ---
2008
-----
First Quarter 1.01 .65
Second Quarter .85 .26
Third Quarter .20 .90
Fourth Quarter .15 .52
2007
-----
First Quarter n/a n/a
Second Quarter n/a n/a
Third Quarter n/a n/a
Fourth Quarter 1.54 .05
25
As of January 31, 2009, we had 1,102 holders of record of our common
stock.
(b) No dividends were paid during the fiscal year ending January 31, 2009. The
Articles of Merger restrict the Company's ability to pay dividends. The
Company may not pay dividends if doing so would result in a consolidated
current ratio of less than two, that is, current assets equaling less than
twice current liabilities.
Item 6.
FINOTEC GROUP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONS ABOUT FORWARD-LOOKING STATEMENTS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K.
Certain of the statements contained in this Form 10-K which are not statements
of historical fact are forward-looking statements that involve risks and
uncertainties. Such forward-looking statements are made only as of the date of
this Form 10-K. The Company's actual results could differ materially from
those contained in the forward-looking statements. Factors that may cause such
differences include, but are not limited to, those discussed under "Risk
Factors" as well as those discussed elsewhere in this Form 10-K.
BUSINESS OVERVIEW
Finotec Group Inc. is a holding company with no activities other than holding
two wholly owned companies Finotec Trading Inc. and Forexcash Global Trading
Ltd. These companies, directly and through their subsidiaries, deal primarily in
two distinct areas:
1. Finotec Trading Inc - marketing, sales, market trading and
facilitation; and
2. Forexcash Global Trading Ltd - financial technology development
Finotec Group Inc. has a fiscal year end of January 31st and its stock symbol is
FTGI.OB.
Finotec Trading Inc. (New York) was established in November 2001 with the
express intent of providing retail customers access to the largest financial
market for online foreign currency trading. Finotec Trading Inc. (New York) is
the market-making arm of the corporation, distributing the live and
instantaneously executable trading prices in global currencies, equities,
indices, commodities and interest rate products through the group's online
trading system. The centralised dealing room services clients, aggregates
globally derived risk in real-time and hedges residual market exposure with the
underlying markets.
26
In 2005 Finotec Trading Inc. established its dealing room in Cyprus through a
wholly owned subsidiary Finotec Trading Cyprus Ltd. In 2007, the dealing room
was moved to the UK. Currently, the subsidiary in Cyprus engages primarily in
sales and marketing of the Company's products.
During 2006, Finotec Trading Inc. additionally established three wholly owned
subsidiaries: In the United Kingdom, Finotec Trading UK Limited, for the purpose
of obtaining the necessary authorization to act as a market maker in Foreign
Exchange and CFD's in the UK and Europe. In November 2007, Finotec UK received
such authorization from the UK Financial Services Authority ("FSA"). Such
authorization was accompanied by approvals from the other European countries
allowing Finotec UK to offer cross-border investment services within their
borders.
In the US, Finotec USA, Inc., incorporated under the laws of Delaware, for the
purpose of obtaining the necessary authorization from the National Futures
Association (NFA)to act as a market maker in Foreign Exchange in the US.
In Poland, Finotec Trading Polska S. A., for the purpose of obtaining the
necessary authorization to act as a market maker in Foreign Exchange and CFD's
in Poland and Eastern Europe. As a result of the FSA approval received by
Finotec UK, and the accompanying approvals in other European countries,
including Poland, the Company decided to discontinue the authorization process
in Poland. In November, 2008, this subsidiary has been sold.
Customers can open accounts with Finotec Trading UK Ltd. by several methods;
1.Directly with Finotec Trading UK Ltd.
2.Via affiliates and Introducing Brokers ("IB's") that sign commission
sharing agreement Finotec Trading UK Ltd.
As part of its code of conduct, all customer monies are segregated in custodian
accounts which have been set up in the United Kingdom and various other
countries.
Since its inception Finotec has secured a number of IB contracts, with
investment houses, financial institutions and high wealth individuals. Finotec's
website and trading system may be accessed on www.finotec.com. The system also
provides a `demo' trading system and an e-learning center that may be accessed
by registering on the website.
27
On August 9, 2001 (the "Merger Date"), Finotec Group, Inc., formerly Online
International Corporation ("Finotec Group"), a Nevada corporation without
significant operations, acquired all of the outstanding shares of Finotec Ltd.
("Finotec Ltd.") (formerly Priory Marketing Ltd.), an Isle of Man company. The
transaction was effected by the issuing of 21,500,000 shares of Finotec Group
common stock to the stockholders of Finotec Ltd. This resulted in the former
Finotec Ltd. stockholders owning approximately 61.5% of the outstanding shares
of Finotec Group. For financial reporting purposes, the transaction was recorded
as a recapitalization of Finotec Ltd., with Finotec Ltd. receiving the
$1,320,363 net assets (assets of $1,404,636, less liabilities of $84,273) of
Finotec Group as a capital contribution. Finotec Ltd. is the continuing
surviving entity for accounting purposes, but is adopting the capital structure
of Finotec Group, which is the continuing parent entity for legal purposes. All
references to common stock have been restated to reflect the equivalent number
of Finotec Group shares.
Finotec Ltd. was formed in December 2000, at which time it acquired 99.7%
of the outstanding stock of Forexcash Global Trading Ltd. ("Forexcash"), an
Israeli corporation, which had been incorporated on June 23, 1998. This
transaction is treated as a recapitalization of Forexcash with Forexcash as the
continuing accounting entity and Finotec Ltd. as the continuing parent for legal
purposes.
The Company currently develops, through its subsidiaries, markets
and operates a software system delivering foreign exchange, commodities, and
futures (CFDs) investment services to the public through the Internet. The
Company also operates an Internet-based brokerage firm for institutional,
professional and serious active individual traders in the financial instruments
markets, especially foreign currency and CFDs. The Company offers an electronic
trading platform which seamlessly integrates strategy trading tools, historical
and streaming real-time market data, and direct-access order-routing and
execution. In addition, the Company operates an internal risk management module
that guides the Company as to when to hedge positions or not and systems that
provide real time management of equity positions and margin requirements. The
Company also acts as a market maker.
