ITEM 1. BUSINESS.
Overview
Optionable, Inc. (“the “Company”) is a corporation that was formed in Delaware in February 2000. Between April 2001 and July 2007, a substantial portion of our revenues were generated from providing energy derivative brokerage services to brokerage firms, financial institutions, energy traders, and hedge funds worldwide.
The Company has not generated any revenues since the third quarter of 2007 as a result of the termination of the business relationship with it by its largest customer in 2007 together with the combined succession of events since then. The litigation matters listed below and discussed in Item 3 of Part I of this Report, "Legal Proceedings", have had a significant adverse impact on its business, including current and, likely, future results of operations and financial condition.
The Company’s management is exploring and seeking possible business transactions and new business relationships in areas unrelated to brokerage services.
The Company is a defendant to three significant legal proceedings, one from the Commodities and Futures Trade Commission (“CFTC”), another from its largest stockholder, Chicago Mercantile Exchange/ New York Mercantile Exchange (“NYMEX”), and a third one from its former largest customer, Bank of Montreal (“BMO”). Also named in such lawsuits, among others, are the Company’s former President (who is a current Director) and the Company’s former Chief Executive Officer. Both of these individuals are defendants in a suit brought by the Securities and Exchange Commission. The former Chief Executive Officer has also been indicted by the US Department of Justice. The Company’s former Chairman is a defendant in the NYMEX and BMO proceedings.
Going Concern
The Company is unable to determine whether it will have sufficient funds to meet its obligations for at least the next twelve months. The combination of its anticipated legal costs to defend against current legal proceedings, the potential amounts the Company would have to pay if there are negative outcomes in one or more of such legal proceedings and the Company’s obligations under its indemnification obligations could exceed the Company’s resources. The legal proceedings also negatively impact the Company’s ability to enter into strategic transactions with other companies. The Company’s future depends on its ability to satisfactorily resolve the aforementioned legal issues and there is no assurance it will be able to do so. If the Company fails for any reason, it would not be able to continue as a going concern and could potentially be forced to seek relief through a filing under the US Bankruptcy Code.
Principles of consolidation
The accompanying consolidated financial statements include the results of operations of Opex International, Inc. and Hydra Commodity Services, Inc. for the year ended December 31, 2009. These subsidiaries were dissolved in December 2009 and January 2010, respectively. All material intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.
HOW WE OPERATE
We have not had revenue-generating operations since the third quarter of 2007. Our management is responsible for seeking alternatives which would allow us to maximize our resources, which is our cash, while satisfying our financial obligations. To this end, our two fold strategy is to vigorously defend our interests in the various pending legal actions while at the same time pursuing various potential merger or investment opportunities which would allow the Company to resume operating status.
CLIENT CONCENTRATION
Not applicable.
COMPETITION
Not applicable
EMPLOYEES
We currently have one full-time employee, the Company’s controller, and two other employees---the Chief Executive Officer and the Chief Financial Officer. In 2009 through May 2010, the Company’s sole employee and full-time employee was the previous Chief Executive Officer. The Company’s sole employee and full-time employee in 2008 was its President at that time.
RESEARCH AND DEVELOPMENT
Ever since the Company terminated its development of its OPEX trading platform in November 2008, the Company has not incurred R&D expenses.
ITEM 1A.
ITEM 1A. RISK FACTORS
This investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this report. Each of the following risks may materially and adversely affect our ability to enter into business transactions and relationships, results of operations and financial condition. These risks may cause the market price of our common stock to decline, which may cause you to lose all or a part of the money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
The Company may not be able to continue to operate as a going concern.
The Company is unable to determine whether it will have sufficient funds to meet its obligations for at least the next twelve months. The combination of our anticipated legal costs to defend against the current legal proceedings described under the heading “Legal Proceedings” in Item 3 of Part I of this Report, the potential settlements the Company would have to pay assuming there are negative outcomes to such legal proceedings, and the Company’s indemnification obligations may exceed the Company’s resources, and therefore the Company may not be able to meet such obligations which would have a material adverse effect on the Company’s ability to continue as a going concern. The Company’s future depends on its ability to satisfactorily resolve these legal issues, although there can be no assurance that we will be able to achieve a satisfactory resolution. While the Company is considering several alternatives, these legal proceedings also negatively impact our ability to enter into strategic transactions with other companies, and there can be no assurance that we will be able to enter into or complete any such transaction. If the Company fails for any reason to satisfactorily resolve these issues, it would not be able to continue to as a going concern and the Company could potentially be forced to seek relief through a filing under the US Bankruptcy Code.
Unless and until we find and enter into new business transactions, we have no revenues and no potential sources of future revenues.
We terminated the development of our OPEX technology in 2008 and have no operations and no revenue source. Our attempts to restore business and generate revenues have been hindered by litigation brought against the Company. Our initial discussions with potential business partners have not progressed beyond an indication of interest in our cash due to pending litigation against the Company and pending litigation against some of the Company's former officers and directors and a current director. There can be no assurance that all pending litigations will be expeditiously and favorably resolved or that we will be able to generate interest that would materialize into an agreement upon terms that are satisfactory to our board of directors.
Although the Company has had no revenues, we continue to incur expenses.
We have not generated revenues since the third quarter of 2007. However, we continue to incur expenses, including salaries, auditing expenses and legal expenses necessary to maintain our reporting status and legal fees in connection with certain legal proceedings. In 2010, we incurred expenses of $2,269,125 in legal fees, advances paid to its former officers and a current director for their legal defense, and expenses associated with intellectual property.
Several legal proceedings are pending against the Company and certain of our former directors and officers and a current director. The Company is unable to predict the outcome of these proceedings and can give no assurance that the outcome of these proceedings will not have a material adverse effect on it, or that other proceedings will not be initiated.
On November 18, 2008, the Commodity Futures Trading Commission (“CFTC”) filed a complaint in the United States District Court for the Southern District of New York, against the Company; former employees of the Company, including its former Chief Executive Officer, Kevin Cassidy, and its former President (currently a Director), Edward O’Connor; and two former employees of Bank of Montreal (the Company’s former client), David Lee and Robert Moore. The CFTC claims that the Company is liable for violations of Section 4c(b) of the Commodity Exchange Act (“CEA”) and CFTC Regulations 33.10(a),(b) and (c). The CFTC seeks a permanent injunction restraining and enjoining the Company and other defendants from directly or indirectly violating these provisions. The CFTC further seeks an order directing the Company and other defendants to pay civil monetary penalties, in an undetermined amount.
On April 10, 2009, NYMEX filed a complaint against the Company, its former Chief Executive Officer, Kevin Cassidy, its former President (who is currently a Director), Edward O’Connor, and its former Chairman of the Board, Mark Nordlicht, in the United States District Court for the Southern District of New York. The complaint claims that all defendants are liable for securities fraud, common-law fraud, aiding and abetting common-law fraud, negligent misrepresentation, and breach of warranty in connection with an April 2007 transaction in which the individual defendants, who were officers and directors of the Company at the time, sold beneficially owned shares of the Company to NYMEX, and the Company issued NYMEX warrants for the purchase of additional shares. The complaint seeks rescission, compensatory damages of at least $28.5 million, and/or punitive damages of $28.5 million.
On August 28, 2009, the Bank of Montreal (“BMO”) filed a complaint against Optionable and other defendants in the United States District Court for the Southern District of New York. The other defendants include former employees Scott Connor and Ryan Woodgate, former Chief Executive Officer Kevin Cassidy, former Chairman Mark Nordlicht, and former President Edward O’Connor (who is currently a Director), as well as MF Global Inc. and one of its employees. The complaint claims that the Company is liable for fraud, aiding and abetting fraud, negligent misrepresentation, aiding and abetting breach of fiduciary duty, and breach of contract. It demands compensatory and punitive damages in an undetermined amount, including indemnification from the Company for certain of BMO’s trading losses and attorneys’ fees.
On December 7, 2009, Scott Connor, a co-defendant in the BMO action, filed cross claims against the Company and other co-defendants. Mr. Connor claims rights to indemnity, breach of contract, quantum meruit and unjust enrichment based on an allegation that the Company failed to pay him fully in 2007.
On November 18, 2008, the Securities and Exchange Commission filed a complaint against the Company’s former Chief Executive Officer, Kevin Cassidy, its former President (and current Director), Edward O’Connor, and its former employee Scott Connor in the United States District Court for the Southern District of New York. The complaint claims that Mr. Cassidy and Mr. O’Connor are liable for violations of Rules 10b-5, 12b-20, 13a-1, 13a-14, 13a-16, 13b2-1, and 13b2-2 and Section 10(b), Section 13(a), Section 13(b)(2), and Section 13(b)(5) of the Exchange Act and Section 17(a) of the Securities Act. The complaint demands, among other things, that Mr. Cassidy and Mr. O’Connor disgorge their alleged ill-gotten gains, be permanently enjoined from certain activities, pay civil penalties, be prohibited from being an officer or director of any issuer that has registered securities or an issuer that is required to file reports pursuant to Section 15(d) of the Exchange Act.
On or about November 13, 2008, the Department of Justice indicted the Company’s former Chief Executive Officer, Kevin Cassidy, in the United States District Court for the Southern District of New York, for wire fraud, conspiracy to commit wire fraud and securities fraud, among other charges that were later dismissed by a superseding indictment and/or the Department of Justice.
We are unable to predict the outcome of these proceedings at this time and can give no assurance that the outcome of these proceedings will not have a material adverse effect on us or that there will not be other proceedings arising from these matters.
Our ability to operate in the future and our success in the future will depend upon our ability to attract and retain qualified officers and other personnel.
The Board of Directors hired Brad P. O’Sullivan as Chief Executive Officer and Matthew L. Katzeff as Chief Financial Officer in 2010. Both Mr. O’Sullivan and Mr. Katzeff have investment banking backgrounds, and both have been given salaries substantially lower than that given to Mr. Burchill, who also received $100,000 in severance pay. The Company also hired a Controller in 2010.
The success of the Company in finding and engaging in new business opportunities may require hiring additional personnel. However, competition for highly qualified personnel is intense and may require financial resources that the Company does not have. We can make no assurances that we can retain or attract qualified personnel in the future. Our ability to retain and attract qualified personnel could have a material adverse effect on our financial condition and our ability to enter into business transactions.
Some stockholders, if they are able to form a majority, may be able to take stockholder actions without giving other stockholders prior notice and without giving such other stockholders a chance to vote on the matter at a stockholder meeting. You may, therefore, be unable to take preemptive measures that you believe are necessary to protect your investment in the Company.
Section 228 of the Delaware General Corporation Law and our Certificate of Incorporation permits our stockholders to take any action which is otherwise required to be taken, or is permitted to be taken, at an annual or special meeting of the stockholders, without prior notice and without a vote of all the stockholders. Instead of a vote, stockholder actions can be authorized by the written consents to such actions, signed by the holders of the number of shares which would have been required to be voted in favor of such action at a duly called stockholders meeting. We would not be required to give prior notice to all stockholders of actions taken pursuant to the written consents of the stockholders who collectively form a majority.
If we fail to remain current in our reporting requirements, we could be removed from the OTC Bulletin Board which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Companies trading on the Over-The-Counter Bulletin Board, such as we are, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. In addition, we may be unable to get re-listed on the OTC Bulletin Board, which may have an adverse material effect on our Company.
The Company may be unable to recoup advances made to former officers and directors.
In 2010, we paid approximately $1.4 million, net of insurance proceeds, to attorneys representing our current and former officers and directors in connection with their defense of lawsuits filed against them relating to their activities at our Company. We expect the amount of advances to be about as much in 2011 as they were in 2010. In some but not all instances, the individual has a contractual right to receive such advancements, subject to an undertaking from such individual to repay all such amount to us if he is not entitled to be indemnified under the provisions of our Bylaws, the Delaware General Corporation Law or otherwise. None of the amounts advanced have been collateralized. If, upon the final disposition of these lawsuits, it is determined that one or more of these individuals is required to repay to us any portion of the advancements made to him, he may also be liable for monetary damages, fines and penalties to various third parties. As a result, we may be unable to actually recoup monies advanced even if we are legally entitled to reimbursement. Such amounts could constitute a material portion of our assets.
The Directors and Officers Liability insurance policy under which we have been reimbursed in connection with lawsuits currently pending against the Company, a current director and certain of our former officers or directors has been exhausted.
We paid almost $2 million from our cash reserve in 2010 for legal fees because the insurance policy covering the currently pending litigations against the Company, its former officers and directors was exhausted in early 2010. The Company purchased additional Directors and Officers Liability insurance in 2010, but this new insurance policy does not cover the currently pending litigation. The Company anticipates that it will pay, without insurance reimbursement, substantial legal fees in 2011 and until the currently pending litigation actions are resolved.
Our common stock is subject to the “penny stock” rules of the SEC, and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
A "penny stock," for the purposes relevant to us, is any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires, among other things:
·
that a broker or dealer approve a person's account for transactions in penny stocks; and
·
the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
·
obtain financial information and investment experience objectives of the person; and
·
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock market, which, in highlight form:
·
sets forth the basis on which the broker or dealer made the suitability determination; and
·
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
ITEM 2. PROPERTIES.
Our headquarters are located in New York, New York. The office consists of approximately 200 square feet. Our headquarters are leased on a yearly basis with the option to renew for additional yearly periods.