Under our business model, we seek recurring revenues mainly by
offering, through use of a software system developed by its subsidiary,
Forexcash, online real-time trading in financial instruments. Forexcash is a
front and back office market maker application for online real-time trading in
financial instruments. We use our capabilities to provide strategy trading
tools, and the unique quality and functionality of those tools attracts our
target customer base of institutional, professional and serious active
individual traders. We market our services primarily through our subsidiaries
who operate call centers and Internet sites. The Company also intends to promote
white-label systems directly to financial institutions such as commercial banks.
We also provide training in online trading.
28
With the proliferation of powerful and efficient direct-access online
brokerage services, the increased accessibility to market data, and the
rapidly-growing capabilities of the Internet, we believe that serious, active
traders, professional and non-professional, are demanding powerful,
Internet-based, real-time strategy all-in-one trading platforms that are
seamlessly integrated with the best-available order execution technology and
include analytical tools which support the design and testing of custom trading
strategies.
To achieve profitability, the Company needs to aggressively market its
services. Included in its marketing strategy is the targeting of
introducing brokers ("IBs") and affiliates to develop a distribution network
with the Company as well as advertising campaigns by affiliates. The Company
also aims to reach a broader customer base and intends to offer a wider array of
financial products. We also intend to consistently improve our system and
implement new features and protocols. The Company is currently recruiting
institutional sales representatives to increase the Company's network of
affiliates and IBs.
The Company currently has subsidiaries in Cyprus, the U.K. and Israel that are
engaged in the marketing of Finotec products in these territories. The business
model for the Company envisions the opening of additional subsidiaries in other
countries. The Company intends for these subsidiaries to provide the Company's
services in the respective countries in which they are located. The Company may
raise financing in the upcoming year in order to finance the opening of new
subsidiaries in additional countries.
RESULTS OF OPERATIONS
Our current expense levels are based upon our expectations concerning
future revenue. However, such revenue levels cannot be guaranteed. Thus,
quarterly revenue and results of operations are difficult to project.
OVERALL
Net gain from foreign currency future operations was $2,641,116, for the
year ended January 31, 2009. There were net gains of $6,984,671 from foreign
currency future operations for the year ended January 31, 2008. This decrease of
$4,345,555 is attributable primarily to decreased spreads (commissions) on many
transactions.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses include
expenses associated with the development of new products, services and
technology; enhancements to existing products, services and technology; testing
of products and services; and the creation of documentation and other training
and educational materials. The Company's subsidiary, Forexcash Global Trading,
Ltd., owns all intellectual property rights relating to our business. Research
and development expenses were $308,935 for the year ended January 31, 2009, and
$387,620 for the year ended January 31, 2008, a decrease of $78,685. This
decrease was due to a decrease in research expenses.
29
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee-related costs for administrative personnel such as
executive, human resources, information technology employees;
telecommunications; rent; marketing; other facility expenses; and insurance.
General and administrative expenses were $1,053,625 for the year ended January
31, 2009, and $708,008 for the year ended January 31, 2008, an increase of
$345,617 due primarily to the Company's continuing development of its business,
and the acquisition of new computers, office furniture and equipment.
Liquidity and Capital Resources
The Company's cash balance decreased by $4,027,447 from a cash balance at
January 31, 2008 of $9,135,591 to $5,108,144 at January 31, 2009. The decrease
is primarily attributable to a significant decrease in cash provided by
operating activities offset by an increase in cash provided by financing
activities.
Net cash used in operating activities amounted to $7,767,822 for the year
ended January 31, 2009, while net cash provided by operating activities was
$4,328,866 for the year ended January 31, 2008, an increase of $12,096,688. The
increase in net cash used in operating activities primarily resulted from a
decrease in net income and a decrease in customers deposits.
Net cash used in investing activities for the year ended January 31, 2009, was
$136,703 while it was $564,929 used in investing activities for the year ended
January 31, 2008, a decrease of $428,226. The cash used in investing activities
for the year ended January 31, 2009, primarily resulted from the acquisition of
property and equipment.
The Company had cash provided in financing activities of $4,468,123 during the
year ended January 31, 2009 compared to net cash provided by financing
activities of $14,686 during the year ended January 31, 2008, an increase of
$4,453,437. This increase primarily reflects the purchase by several investors
of shares of the Company in a private placement.
Our future capital requirements and the adequacy of available funds will
depend on numerous factors, including the successful commercialization of our
products, competing technological and market developments, and the development
of strategic alliances for the development and marketing of our products. The
Company has sufficient funds to satisfy its cash requirements until early June
2009, assuming monthly expenses of the Company at $750,000 and no revenue
generation by the Company. In April 2008, due to lower-than-expected revenues,
the Company laid off approximately 15% of its employees and engaged in other
cost-cutting measures. Such action may have a material adverse effect on the
Company's operations and results. The Company intends to try to obtain
additional funds through equity or debt financing, strategic alliances with
corporate partners and others, or through other sources. In the event Finotec's
plans change or its assumptions change or prove to be inaccurate or the funds
available prove to be insufficient to fund operations at the planned level (due
to further unanticipated expenses, delays, problems or otherwise), Finotec could
be required to obtain additional funds earlier than expected. Finotec does not
have any committed sources of additional financing, and there can be no
assurance that additional funding, if necessary, will be available on acceptable
terms, if at all. If adequate funds are not available, we may be required to
further delay, scale-back, or eliminate certain aspects of our operations or
attempt to obtain funds through arrangements with collaborative partners or
30
others that may require us to relinquish rights to certain of our technologies,
product candidates, products, or potential markets. If adequate funds are not
available, Finotec's business, financial condition, and results of operations
will be materially and adversely affected.
Until required for operations, Finotec's policy is to invest its cash
reserves in bank deposits.