We believe our space is adequate for our current and foreseeable future needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Commodity Futures Trading Commission v. Cassidy et al.
On November 18, 2008, the Commodity Futures Trading Commission (“CFTC”) filed a complaint in the United States District Court for the Southern District of New York, against the Company; former employees of the Company, including its former Chief Executive Officer, Kevin Cassidy, and its former President (currently a Director), Edward O’Connor; and two former employees of Bank of Montreal (the Company’s former client), David Lee and Robert Moore. The CFTC claims that the Company is liable for violations of Section 4c(b) of the Commodity Exchange Act (“CEA”) and CFTC Regulations 33.10(a),(b) and (c). The CFTC seeks a permanent injunction restraining and enjoining the Company and other defendants from directly or indirectly violating these provisions. The CFTC further seeks an order directing the Company and other defendants to pay civil monetary penalties, in an undetermined amount. The Company is unable to predict the outcome of this matter. The Court denied our motion to dismiss the complaint on March 31, 2010.
CME Group NYMEX Inc. v. Optionable, Inc. et. al.
On April 10, 2009, NYMEX filed a complaint against the Company, its former President (who is currently a Director) Edward O’Connor, its former Chief Executive Officer Kevin Cassidy and its former Chairman Mark Nordlicht in the United States District Court for the Southern District of New York. The complaint claims that all defendants are liable for securities fraud and common-law fraud, aiding and abetting common-law fraud, negligent misrepresentation, and breach of warranty in connection with an April 2007 transaction in which the individual defendants (who were officers and directors of the Company at the time) sold beneficially owned shares of the Company to NYMEX, and the Company issued NYMEX warrants for the purchase of additional shares. The complaint seeks rescission, compensatory damages of at least $28.5 million, and/or punitive damages of $28.5 million. The Company is unable to predict the outcome of this matter. The Court denied our motion to dismiss the complaint on March 31, 2010.
Bank of Montreal v. Optionable, Inc. et al.
On August 28, 2009, the Bank of Montreal (“BMO”) filed a complaint against the Company and other defendants in the United States District Court for the Southern District of New York. The other defendants include former Company employees Scott Connor and Ryan Woodgate, former Chief Executive Officer Kevin Cassidy, former chairman Mark Nordlicht, and former President (and current Director) Edward O’Connor, as well as MF Global Inc. and one of its employee. The complaint claims that the Company is liable for fraud, aiding and abetting fraud, negligent misrepresentation, aiding and abetting breach of fiduciary duty, and breach of contract. It demands compensatory and punitive damages in an undetermined amount, including indemnification from the Company for certain of BMO’s trading losses and attorneys’ fees. The Company is unable to predict the outcome of this litigation. The Court denied our motion to dismiss the complaint on June 18, 2010.
On December 7, 2009, Scott Connor, a co-defendant in the BMO action, filed cross-claims against the Company and other co-defendants in the United States District Court for the Southern District of New York. Mr. Connor claims rights to indemnity and contribution from the Company for any liability he may have to BMO. He also lays claims of breach of contract, quantum meruit, and unjust enrichment, on the basis of an allegation that the Company failed to pay him the full amount of salary and commissions that was due to him for 2007. The Company filed a motion to dismiss Mr. Connor’s cross-claims against it on November 15, 2010, which is currently pending before the Court.
The actual costs that will be incurred in connection with these actions cannot be quantified at this time and will depend upon many unknown factors. For 2010, the Company paid almost $2.0 million, net of insurance proceeds, in legal costs for these actions and other legal actions against Mr. Cassidy and Mr. O'Connor. The Company’s management anticipates that its costs for these actions in 2011 could be comparable to 2010 or higher.
While the Company intends to defend itself vigorously against such claims and cross-claims, there exists the possibility of adverse outcomes that the Company cannot determine. These matters are subject to inherent uncertainties and management’s view of these matters may change in the future
Other Matters
Since May 2007, the Company has received requests for documents and information from the CFTC, the SEC and the DOJ and the New York County’s District Attorney's Office. Since that time, the Company has complied with such requests and has not received any new requests on such matters since 2007.
ITEM 4.
ITEM 4. REMOVED AND RESERVED.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is quoted on the Over-the-Counter Bulletin Board operated by the National Association of Securities Dealers, Inc. Our shares are listed under the symbol "OPBL."
The following table sets forth, for the fiscal quarters indicated, the high and low closing prices per share of our common stock as reported on the Over-the-Counter Bulletin Board. The quotations reflect inter dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.
At March 29, 2011, the closing price for our common stock was $0.02.
At March 29, 2011, there were 48,328,328 shares of our common stock outstanding. There were approximately 17 stockholders of record at April 12, 2010.
The transfer agent of our common stock is Continental Stock Transfer & Trust Company, whose address is 17 Battery Place, New York, NY 10004. The phone number of the transfer agent is (212) 509-4000.
DIVIDENDS
We have not declared any dividends to date. We have no present intention of paying any cash dividends on our common stock in the foreseeable future. The payment by us of dividends, if any, in the future, rests within the discretion of our Board of Directors and will depend, among other things, upon our financial condition, as well as other relevant factors. There are no restrictions in our articles of incorporation or bylaws that restrict us from declaring dividends. However, we have no current earnings and profits and do not expect to generate earnings and profits in the near future. Our ability to pay dividends may therefore be limited under applicable state corporate law, including the Delaware General Corporation Law.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY COMPENSATION PLAN INFORMATION
The following table shows information with respect to each equity compensation plan under which our common stock is authorized for issuance at December 31, 2010:
2004 STOCK OPTION PLAN
We adopted our 2004 Stock Option Plan in November 2004, and amended it in March 2011. The Plan provides for the grant of options intended to qualify as "incentive stock options" and options that are not intended to so qualify, or "nonstatutory stock options." The total number of shares of common stock reserved for issuance under the Plan is 7,500,000, subject to adjustment in the event of a stock split, stock dividend, recapitalization or similar capital change.
The Plan is presently administered by our board of directors, which selects the eligible persons to whom options shall be granted, determines the number of common shares subject to each option, the exercise price therefor and the periods during which options are exercisable, interprets the provisions of the plan and, subject to certain limitations, may amend the Plan. Each option granted under the Plan is evidenced by a written agreement between us and the optionee.
Options may be granted to our employees (including officers) and directors and certain of our consultants and advisors.
The exercise price for incentive stock options granted under the plan may not be less than the fair market value of the common stock on the date the option is granted, except for options granted to 10% stockholders which must have an exercise price of not less than 110% of the fair market value of the common stock on the date the option is granted. The exercise price for nonstatutory stock options is determined by the board of directors. Incentive stock options granted under the plan have a maximum term of ten years, except for 10% stockholders who are subject to a maximum term of five years. The term of nonstatutory stock options is determined by the board of directors. With respect to the current directors and officers of the Company, their nonstatutory stock options do not expire until the second year anniversary of their resignation from the Company for Good Reason or termination without Cause (as these terms are defined in the Plan), or upon the occurrence of certain other events. Options granted under the plan are not transferable, except by will and the laws of descent and distribution.
RECENT SALES OF UNREGISTERED SECURITIES
The Company executed on June 29, 2010 a stock option agreement with its new CEO, Brad P. O’Sullivan. Mr. O’Sullivan was given options of 500,000 shares, with 50,000 vesting on June 29, 2010 and an exercise price of $0.015 per share (the closing price on the grant date). On March 1, 2011, the Company and Mr. O’Sullivan executed an amendment , which among other things increased the exercise price to $0.02 (the closing price on the day immediately prior to the amendment).
In October 2010, the Company granted Chief Financial Officer Matthew L. Katzeff 450,000 stock options, with 45,000 vesting immediately and an exercise price of $0.018 per share. On March 1, 2011, the Company and Mr. Katzeff executed an amendment, which among other things increased the exercise price to $0.02 (the closing price on the day immediately prior to the amendment).
All of the aforementioned securities were issued pursuant to the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear in this annual report.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2010 COMPARED TO YEAR ENDED DECEMBER 31, 2009
NM: Not Meaningful
General and administrative expenses
General and administrative expenses consists primarily of legal fees (including advances) paid by the Company for the legal proceedings listed in Part I, Item 1 - overview, or to handle certain matters, which occur during the course of our operations, and compensation of personnel supporting our operations.
The increase in general and administrative expenses during 2010, when compared to the prior year period is primarily due a one-time severance pay of $100,000 to Thomas Burchill (whose positions as the Company’s Chief Executive Officer, President and Director were terminated in May 2010) and a reclassification of approximately $855,000 of prepaid expenses for legal retainers which existed on the balance sheet dated December 31, 2009 to legal expenses, which is a component of general and administrative expenses. The reclassification was due to the use of the previously paid retainers being utilized to pay legal expenses. However operating expenses improved in 2010 due to the following:
- Lower legal fees were incurred after the Company placed a cap on advancements for legal fees and instituted other cost-saving measures, including changing legal counsel.
- Lower legal fees were incurred in the twelve-month period ended December 31, 2010, compared to the twelve month period in the prior year because the Company had to incur legal expenses in the first half of 2009 for a settlement agreement with Mark Nordlicht, who is one of the Company’s largest stockholders and the Company’s former Chairman of the Board. In 2010, the Company paid approximately $2.3 million for legal fees (including corporate, litigation, and intellectual property matters, and for the defense of its former officers and directors with respect to current litigation matters), net of insurance proceeds.
- Substantially lower salaries were paid to the Company's current chief executive officer and chief financial officer compared to their predecessors.
We believe that our legal fees for 2011 will continue to constitute a large share of our general and administrative expenses.
Research and development
We did not incur any research and development expenses in 2009 and 2010.
Interest income
Interest income consists primarily of interest earned on interest-bearing cash and cash equivalents. The decrease in interest income during 2010 when compared to the prior year period is primarily due to a decrease in cash invested in interest-bearing account and, to a lesser extent, to a decrease in interest rate we earned.
Interest expense to related parties
Interest expense to related parties consists of interest charges associated with amounts due to related parties, including Mark Nordlicht, our former Chairman of the Board, and Edward O’Connor, our former President and current Director. In February 2009, the Company satisfied its obligations to Mr. Nordlicht. As of December 31, 2010, the only remaining related party note payable is due to Mr. O’Connor. The decrease in interest expense to related parties during the twelve -month period ended December 31, 2010 in comparison to the comparable period in 2009 is primarily due to the satisfaction of the note to Mr. Nordlicht.
Income tax
Income tax benefit/expense consists of federal and state current and deferred income tax or benefit based on our net income. The increase in our deferred income tax benefit during the twelve-month period ended December 31, 2010 when compared to the comparable prior-year period is primarily due to our continued operating losses in 2010 and the fact that in the first quarter of 2009 we incurred a $2.5 million gain due to a settlement with Mark Nordlicht, one of our largest stockholders and our former Chairman of the Board.
Going Concern
The Company is unable to determine whether it will have sufficient funds to meet its obligations for at least the next twelve months. The combination of its anticipated legal costs to defend against current legal proceedings, the potential amounts the Company would have to pay if there are negative outcomes in one or more of such legal proceedings and the Company’s obligations under its indemnification obligations could exceed the Company’s resources. The legal proceedings also negatively impact the Company’s ability to enter into strategic transactions with other companies. The Company’s future depends on its ability to satisfactorily resolve the aforementioned legal issues and there is no assurance it will be able to do so. If the Company fails for any reason, it would not be able to continue as a going concern and could potentially be forced to seek relief through a filing under the US Bankruptcy Code.
LIQUIDITY AND CAPITAL RESOURCES
Our cash balance as of December 31, 2010 amounts to approximately $3.05 million.
During 2010, we used cash from operating activities of approximately $1.2 million, primarily resulting from:
·
net loss of approximately $2.5 million, adjusted for the amortization of debt discount of approximately
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A summary of significant accounting policies is included in Note 2 of the audited financial statements included in this Annual Report. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition. Our financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Critical accounting policies for us include the following:
Contingencies
The outcomes of legal proceedings and claims brought against the Company are subject to significant uncertainty. FASB ASC 450-20-25-2 “Contingencies- Loss Contingencies-Recognition”, requires that an estimated loss from a loss contingency such as a legal proceeding or claim should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred.
In determining whether a loss should be accrued the Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. While the Company believes that it will continue to incur losses from such legal proceedings, it is unable to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All financial information required by this Item is attached hereto at the end of this report beginning on page and is hereby incorporated by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of December 31, 2010, our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2010, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, including ensuring that such material information is accumulated and communicated to our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a - 15(f). Our internal control system was designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework - Guidance for Smaller Public Companies (the COSO criteria). Based on our assessment we believe that, as of December 31, 2010, our internal controls over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our management's report was not subject to attestation by our registered public accounting.
Changes in Internal Controls Over Financial Reporting
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following table sets forth information about our executive officers and directors during the fiscal year ended December 31, 2010.