Finotec expects that its operating results will fluctuate significantly from
quarter to quarter in the future and will depend on a number of factors, most of
which are outside Finotec's control.
Item 7. Financial Statements and Supplementary Data
FINOTEC GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JANUARY 31, 2009 AND 2009
31
Gvilli & Co. C.P.A. (isr.) 7 Haeshel St.
Cesarea Israel 38900
Phone: 04 - 6372740
Fax: 04 - 6272130
E-mail: ir@gvilicpa.co.il
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Stockholders
Finotec Group, Inc.
We have audited the accompanying consolidated balance sheet of Finotec Group,
Inc. as of January 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended January 31, 2009. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the company as of
January 31, 2009, and the results of their operations and their cash flows for
each of the two years in the period ended January 31, 2009, in conformity with
accounting principles generally accepted in the United States.
/s/ Gvilli and Co.
Gvilli & Co.
April 30, 2009
Caesarea, Israel
1
------------
Gvilli & Co.
------------
FINOTEC GROUP INC.,
AND SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE YEAR ENDED JANUARY 31, 2009
Page
F-2 Consolidated Balance sheet
- --------------------------------------------------------------------
F-3 Statement of Income
- --------------------------------------------------------------------
F-4 Statement of Stockholders' equity
- --------------------------------------------------------------------
F-5 Statement of cash flow operations
- --------------------------------------------------------------------
FINOTEC GROUP INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
===========================================================================================================
U.S Dollars
----------------------------------
January 31 January 31
----------------------------------
2009 2008
----------------------------------
ASSETS
Current Assets
Cash and cash equivalents 5,108,144 9,135,591
Securities - 486,151
Prepaid and other current assets 472,662 293,562
- -----------------------------------------------------------------------------------------------------------
Total Current Assets 5,580,806 9,915,304
Property and Equipment, Net 599,879 729,532
Forward transaction-Hedging 441,090 354,100
- -----------------------------------------------------------------------------------------------------------
Total Assets 6,621,775 10,998,936
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
short term bank credit 216 22,493
Accounts payable and accrued expenses 995,820 945,151
Customers deposits 4,924,316 6,151,755
Forward transaction-Customers and Hedging 27,649 546,578
Provision for severance 261,063 188,158
- -----------------------------------------------------------------------------------------------------------
Total current Liabilities 6,209,064 7,854,135
- -----------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $0.001 par value, 100,000,000 shares authorized,
86,721,825 shares issued and outstanding 92,098 70,892
Treasury stock -- (156,513)
Additional paid-in capital 5,858,059 1,545,378
Foreign currency translation adjustment (732,344) (159,916)
Retained earnings (4,805,102) 1,844,960
- -----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 412,711 3,144,801
- -----------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity 6,621,775 10,998,936
===========================================================================================================
See accompanying notes to consolidated financial statements.
F-2
FINOTEC GROUP INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
=========================================================================
===========================================
U.S Dollars
-------------------------------------------
January 31 January 31
2009 2008
-------------------------------------------
Revenues
Net (losses) gain from foreign currency future operations 2,641,116 6,984,671
Consulting 5,746 1,985
- ------------------------------------------------------------------- -------------- -----------
Total Revenues 2,646,862 6,986,656
- ------------------------------------------------------------------- -------------- -----------
Operating Expenses
Selling, General and Administrative 1,053,625 708,008
Salaries 2,948,013 2,146,560
Research and Development 308,935 387,620
Technology and computer 859,896 722,561
Commissions Brokers 0 (147,691)
Bonuses & cash back-Witholding 132,941 492,729
Marketing 1,608,866 1,097,674
Professional fees 710,772 543,388
Financial datas 232,754 192,871
Depreciation 265,378 213,744
Exceptional 224,323 7,513
Other expense 570,106 530,339
- ------------------------------------------------------------------- -------------- -----------
Total Operating Expenses 8,915,609 6,895,317
- ------------------------------------------------------------------- -------------- -----------
Operating P&L (6,268,748) 91,340
Financing Expenses
Interest (expense) income 79,300 452,940
Finance Charges (460,615) (645,241)
- ------------------------------------------------------------------- -------------- -----------
Financing P&L (381,315) (192,301)
Exceptional Expenses
Exceptional (expense) - Previous years
Exceptional P&L
Profit&Loss before income taxes (6,650,062) (100,961)
Income tax expense 0 0
- ------------------------------------------------------------------- -------------- -----------
Net Income (Loss) (6,650,062) (100,961)
=================================================================== ============== ===========
Weighted average number of shares outstanding
Basic 86,721,825 65,516,224
Net Income per common share- Basic -$0.1 -$0.0
=================================================================== ============== ===========
See accompanying notes to consolidated financial statements.
F-3
FINOTEC GROUP INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
=======================================================================================
U.S Dollars
-------------------------------------------
January 31 January 31
---------- ----------
2009 2008
---- ----
Cash Flows from Operating Activities
Net Income ( Loss) (6,650,062) (100,961)
Adjustment to reconcile Net Loss to
Net cash Used in Operating Activities
Depreciation 265,378 276,498
Loss on sold assets 19,593 -
Changes in Operating Assets and Liabilities
Decrease in prepaid and other current assets (179,098) (191,903)
Increase in accrued expenses 424 202,265
Decrease in other current liabilities 50,246 262,940
Increase in accrued severance payable 72,905 83,882
Increase (decrease) in receivable forward Clients Trs (86,990) 541,296
Increase (decrease) in payable forward Hedging Trs/option (518,929) -
Increase in marketable securities 486,151 1,171,250
Increase (decrease) in customers Deposits (1,227,439) 2,083,599
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) Operating Activities (7,767,822) 4,328,866
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of fixed Assets (170,660) (605,866)
Selling of fixed Assets 33,957 40,937
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by Investing Activities (136,703) (564,929)
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Short term bank credit (22,277) 1,185
Proceeds from treasury shares - 13,501
Stock issuance 4,490,400 -
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) Financing Activities 4,468,123 14,686
- -----------------------------------------------------------------------------------------------------------------------
Effect of Foreign Currency Translation (591,045) (137,976)
- -----------------------------------------------------------------------------------------------------------------------
Net increase in Cash and Cash Equivalent (4,027,447) 3,640,647
Cash and Cash Equivalents- beginning of year 9,135,591 5,494,944
- -----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents- Ending 5,108,144 9,135,591
=======================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net 2,996 40,873
=======================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
FINOTEC GROUP INC AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
====================================================================================================================================
Common Stock
------------------
Accumulated
Additional Other Stock
Paid Deficit Comprehensive Treasury Subscription
Shares Amount in capital Accumulated income Stock Receivable Total
- ------------------------------------------------------------------------------------------------------------------------------
Balance at january 31, 2006 34,985,241 34,985 1,545,378 (532,949) (24,426) 0 1,022,988
==============================================================================================================================
Net Income (Loss) 2,478,870 2,478,870
Purchase of shares (2,687,500) 2,689 (169,813) (167,125)
Exercise of Options 33,018,483 33,018 33,018
Foreign currency translation 2,486 2,486
- ------------------------------------------------------------------------------------------------------------------------------
Balance at january 31, 2007 65,316,224 70,692 1,545,378 1,945,921 (21,940) (169,813) 0 3,370,238
==============================================================================================================================
Net Income (Loss) (100,961) (100,961)
Shares issued from Treasury stock 200,000 200 13,300 13,500
Purchase of shares 0
Exercise of Options 0
Foreign currency translation (137,976) (137,976)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 2008 65,516,224 70,892 1,545,378 1,844,960 (159,916) (156,513) 0 3,144,801
==============================================================================================================================
Net Income (Loss) (6,650,062) (6,650,062)
Shares issued 2,487,500 2,488 413,124 156,513 572,125
New shares issuing 1,860,324 1,860 426,015 427,876
New shares issuing 3,333,333 3,333 996,667 1,000,000
New shares issuing 2,793,889 2,794 500,106 502,900
New shares issuing 7,222,222 7,222 1,292,778 1,300,000
New shares issuing 2,708,333 2,708 484,792 487,500
New shares issuing 600,000 600 149,400 150,000
New shares issuing 200,000 200 49,800 50,000
Total issued : 21,205,601
Exercise of Options 0
Foreign currency translation (572,428) (572,428)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 2009 86,721,825 92,098 5,858,059 (4,805,103) (732,344) 0 0 412,710
==============================================================================================================================
F-5
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. Description of
Business Finotec Group, Inc. ("Finotec, Inc.), a Nevada
corporation, is principally engaged, through its
wholly-owned subsidiaries, in offering foreign
currency market trading to professionals and
retail clients over its web-based trading
system.
Shares in Finotec began trading on the Over the
Counter Bulletin Board listings. (OTCBB: FTGI).
Finotec Group's United Kingdom subsidiary,
Finotec Trading UK, Limited, has been authorized
by the UK's Financial Services Authority (FSA)
to act as a Market Maker, as defined by the FSA,
in the United Kingdom. As of November 9, 2007,
Finotec Trading UK, Limited, is approved by the
FSA as a Market Maker and Principal, and thus
Finotec Trading UK, Limited, may now offer UK
clients certain regulated investment instruments
such as Commodity Futures, Commodity options and
options on commodity futures, Contract for
Differences, Futures, Options, Rights to or
interests in investments, Rolling spot forex
contracts, and Spread Bets.
Risk Management
These Finotec Group activities give rise to
risks which are monitored and managed as
follows:
Credit risk
Clients are required to deposit cleared funds as
margin before they can trade. If the client
margin falls below the minimum required to
maintain a position, they will be notified that
they are on margin call and can only reduce
their positions or provide additional funds. At
any time the client is on margin call, the
company may, at its discretion, liquidate some
or all of that client's positions in order to
bring them back into line with their margin
requirements.
The company also has potential credit risk
exposure to market counterparties with which it
hedges and with banks. The company has a defined
risk appetite for exposure to each market
counterparty and bank to which it has credit
exposure.
Liquidity risk
The company has significant net cash balances as
at the balance sheet date and continually
monitors its capital adequacy.
Foreign currency risk
The company has financial instruments which are
denominated predominantly in US dollars. The
gains and losses arising from the company's
exposure are recognised in the profit and loss
account.
Market price risk
Market risk arises from open contracts with
customers and counterparties. Exposure to market
risk is closely monitored in accordance with
limits and reduced through hedging.
F-6
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. Summary of Significant Accounting Policies
Principles of
Consolidation The consolidated financial statements include
the accounts of Finotec Inc. and its wholly
owned subsidiaries, Finotec Trading, Inc.
("Finotec Trading") and its owned subsidiaries
Finotec Trading Cyprus Ltd. Finotec USA Inc.,
Finotec Trading Polska S.A., Finotec Trading UK
Ltd, and Finotec Ltd.'s 99.7% owned subsidiary,
Forexcash Global Trading Ltd. ("Forexcash")
(collectively referred to as the "Company",
unless otherwise indicated). All material
intercompany transactions and balances have been
eliminated in consolidation.
Since the liabilities of Forexcash exceed its
assets, and the owner of the 0.3% minority
interest has no obligation to supply additional
capital, no minority interest has been recorded
in the consolidated financial statements.
Fixed Assets Fixed assets are stated at cost, less
accumulated depreciation. Office furniture and
equipment are depreciated using the
straight-line method over seven years. Computer
equipment and software are depreciated using the
straight-line method over three years. Leasehold
improvements are amortized on a straight-line
basis over the lesser of the useful life or the
life of the lease. Repairs and maintenance costs
are expensed as incurred. Costs of software
acquired along with payroll costs and consulting
fees relating to the development of internal use
software, including that used to provide
internet solutions, are capitalized. Once the
software is placed in service, the costs are
amortized over the estimated useful life.
Cash and Cash
Equivalents The Company considers all highly liquid debt
instruments purchased with original maturities
of three months or less to be cash equivalents.