Brad P. O’Sullivan was appointed Chief Executive Officer and Director of the Company on May 13, 2010, effective May 17, 2010, by the Board of Directors. He is also the General Counsel and a Managing Director of Ashir Group, Inc., a financial consulting firm. Mr. O’Sullivan has over twenty years experiences in corporate finance, real estate and securities/corporate law. Before joining Ashir Group, he was one of the managing partners at Patriot Title & Abstract, Inc., a real estate professional services company that he helped establish and operate for almost 7 years. He was responsible for initiating and maintaining all client relationships, and successfully closed over 550 deals. Prior to this, Mr. O’Sullivan was a vice president at Brean Murray, Carret & Co., LLC, a boutique investment bank headquartered in Manhattan with local office in Beijing, China. Prior to that he was an associate in the Corporate Practice Group at O’Melveny & Myers, LLP. Mr. O’Sullivan holds a JD from the Law Center of Georgetown University, an MBA from Columbia University Business School and a Bachelor of Arts degree from Georgetown University.
Matthew L. Katzeff was appointed by the Board of Directors to the position of Chief Financial Officer on July 27, 2010. In December 2010, he was elected to the Board of Directors. Mr. Katzeff also is the Head of M&A and a Managing Director at Ashir Group, Inc., a financial consulting firm. Since beginning his investment banking career at The Blackstone Group, Mr. Katzeff has developed a successful 18 year career predominantly focused upon Mergers & Acquisitions advisory, Private Equity sourcing and execution, as well as the development and execution of debt and equity capital transactions, all across a wide array of industry sectors as well as corporate sizes and situations. Since his tenure at Blackstone, Mr. Katzeff was a member of the M&A teams at SBC Warburg Dillon Read (currently UBS), Credit Suisse First Boston and Peter J. Solomon Company. Mr. Katzeff then became a Vice President with North Atlantic Trading Company, focusing on the sourcing and execution of both stand-alone and “bolt-on” private equity investments, primarily within the consumer products sector. He was also responsible for the financing and refinancing of a number of the company’s investments and acquisitions, including the arrangement of senior debt facilities and high-yield offerings.
Immediately prior to joining Ashir Group, Mr. Katzeff was a Managing Director with J Giordano Securities Group, an investment banking boutique in which he focused upon the development, strategy and execution of debt and equity capital transactions as well as M&A across a number of industry sectors. Mr. Katzeff’s experiences at both bulge-bracket institutions as well as boutique investment firms have given him a unique and very well-rounded perspective enabling him to be truly value-added with respect to corporate strategy, development and value, while maintaining a very strong sense of creativity.
Mr. Katzeff has closed transactions amounting to an aggregate value of approximately $18 billion, including the Blackstone Group’s acquisition of Wahaha Group Corporation, a large Chinese consumer products company. Sectors in which Mr. Katzeff has operated include telecommunications, consumer products, retail, business process outsourcing, teleservices, IT services, aerospace & defense, healthcare, building materials, gaming, enterprise software, financial institutions, natural resources, alternative fuels, and general industrial & manufacturing. Corporate situations have included public and private entities, family-owned situations, joint ventures, corporate partnerships and defense from hostile acquisitions. Mr. Katzeff graduated from Cornell University, earning a BS in Economics with a concentration in International Finance. He is Series 7, 63 and 79 licensed and is also proficient in Spanish and Japanese.
Edward J. O'Connor has served as a Director since March 2001. Mr. O'Connor previously served as our Chief Executive Officer between March 2004 and October 2005 and as our President between March 2001 and January 2009. Since December 1996 to early 2007, Mr. O'Connor served as a Director and periodically as a managing director of Capital Energy Services, LLC (formerly Orion Energy Services, LLC), which was an energy options brokerage business on the NYMEX. Mr. O'Connor graduated from Georgetown University in 1977 with a BS degree in Business Administration.
Andrew Samaan has served as one of our directors since January 2009. Mr. Samaan currently works as Principal at Columbia Sports Group, a financial advisory firm specializing in professional minor league sports organizations, which he joined in October 2008. Mr. Samaan worked in various high level positions from April 1998 to September 2008 for Venaca, Inc., a media technology company. Mr. Samaan earned a Bachelor of Arts degree in Political Science from Loyola College and his Juris Doctor/MBA from Fordham University.
Thomas F. Burchill served as one of our directors from November 2007 through May 2010 and served as our Chief Executive Officer and President from January 2009 through May 2010 He is, and has been since 2007, the Chairman and Chief Executive Officer of Mediastar Ventures, LLC., a media advisory firm. Since 2001, Mr. Burchill has provided leadership or advisory assistance to a number of early stage companies that serve the media sector, including Mitra Technologies, a traffic and billing software firm, and SB3 Inc., and Venaca, Inc., a media technology company. Mr. Burchill has been active in a number of industry organizations, including service as Chairman of the Cable Television Advertising Bureau and as a member of the Board of Directors of both the Television Bureau of Advertising and the International Radio and Television Society. Mr. Burchill holds degrees from Holy Cross College and the Columbia University Graduate School of Business.
Marc-Andre Boisseau served as our Chief Financial Officer between December 2004 and March 2010 and as one of our directors from March 2009 through August 2010. Since January 2002, as President of Boisseau, Felicione & Associates, Inc., he has served as an advisor to small and medium publicly traded and private companies on financial, tax and accounting matters. Mr. Boisseau is a certified public accountant. Mr. Boisseau graduated with a BA degree in Business Administration in 1987 from the University of Montreal.
DIRECTOR INDEPENDENCE, COMMITTEES OF THE BOARD OF DIRECTORS AND FINANCIAL EXPERT
One of our members of our Board of Directors, Andrew Samaan is "independent" within the meaning of Nasdaq Marketplace Rule 4200. We have not established any committees, including an Audit Committee, a Compensation Committee, a Nominating Committee, or any committee performing a similar function. The functions of those committees are being undertaken by the entire Board as a whole. Due to the size of the Board and the Company’s limited resources, our Board of Directors believes that the establishment of such committees of the Board is unnecessary and could be considered more form than substance. The Board of Directors has determined that it has one audit committee financial expert, Matthew Katzeff, serving on the Board, which acts as a whole as an audit committee. Mr. Katzeff is not “independent “ within the meaning of Nasdaq Marketplace Rule 4200.
FAMILY RELATIONSHIPS
There are no family relationships among our executive officers and directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
We are required to identify each person who was an officer, director or beneficial owner of more than 10% of our registered equity securities during our most recent fiscal year and who failed to file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934.
To our knowledge, based solely on review of these filings and written representations from certain of the reporting persons, we believe that during the fiscal year ended December 31, 2010, all of our officers, directors and significant stockholders have timely filed all required forms under Section 16(a) of the Exchange Act, with the exception of Brad O’Sullivan, whose Form 3 and Form 4 were filed shortly after he joined the Company, but not within the filing deadlines.