Revenue recognition
Finotec acts as a market maker for its customers
based on the prices traded in the interbank
market, and recognizes a loss or revenue both
when customers close transactions in foreign
currencies and also on the open customer
positions showing gain or loss. When there is no
Compensation inside the system with its
customers, Finotec turns to other institutions
to clear the contracts and recognizes a loss or
revenue from actions in derivative financial
instruments.
F-7
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. Summary of Significant Accounting Policies
(Continued)
Income Taxes Deferred taxes are determined based on the
differences between financial reporting and tax
basis of assets and liabilities, and are
estimated using the tax rates and laws in effect
when the differences are expected to reverse. A
valuation allowance is provided based on the
weight of available evidence, if it is
considered more likely than not that some
portion of or all of, the deferred tax assets
will not be realized.
Advertising Expense The Company expenses advertising costs as
incurred. Advertising expenses included in the
profit and losses in the total amount of
Marketing for the years ended January 31, 2009
and 2008 amounted to $1,084,562 and $742,599,
respectively.
Use of Estimates The preparation of financial statements in
conformity with accounting principles generally
accepted in the United States of America
requires management to make estimates and
assumptions that affect certain reported amounts
and disclosures. Actual results could differ
from those estimates.
Shareholders' Equity
On June 16, 2008, the Company entered into
definitive agreements for the sale of 4,347,824
shares of Common Stock at a price of $0.23 per
share. As a part of the transaction, the Company
agreed to issue accompanying warrants to
purchase an aggregate of 10,000,000 shares of
Common Stock at an exercise price of $0.50 per
share. Four investors subscribed to the
investment. The shares of Common Stock sold in
the private placement offering have not been
registered and may not be offered or sold absent
registration or an applicable exemption from
such registration requirements. All such shares
are subject as well to a registration rights
agreement. The transaction closed in mid-June
2008. 2,487,500 treasury shares were issued as
part of the 4,347,824 shares issued thereunder.
On July 29, 2008, the Company entered into a
definitive agreement for the sale of 3,333,333
shares of Common Stock at a price of $0.30 per
share for a total of $1 million. As a part of
the transaction, the Company agreed to issue
accompanying warrants to purchase an aggregate
of 1,428,571 shares of Common Stock at an
exercise price of $0.70 per share. The shares of
Common Stock sold in the private placement
offering have not been registered and may not be
offered or sold absent registration or an
applicable exemption from such registration
requirements. All such shares are subject as
well to a registration rights agreement. The
transaction closed on July 31, 2008
F-8
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Shareholders' Equity
(Continued)
On October 31, 2008, the Company entered into
definitive agreements and received funds for the
sale of 12,724,444 shares of Common Stock at a
price of $0.18 per share and 800,000 shares of
Common Stock at a price of $0.25 per share. As a
part of the transaction, the Company agreed to
issue accompanying warrants to purchase
5,777,776 shares of Common Stock at an exercise
price of $0.45 per share and warrants to
purchase 400,000 shares of Common Stock at an
exercise price of $0.50. Five new investors
subscribed to the investment. The shares of
Common Stock sold in the private placement
offering were not registered under the
Securities Act of 1933, as amended, and may not
be offered or sold absent registration or an
applicable exemption from such registration
requirements. All such shares are subject as
well to a registration rights agreement. The
offering closed on November 2, 2008.
Translation of Foreign
Currencies Forexcash Ltd and Finotec Trading Cyprus Ltd,
Finotec Trading UK Ltd and Finotec Trading
Polska SA Ltd are operated primarily in local
currencies, which represent the functional
currencies of those subsidiaries. Forexcash
Ltd, Finotec Trading UK Ltd and Finotec Trading
Cyprus Ltd encompass substantial part of the
Company's operations. All assets and
liabilities of Forexcash Ltd and FinotecTrading
Cyprus Ltd Finotec Trading UK Ltd and Finotec
Trading Polska SA Ltd were translated into U.S.
dollars using the exchange rate prevailing at
the balance sheet date, while income and
expense amounts were translated at average
exchange rates during the year. Translation
adjustments are included in accumulated other
comprehensive income (loss), a separate
component of stockholders' equity.
Fair Value of Financial
Instruments SFAS No. 107, Disclosures About Fair Value of
Financial Instruments, requires disclosure of
the fair value of certain financial instruments.
The carrying value of financial instruments,
which include cash and cash equivalents, loans
payable, customer deposits and accrued expenses,
approximate their fair values due to the
short-term nature of these financial
instruments. The carrying value of the Company's
note receivable approximates its fair value
based on management's best estimate of future
cash collections.
Earning Per Common
Share Basic earnings per share is based on the
weighted effect of all common shares issued and
outstanding, and is calculated by dividing net
income (loss) by the weighted average shares
outstanding during the period. Diluted earnings
per share is calculated by dividing net income
(loss) by the weighted average number of common
shares used in the basic earnings per share
calculation plus the number of common shares
that would be issued assuming exercise or
conversion of all stock options. The dilutive
effect of stock options was not assumed for the
years ended January 31, 2009 and 2008, because
the effect of these securities is antidilutive.
F-9
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Comprehensive
Income SFAS No. 130, Reporting Comprehensive Income,
requires a full set of general-purpose financial
statements to be expanded to include the
reporting of comprehensive income. Comprehensive
income is comprised of two components, net
income and other comprehensive income.
Comprehensive income is defined as the change in
equity of a business enterprise during a period
from transactions and other events and
circumstances from nonowner sources. As of
January 31, 2008 foreign currency translation
adjustments were the only items of other
comprehensive income for the Company.
Derivative Financial
Instruments The Company follows SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities,
and its related amendments to account for its
derivative transactions. The Company accounts
for its forward foreign currency exchange
contracts as derivative financial instruments.
The Company uses derivative instruments as part
of its asset/liability management activities to
meet the risk management needs of its clients as
part of its trading activity for its own
account. These derivative financial instruments
are carried at fair value, with realized and
unrealized gains and losses included in net gain
from foreign currency future operations.
Critical accounting policies
A summary of significant accounting policies is
included in Note 2 to the accompanying financial
statements. We believe that the application of
these policies on a consistent basis enables our
company to provide useful and reliable financial
information about the company's operating
results and financial condition. The preparation
of financial statements in conformity with
generally accepted accounting principles
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 period. Actual results may differ from
those estimates.
We account for stock options issued to employees
in accordance with the provisions of SFAS No.
123(R), "Share-Based Payment". In December 2004,
the FASB issued SFAS No. 123(R) 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 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.
F-10
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Critical accounting policies
(Continued)
In March 2005 the SEC issued Staff Accounting
Bulletin No. 107, or "SAB107". 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 123R. 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 SFAS123.
Effective January 1, 2007, we fully adopted the
provisions of SFAS No. 123R and related
interpretations as provided by SAB 107. As such,
compensation cost is measured on the date of
grant as the excess of the current market price
of the underlying stock over the exercise price.
Such compensation amounts, if any, are amortized
over the respective vesting periods of the
option grant. We apply this statement
prospectively. The valuation of such share based
payments requires significant judgment. We
exercise our judgment in determining the various
assumptions associated with the associated share
based payments as well as the expected
volatility related to their fair value. We base
our estimate of the share based payments on our
interpretation of the underlying agreements and
historical volatility of our stock price.
We account for our investment in equity
securities pursuant to Statement of Financial
Accounting Standards ("SFAS") No.115. This
standard requires such investments in equity
securities that have readily determinable fair
values be measured at fair value in the balance
sheet and that unrealized holding gains and
losses for investments in available for sale
equity securities and investments in trading
equity securities be recorded as a component of
stockholders' equity and statement of
operations, respectively. Furthermore, it
provides that if factors lead us to determine
that the fair value of certain financial
instruments is impaired, that we should adjust
the carrying value of such investments to its
fair value. Marketable securities consist
principally of corporate stocks. Management has
classified the Company's marketable securities
as available for sale securities in the
accompanying consolidated financial statements.
Marketable Securities Available-for-sale securities are carried at
fair value, with unrealized gains and losses
reported as a separate component of
stockholders' equity. Realized gains and losses
on available-for-sale securities are included in
interest income. Gains and losses, both realized
and unrealized, are measured using the specific
identification method. Market value is
determined by the most recently traded price of
the security at the balance sheet date. As of
January 31, 2009 the market value of the
security equals its cost.
F-11
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. Property and
Equipment Consist of the following:
As of January 31, 2009
Computer equipment $ 862,272
Purchased software 222,647
Office furniture and equipment 234,647
Leasehold improvements 117,666
-----------------------------------------------------------
Total Property and Equipment at Cost 1,437,494
Less accumulated depreciation and amortization 837,615
-----------------------------------------------------------
Property and Equipment - Net $ 599,879
===========================================================
4. Related Party
Transactions/Loans Finotec Inc. is a holding Company which operates
via its wholly owned subsidiaries and their
subsidiaries. Within the Group there are various
inter- company agreements setting out the
different undertakings of the companies and the
commissions paid in such transactions.
The Company has in place, from time to time,
inter-company loans which are granted at
interest rates which the Company believes
reflect market conditions at such time.
5. Due to Stockholder The amount due to stockholder consists primarily
of unpaid compensation.
6. Stock Options
and Awards In April of 2003, the Board of Directors of
Finotec Group, Inc. (the "Company") approved a
resolution to provide for the automatic grant to
Didier Essemini, the Chief Executive Officer of
the Company, of a stock option award of
33,018,483 shares of Common Stock. On March 17,
2004, the shareholders of the Company voted to
approve the grant to Didier Essemini, the Chief
Executive Officer of the Company, of stock
options for 33,018,483 shares of Common Stock.
The Registrant awarded Mr. Essemini 33,018,483
options to purchase common stock at an exercise
price of $0.001 per share. On January 27, 2007
Mr. Essemini exercised the options for
33,018,483 shares of Common Stock of the
Company.
During the year 2007, 200,000 shares were issued
to an outside legal advisor as partial payment
for legal services rendered in connection with
the filing of a registration statement by the
Company.
F-12
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. Derivative Financial
Instruments Derivative financial instruments consist of the
Company's forward foreign exchange currency
contracts, which are agreements to exchange
specific amounts of currencies at a future date,
at a specific rate of exchange. Foreign exchange
contracts are entered into primarily to meet the
foreign exchange risk management needs of the
Company's clients. The major risk associated
with this instrument is that foreign exchange
rates could change in an unanticipated manner,
resulting in a loss in the underlying value of
the instrument. The Company mitigates this risk
by using hedging techniques that limit the
exchange rate exposure. As the Company accounts
for the foreign exchange contracts as fair value
hedges (per FASB No. 133), all gains and losses
are recognized in earnings and the fair value of
the instruments are reported as other
assets/liabilities on the consolidated balance
sheet.. During the year ended January 31, 2009
the Company recognized gains in an amount of
$182,897 from its forward foreign currency
contracts. As of January 31, 2009, the Company
has entered into a number of forward foreign
exchange currency contracts that were hedged in
February, 2009. The Company recognized a gain of
approximately $50,410 on these contracts, during
the first quarter of fiscal 2009..
8. Legal Proceedings
1- Customer v. Finotec Trading UK Limited (in
arbitration; previously before the Tel Aviv
Magistrates Court): This is a case in which a
former customer of Finotec Trading UK Limited
("Finotec UK"), has sued for $41,973.00. The
customer asserts that Finotec UK's cancelation
of certain trades in April and June 2008 was
unlawful and that he is entitled to lost
profits. In February 2009, at the suggestion of
the court, the parties agreed to submit the
dispute to arbitration. Two arbitration hearings
were held in March 2009, and customer's attorney
has filed his written summations. We expect to
file our written summations within approximately
three weeks. In connection with the agreement
to arbitrate, in the spring of 2009, Finotec
deposited, in an attorney escrow account, the
amount claimed in the Action. Finotec UK
intends to defend the matter vigorously.