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a Code of Business Conduct and Ethics to provide guiding principles to all of our employees. Our Code of Business Conduct and Ethics does not cover every issue that may arise, but it sets out basic principles to guide our employees and provides that all of our employees must conduct themselves accordingly and seek to avoid even the appearance of improper behavior. Any employee who violates our Code of Business Conduct and Ethics will be subject to disciplinary action, up to and including termination of his or her employment. Generally, our Code of Business Conduct and Ethics provides guidelines regarding:
·
compliance with laws, rules and regulations,
·
conflicts of interest,
·
insider trading,
·
corporate opportunities,
·
competition and fair dealing,
·
discrimination and harassment,
·
health and safety,
·
record keeping,
·
confidentiality,
·
protection and proper use of company assets,
·
payments to government personnel,
·
waivers of the Code of Business Conduct and Ethics,
·
reporting any illegal or unethical behavior, and
·
compliance procedures.
In addition, we have also adopted a Code of Ethics for our Chief Executive Officer and Senior Financial Officer. In addition to our Code of Business Conduct and Ethics, our CEO and CFO are also subject to specific policies regarding:
·
disclosures made in our filings with the SEC,
·
deficiencies in internal controls or fraud involving management or other employees who have a significant role in our financial reporting, disclosure or internal controls,
·
conflicts of interests, and
·
knowledge of material violations of securities or other laws, rules or regulations to which we are subject.
A copy of the Code of Ethics is filed as an exhibit to our annual report for the fiscal year ended December 31, 2005 as Exhibit 14.1. The Code of Ethics is also posted on our website under Governance Documents under the investor relations section of our website.www.optionable.com
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation (but excludes compensation for services on the Board of Directors) recorded by us in each of the last two completed fiscal years for our principal executive officer, our two most highly compensated executive officers who were serving as such at December 31, 2010 and two additional executive officers who were not serving as such in fiscal year 2010 but not at December 31, 2010. The value attributable to any option awards is computed in accordance with ASC 718.
(1) Mr. O'Connor served as our principal executive officer from November 2007 through January 2009 and as a Director since March 2001.
(2) Mr. Burchill served as our Chief Executive Officer and President from January 2009 through May 2010 and as Director from November 2007 through May 2010. In May 2010, he received $100,000 in severance pay, which is listed in the above table as “All Other Compensation”.
EMPLOYMENT AGREEMENTS
On June 29, 2010. Optionable, Inc. (the “Company”) executed a compensation agreement with Brad P. O’Sullivan for his services as Chief Executive Officer and Director. The agreement was dated May 17, 2010 to reflect the date on which Mr. O’Sullivan became the Company’s CEO. The terms of Mr. O’Sullivan’s compensation were first disclosed in a Form 8-K filed on May 18, 2010 but the contract was not finalized until June 29, 2010. Mr. O’Sullivan’s annual compensation is $25,000 for his services as CEO and $25,000 for his services as a Director, payable in 12 equal installments.
The Company also executed on June 29, 2010 a stock option agreement with Mr. O’Sullivan. Mr. O’Sullivan was given options of 500,000 shares, with 50,000 vesting on June 29, 2010. The original exercise price was $0.015 per share (the closing price on the grant date) but on March 1, 2011 the Company and Mr. O’Sullivan executed an amendment which increased the exercise price to $0.02 per share (the closing price of the amendment date).
The Company has executed an indemnification agreement with each of Andrew Samaan, who is a Director, Matthew Katzeff, who is a Director and Chief Financial Officer, and Mr. O’Sullivan.
On July 27, 2010, Optionable, Inc. (the “Company”) appointed Matthew L. Katzeff, age 40, to the position of Chief Financial Officer. Per his employment letter, Mr. Katzeff shall receive an annual salary of $20,000, pro rated for the year 2010. Also, the Company’s Board of Directors granted Mr. Katzeff 450,000 stock options, with an exercise price of $0.02 per share.
In January 2009, Edward O’Connor resigned as President but remained as a Director. In connection with Mr. O’Connor’s resignation, the Company and Mr. O’Connor entered into a Separation Agreement, giving Mr. O’Connor a monthly severance of $2,083.33 (net of applicable withholding) for twelve consecutive months. Pursuant to the terms of Separation Agreement, the Company agreed to maintain sufficient resources to indemnify Mr. O’Connor in any threatened or pending action, suit or proceeding brought against him by reason of the fact that he was an officer or director of the Company.
In January 2009, the Company executed an employment agreement with Thomas Burchill to hire him as Chief Executive Officer and President. Per the terms of his Employment Agreement, the Company notified Mr. Burchill on April 14, 2010 that it was terminating his employment without cause by providing him with thirty days notice. Per the terms of the Employment Agreement, Mr. Burchill received $100,000 in severance pay and received benefits for six months.
We had a consulting agreement with Marc-Andre Boisseau, who served as our Chief Financial Officer through March 2010. The agreement, as amended, provided that the Company compensate him at $300 per hour through March 31, 2009, and a rate of $12,500 per month from April 1, 2009 to June 31, 2009 and $10,417 per month from July 1, 2009 through March 31, 2010.
Outstanding Equity Awards at Fiscal Year-End Table.
The following table sets forth information with respect to grants of options to purchase our common stock to the named executive officers at December 31, 2010.
Director Compensation
The following table sets forth, with respect to the named directors, director compensation information inclusive of equity awards and payments made for the fiscal year ended December 31, 2010.
Director Compensation
The Board of Directors agreed to give Marc-Andre Boisseau $50,000 in annual compensation for his services on the Board starting March 31, 2009. Subsequently, Mr. Boisseau voluntarily offered to reduce his compensation as Director. The Company then compensated Mr. Boisseau at an annual rate of $25,000 from August 1, 2009 until his departure in August 2010.
Thomas Burchill did not receive compensation for his services as a Director in 2010. He received compensation for his services as CEO, detailed above.
The Company agreed to pay Andrew Samaan $25,000 in annual compensation when he joined the Board of Directors in February 2009. Starting on March 31, 2009, his annual compensation was raised to $50,000.
In February 2009, the Board also approved a grant of 250,000 options to Mr. Samaan. The options have all vested as of March 29, 2011.
The Company agreed to give Brad O’Sullivan $25,000 in annual compensation starting in May 2010 for his services on the Board of Directors. Mr. O’Sullivan also receives $25,000 in annual compensation and 500,000 stock options for his services as Chief Executive Officer, as described in the Executive Compensation section above.
Matthew Katzeff was appointed to the Board of Directors in December 2010. He is paid $25,000 in annual compensation for such services. As Chief Executive Officer of the Company, Mr. Katzeff is paid $25,000 in annual compensation as an officer and received 450,000 stock options, as described in the Executive Compensation section above.
All of our directors are reimbursed for their reasonable expenses for attending board and board committee meetings
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of March 29, 2011, the number of and percent of our common stock beneficially owned by:
· all directors and nominees, naming them,
· our executive officers,
· our directors and executive officers as a group, without naming them, and
· persons or groups known by us to own beneficially 5% or more of our common stock:
We believe that all persons named in the table have sole voting and investment power (or shares such powers with his or her spouse) with respect to all shares of common stock beneficially owned by them.