2- Customer v. Finotec Trading Ltd. (Tel Aviv
Magistrates Court): This is a case in which a
customer of Finotec Trading Ltd. ("Finotec
Israel"), has sued Finotec Israel for NIS
154,000. The customer alleges that Finotec
Israel acted negligently in (a) recommending
that he execute trades through a third-party,
and (b) failing to oversee such third party.
Finotec Israel filed its statement of defense in
December 2008, and it intends to defend the case
vigorously. Customer's questionnaire and
document demand were received on May 4, 2009.
F-13
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. Legal Proceedings
(continued)
3-. Potential Claim of Customer: On or about
Nov. 16, 2008, Finotec Israel received a letter
from counsel to a customer, concerning an
alleged claim of customer, who has been a
customer of Finotec Israel. The essence of the
claim in the letter is that Finotec Israel
unlawful cancelled certain trades of customer in
October 2007. The letter is not clear as to the
amount of damages allegedly owed to customer.
The letter refers to customer's right to
reinstate a transaction in the amount of $5,000,
and it also asserts that customer is entitled to
damages of NIS 2,000 To the best of our
knowledge, no lawsuit has been filed by customer
(or on his behalf) against any Finotec entity.
Management does not expect either claim to have
a material effect on the Company's financial
position or results of operations.
9. Commitments Forexcash Ltd, Finotec Trading (Cyprus) Ltd and
Finotec Trading UK Ltd lease their offices space
facilities on a month-to-month basis. Rent
expense included in the profit and losses in the
total amount of Selling, General and
Administrative for the years ended January 31,
2009 and 2008 amounted to $255,054 and $204,340,
respectively.
10. Income Taxes Realization of the future tax benefits related
to the deferred tax assets is dependent on many
factors including the Company's ability to
generate taxable income within the net operating
loss carryforward period. The Company has
provided a valuation allowance for the full
amount of its net deferred tax assets due to the
uncertainty of generating future profits that
would allow for the realization of such deferred
tax asset.
11. Subsequent Events A subsidiary company has submitted an
application for registration in the U.S. with
the National Futures Associations (NFA). If
approved, this registration will make it more
attractive to do business with the Company and
increase the potential for the Company to do
business in the U.S. market.
See Note 9 regarding legal proceedings.
F-14
PART III
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There have been no changes in or disagreements with the Company's
accountants on accounting and financial disclosure for the year ended January
31, 2009.
Item 8A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Management of the Company, with the participation of the Chief Executive Officer
(who also serves as the Chief Financial Officer), evaluated the effectiveness of
the design and operation of the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), as of October 31,
2008. Based upon this evaluation, the Chief Executive Officer (who also serves
as the Chief Financial Officer) has concluded that the Company's disclosure
controls and procedures were not effective as of October 31, 2008 due to the
material weaknesses in internal control over financial reporting as described
below.
(b) Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rule 13a-15(f)
of the Exchange Act. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
A material weakness represents a significant deficiency (as defined in the
Public Company Accounting Oversight Board's Auditing Standard No. 5), or a
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis.
32
Management conducted an assessment of the effectiveness of the Company's
internal control over financial reporting as of October 31, 2008 based on the
framework published by the Committee of Sponsoring Organizations of the Tread
way Commission, Internal Control -- Integrated Framework. Management has
identified the following material weaknesses in the Company's internal control
over financial reporting as of October 31, 2008.
Material weaknesses identified in Finotec Group, Inc are as follows:
Entity Level Controls:
- ----------------------
o The Audit Committee is inactive.
o There is no internal audit function.
o Management does not perform a periodic check of the access rights of
all users to ensure that their access is suitable to their positions
and functions.
o Remediation Plan: The Audit Committee will be activated.
o The Company will implement an internal audit function.
o The CFO will extract from the information system an access list for
all employees and ensure that each function, screen and field is
suitable to the employee's job description.
o The CFO will ensure that the access rights are adequately segregated.
Financial Statements:
- ---------------------
o Lack of documentation at the financial statement preparation process
creates the potential of the occurrence of a material error occurring
in the financial statements.
Remediation Plan:
- -----------------
o The Company will retain evidence of all the controls performed in the
financial statement preparation process.
Treasury and Cash Management:
- -----------------------------
o Lack of documentation in the Treasury and Cash Management process
creates the potential of the occurrence of a material error occurring
in the financial statements.
Remediation Plan:
- -----------------
o The Company will retain evidence of all the controls performed in the
process.
Revenue:
- --------
o Lack of documentation in the Order to Cash process creates the
potential of the occurrence of a material error occurring in the
financial statements.
33
Remediation Plan:
- -----------------
o The Company will retain evidence of all the controls performed in the
process.
Human Resources & Payroll:
- --------------------------
o Lack of documentation in the human resources and payroll processes
creates the potential of the occurrence of a material error occurring
in the financial statements.
Remediation Plan:
- -----------------
o The Company will retain evidence of all the controls performed in the
process.
Information Technology:
- -----------------------
o The Company does not have a permission and access right table
specifying group authorizations. Some employees have more
authorizations than their role definition. There is no authorization
procedure.
o The Company does not have password complexity procedure. User
passwords do not require any complexity, and there is no requirement
for password change.
o No Formal system development, acquisition and program change policies
and procedures exist for development/acquisitions of new systems and
changes to existing systems.
o The developers have access to the production.
Remediation Plan:
- -----------------
o The Company will examine and minimize user rights and will prepare
permissions table and access rights that includes group permissions
and prepare access to programs and data procedures.
o The Company will prepare "Access to Programs and Data" procedure.
Passwords to the database will be managed and complex.
o The Company will write a methodology for system development,
acquisitions and change management.
o The Company will prevent the developers from accessing the production
environment.
34
Item 9. Directors, Executive Officers, Promoters, and Control Persons.