A person is deemed to be the beneficial owner of securities if that person has the power to vote or dispose of such securities or if that person can acquire such securities within 60 days from March 29, 2011 upon the exercise of options, warrants, convertible securities or other rights. Each beneficial owner's percentage ownership is determined by assuming that options, warrants or convertible securities that are held by him, but not those held by any other person, and which are exercisable within 60 days of March 29, 2011 have been exercised and converted.
* Based upon 48,328,328 shares outstanding as of March 29, 2010.
(1) Includes 2,682,201 shares owned by Ridgecrest Capital Corp., Inc., a corporation wholly owned by Mr. O'Connor, 901,929 shares owned by Mr. O'Connor's daughter Kathleen O'Connor and 901,929 shares owned by Mr. O'Connor's daughter Erin O'Connor. Mr. O’Connor disclaims beneficial ownership of his daughters’ shares.
(2) Includes shares issuable pursuant to the exercise of stock options exercisable within 60 days.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
In 2010, the Company advanced approximately $1.4 million to its former President Kevin Cassidy, its former Chairman Mark Nordlicht and its former President (and current Director) Edward O’Connor---all of whom are large stockholders in the Company---for their legal fees regarding the currently pending lawsuits described in Item 3 of Part I as well as for Mr. Cassidy’s defense of the Department of Justice action and claims made by the Securities and Exchange Commission against Mr. Cassidy and Mr. O'Connor. None of these advancements have been collateralized. If, upon the final disposition of these lawsuits, it is determined that one or more of these individuals is required to repay a portion of any of the advancements, such individual(s) may also be liable for monetary damages, fines and penalties to various third parties. As a result, we may be unable to actually recoup the advanced monies even if we are legally entitled to reimbursement.
The Company has obligations to Edward O’Connor (a current director and a former President) which were entered into in April 2005, when the Company received a $765,000 note, which is payable by March 12, 2014. If the Company obtains additional equity or debt financing of at least $1,000,000 following a Capital Raise, the Company will repay Mr. O’Connor up to 5.3% of the Capital Raise, up to $381,250, with the remaining balance and accrued interest of 4.68% from the date of the Capital Raise due on March 12, 2014.
One of our members of our Board of Directors, Andrew Samaan, is "independent" within the meaning of Nasdaq Marketplace Rule 4200. The other current members of the Board of Directors---Edward O’Connor, Brad P. O’Sullivan, and Matthew Katzeff---are not “independent”. Marc-Andre Boisseau and Thomas Burchill, who were Directors for a portion of 2010, were not “independent”.We have not established any committees, including an Audit Committee, a Compensation Committee, a Nominating Committee, or any committee performing a similar function. The functions of those committees are being undertaken by the entire board as a whole. Due to the size of the Board and the Company’s limited resources, our Board of Directors believes that the establishment of such committees of the Board is unnecessary and could be considered more form than substance.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Sherb & Co., LLP, an independent registered accounting firm, has audited our financial statements for the years ended December 31, 2010 and 2009. The Company’s stockholders ratified the Board’s selection of Sherb & Co. as the Company’s registered accounting firm for the 2010 year-end audit and to review our quarterly financial reports for filing with the Securities and Exchange Commission during fiscal year 2010. The following table shows the fees paid or accrued by us for the audit and other services provided by Sherb & Co. for fiscal year 2009 and 2010.
(1) Audit fees represent fees for professional services provided in connection with the audit of our annual financial statements and review of our quarterly financial statements and audit services provided in connection with other statutory or regulatory filings.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Board of Directors acts as the audit committee, and consults with respect to audit policy, choice of auditors, and approval of out of the ordinary financial transactions. The Board approved all of the services provided by Sherb & Co., LLP, as described above.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES.
Exhibit No.
Description
3.1
Certificate of Incorporation of Optionable, Inc., dated February 4, 2000 (incorporated by reference to Exhibit 3(i)(a)to the Registrant's Registration Statement on Form SB-2, filed December 22, 2004, file no. 333-121543 (the "SB-2").
3.2
Certificate of Amendment to the Certificate of Incorporation of Optionable, Inc., dated March 30, 2000 (incorporated by reference to Exhibit 3(i)(b) to the SB-2)
3.3
Certificate of Amendment to the Certificate of Incorporation of Optionable, Inc., dated May 31, 2000 (incorporated by reference to Exhibit 3(i)(c) to the SB-2).
3.4
Certificate of Amendment to the Certificate of Incorporation of Optionable, Inc., dated July 21, 2000 (incorporated by reference to Exhibit 3(i)(d) to the SB-2).
3.5
Corrected Certificate of Amendment to the Certificate of Incorporation of Optionable, Inc., dated January 31, 2003 (incorporated by reference to Exhibit 3(i)(e) to the SB-2).
3.6
Certificate of Amendment to the Certificate of Incorporation of Optionable, Inc., dated June 9, 2004 (incorporated by reference to Exhibit 3(i)(f) to the SB-2).
3.7
Amended and Restated By-laws of Optionable, Inc. (incorporated by reference to Exhibit 3(ii) to the SB-2)
10.1
Master Services Agreement with Capital Energy Services LLC dated April 1, 2004 including the Consulting Agreement as a part thereof and Addendum, dated October 7, 2004 (incorporated by reference to Exhibit 10(ii)(a) to the SB-2)
10.2
Addendum to Master Services Agreement (incorporated by reference to Exhibit 10(ii)(b) to the SB-2)
10.3
Amendment to Master Services Agreement (incorporated reference to the Registrant's Current Report on Form 8-K, dated as of April 10, 2006)
10.4
Termination Agreement (of Master Service Agreement; incorporated by reference to the Registrant's Current Report of Form 8-K, dated as of January 31, 2007)
10.5
Options Order Flow Agreement, dated July 1, 2004, between the Company and Intercontinental Exchange, Inc. (incorporated by reference to Exhibit 10(iii)(a) to the SB-2)
10.6
Superseding Option Order Flow Agreement, dated as of March 2, 2005 (incorporated by reference to Exhibit 10(iii)(b) to the SB-2)
10.7
Employment Agreement, as amended, between the Company and Edward J. O'Connor (incorporated by reference to Exhibit 10(iv) (a) to the SB-2)
10.8
Optionable, Inc. 2004 Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, file number 333-129853, as filed on November 21, 2005 (the "S-8")
10.9
Form of Incentive Stock Option Agreement(incorporated by reference to Exhibit 4.2 to the S-8)
10.10
Nonstatutory Stock Option Agreement(incorporated by reference to Exhibit 4.3 to the S-8)
10.11
Prepaid Commission Agreement, dated February 3, 2003, between the Company and Mark Nordlicht (incorporated by reference to Exhibit 10(vi) to the SB-2).