The officers of the Company are as follows:
NAME POSITION(S) TERM OF OFFICE
Didier Essemini (37) President, Chief Financial 1 year
Officer, Director
Guy Senbel (56) Secretary, Director 1 year
Gil Ovadia (43) Director 1 year
Victor Essemini (63) Director 1 year
Albert Layani (68) Director 1 year
Didier Essemini
Mr. Essemini is the President and a Director for the Company. Mr. Essemini
graduated from the Sorbonne University in Paris with an MBA. He worked at Bank
Hapoalim in Israel from 1994 to 1998. In 1998 Mr. Essemini started a brokerage
company and implemented a front end internet solution for currency trading known
as "Forexcash". Today Forexcash is a fully owned subsidiary of the Company.
Guy Senbel
Mr. Senbel is the Secretary and a Director for the Company. Mr. Senbel was
President of the holding company of BS Decoration. Mr. Senbel attended
University in France.
Gil Ovadia
Mr. Ovadia is a director of the Company. Mr. Ovadia graduated with degrees
in Law & Economics from Keele University (UK). Mr. Ovadia has worked as a
Solicitor in London for the last 12 years. Mr. Ovadia founded Silvergate
Management Ltd. a property and financial services company which provides
property and corporate management services.
Victor Essemini
Mr. Essemini has extensive experience in human resources management,
as manager of a medical analysis laboratory for 20 years and management of the
analysis department of the largest laboratory in Paris Laboratoire Deloy. Mr.
Victor Essemini is the father of Mr. Didier Essemini.
Albert Layani
Mr. Layani was the founder of one of the largest textile
distribution store chains in France with 92 stores in France and another 26
stores in Israel under the brand names Fly and Makin. Mr. Layani is the
father-in-law of Mr. Didier Essemini.
Code of Conduct
The Company has adopted a Code of Conduct for its employees which will be made
available, without charge, upon written request to ir@finotec.com.
35
ITEM 10. MANAGEMENT REMUNERATION
The following table sets forth the compensation paid during the fiscal year
ended January 31, 2009, to the Company's Chief Executive Officer and each of the
Company's officers and directors. No other person received compensation equal to
or exceeding $100,000 in fiscal 2008.
Annual Compensation Awards Payouts
--------------------------------------------- ------------------------ ---------------------
Other
Annual Restricted Securities Other
compen- Stock Underlying LTIP Compen-
sation Award(s) Options/SAR Payouts sation
Name and Principal Position Year Salary ($) Bonus ($) ($) ($) (#) ($) ($)
- --------------------------- ---- ---------- --------- --- --- --- --- ---
Didier Essemini
President, 2008 $385,126 -0- -0- -0- -0- -0-
Director
Guy Senbel
Director 2008 -0- -0- -0- -0- -$1,000- -0- -0-
Gil Ovadia
Director 2008 -0- -0- -0- -0- -$1,500- -0- -0-
Victor Essemini -0- -0- -0- -0- -$1,000-
Albert Layani -0- -0- -0- -0- -$1,000-
Item 11. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of Common Stock as of January 31, 2009, by
(i) each Director of the Company, (ii) each executive officer of the Company,
(iii) all directors and executive officers as a group, and (iv) each person
known to the Company to be the beneficial owner of more than 5% of its
outstanding shares of Common Stock.
36
Shares Beneficially Owned
-------------------------
Percentage
Directors and Executive Officers Shares Held Owned (1)
- ---------------------------------- ----------- ---------
Didier Essemini 36,175,983 41%
Guy Senbel 2,302,650 3%
Gil Ovadia option to purchase 100,000 shares
Directors and Officers as a Group 38,478,633 44%
(1) Percentage of ownership is based on 86,721,825 shares of Common Stock issued
and outstanding as of January 31, 2009.
BENEFICIAL OWNERS OF OVER 5%
- ----------------------------
Gan Paradis Ltd. owns 6,115,000 unregistered Shares or 7% of the Company.
Registered Office
Kings Court
PO Box N-3944
Bay Street
Nassau, Bahamas
Director
Allistair Matthew Cunningham
3,057,500 of Didier Essemini's 36,175,983 shares consist of his 50% ownership of
Gan Paradis Ltd.
Tableland Ltd owns 7,222,222 registered Shares or 8% of the Company.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
There have been no other material transactions, series of similar
transactions, or currently proposed transactions, to which the Company was or is
to be a party, in which the amount involved exceeds $60,000 and in which any
director or executive officer, or any security holder who is known to the
Company to own of record or beneficially more than five percent of the Company's
Common Stock, or any member of the immediate family of any of the foregoing
persons, had a material interest.
37
CERTAIN BUSINESS RELATIONSHIPS
In January, 2003 the Company borrowed $30,000 from Dunleigh Investments
Limited, a company whose shareholder is also a shareholder in Finotec Inc. The
loan bears interest at the rate of 4% and is payable on demand. The loan was
repaid by the Company.
There have been no other material transactions, series of similar
transactions, currently proposed transactions, or series of similar
transactions, to which the Company was or is to be a party, in which the amount
involved exceeds $60,000 and in which any director or executive officer, or any
security holder who is known to the Company to own of record or beneficially
more than five percent of the Company's Common Stock, or any member of the
immediate family of any of the foregoing persons, had a material interest other
than as listed in this Form 10K.
Item 13. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) All required exhibits are incorporated herein by reference from the
Company's Form 10-K and Amendments thereto.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: June 5, 2009 By: /s/ Didier Essemini
-------------------
Didier Essemini
President
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Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and dates indicated.
Signature Title Date
/s/ Didier Essemini
- --------------------
Didier Essemini President, Chief Financial
June 5, 2009 Officer and a Director
/s/ Guy Senbel
- ---------------
Guy Senbel Secretary and a Director June 5, 2009
/s/ Gil Ovadia
- ---------------
Gil Ovadia Director June 5, 2009
/s/ Albert Layani
- ---------------
Albert Layani Director June 5, 2009
/s/ Victor Essemini
- ---------------
Victor Essemini Director June 5, 2009
40