10.12
Revolving Credit Facility Agreement, dated June 5, 2003, between the Company and Platinum ValueArbitrage Fund LP(incorporated by reference to Exhibit 10(vii)(a) to the SB-2)
10.13
$500,000 Revolving Promissory Note from the Company to Platinum Value Arbitrage Fund LP dated June 5, 2003 (incorporated by reference to Exhibit 10(vii)(b) to the SB-2)
10.14
Prepaid Commission Agreement, dated June 9, 2003, between the Company and Platinum Partners Value Arbitrage Fund LLP(incorporated by reference to Exhibit 10(viii) to the SB-2)
10.15
Loan Agreement, dated February 13, 2004, between the Company and Mark Nordlicht (incorporated by reference to Exhibit 10(ix)(a) to the SB-2)
10.16
$250,000 Promissory Note, dated February 13, 2004, from the Company to Mark Nordlicht (incorporated by reference to Exhibit 10(ix)(b) to the SB-2)
10.17
$250,000 Promissory Note Extension Agreement, dated September 9, 2004 (incorporated by reference to Exhibit 10(ix)(c) to the SB-2)
10.18
Loan Agreement, dated March 8, 2004, between the Company and Mark Nordlicht (incorporated by reference to Exhibit 10(x)(a) to the SB-2)
10.19
$50,000 Promissory Note, dated March 8, 2004, from the Company to Mark Nordlicht (incorporated by reference to Exhibit 10(x)(b) to the SB-2)
10.20
$50,000 Promissory Note Extension Agreement, dated September 9, 2004 (incorporated by reference to Exhibit 10(x)(c) to the SB-2)
10.21
Loan Agreement, dated March 22, 2004, between the Company and Mark Nordlicht (incorporated by reference to Exhibit 10(xi)(a) to the SB-2)
10.22
$5,621,753.18 Promissory Note, dated March 22, 2004, from the Company to Mark Nordlicht (incorporated by reference to Exhibit 10(xi)(b) to the SB-2)
10.23
Addendum to Loan Agreement, dated March 22, 2004 (incorporated by reference to Exhibit 10(xi)(c) to the SB-2)
10.24
Addendum to Promissory Note, dated March 22, 2004 (incorporated by reference to Exhibit 10(xi)(d) to the SB-2)
10.25
Revolving Credit Facility Agreement, dated April 15, 2004, between the Company and Mark Nordlicht (incorporated by reference to Exhibit 10(xii)(a) to the SB-2)
10.26
$50,000 Promissory Note, dated April 15, 2004, from the Company to Mark Nordlicht (incorporated by reference to Exhibit 10(xii)(b) to the SB-2)
10.27
Warrant Agreement for the Purchase of Common Stock (incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2006)
10.28
Service and Repurchase Agreement (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of January 31, 2007
10.29
Code of Business Conduct and Ethics (Incorporated by reference to the Registrant’s Form 10-KSB for the fiscal year ended December 31, 2007)
10.30
Acquisition Agreement, dated March 23, 2007, between the Company, Peter Holmquist, Douglas Towne, and Joseph McHugh (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of March 23, 2007.
10.31
Release, Rescission and Termination Agreement, dated May 18, 2007, by and among Optionable, Inc., Peter Holmquist, Douglas Towne, Joseph McHugh and Nicole Troiani (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of May 18, 2007.
10.32
Separation and Release Agreement, dated July 25, 2007, by and among Optionable, Inc., Opex International, Inc., Kevin DeAndrea, Noah Rothblatt, Kevin Brennan and Nicole Troiani. (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of July 25, 2007).
10.33
Warrant, dated April 10, 2007, issued pursuant to that certain Stock and Warrant Purchase Agreement, dated April 10, 2007, by and among Optionable, Inc., NYMEX Holdings, Inc., Mark Nordlicht, Kevin Cassidy through Pierpont Capital, Inc. and Edward O'Connor through Ridgecrest Capital, Inc. (incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2007)
10.34
Stock and Warrant Purchase Agreement, dated April 10, 2007, by and among Optionable, Inc., NYMEX Holdings, Inc., Mark Nordlicht, Kevin Cassidy through Pierpont Capital, Inc. and Edward O'Connor through Ridgecrest Capital, Inc.(portions of this exhibit are subject to a confidential treatment request) (incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2007)
10.35
Investor Rights Agreement, dated April 10, 2007, by and among Optionable, Inc., NYMEX Holdings, Inc., Mark Nordlicht, Kevin Cassidy and Edward O'Connor. (incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2007)
10.36
Waiver, dated April 10, 2007, by and between Optionable, Inc. and Mark Nordlicht, to that certain Loan Agreement, dated March 22, 2004, by and between Optionable, Inc. and Mark Nordlicht. (incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2007)
10.37
Amended and Restated Employment Agreement, dated April 10, 2007, by and between Optionable, Inc. and Kevin Cassidy. (incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2007)
10.38
Registration Rights Agreement, dated April 10, 2007, by and between Optionable, Inc. and NYMEX Holdings, Inc. (incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2007)
10.39
Separation and Release Letter, dated November 6, 2007, by and between Optionable, Inc. and Albert Helmig (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of November 6, 2007).
10.40
Letter Agreement, dated as of November 26, 2007, by and between Optionable, Inc. and Thomas Burchill. (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of November 26, 2007).
10.41
Letter Agreement, dated as of November 26, 2007, by and between Optionable, Inc. and Dov Rauchwerger. (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of November 26, 2007).
10.42
Stock Option Agreement, dated as of November 26, 2007, by and between Optionable, Inc. and Thomas Burchill. (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of November 26, 2007).
10.43
Stock Option Agreement, dated as of November 26, 2007, by and between Optionable, Inc. and Dov Rauchwerger. (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of November 26, 2007).
10.44
Separation Agreement between Optionable, Inc. and Edward J. O’Connor dated as of January 28, 2009. (incorporated by reference to the Registrant’s Current Report on Form 8-K dated as of February 2, 2009)
10.45
Employment Agreement between Optionable, Inc. and Thomas Burchill dated as of January 28, 2009(incorporated by reference to the Registrant’s Current Report on Form 8-K dated as of February 2, 2009)
10.46
Letter Agreement dated as of January 15, 2009 with respect to compensation to Andrew Samaan (incorporated by reference to the Registrant’s Current Report on Form 8-K dated as of February 2, 2009)
10.47
Settlement and Voting Agreement between Optionable, Inc. and Mark Nordlicht dated as of February 26, 2009 (incorporated by reference to the Registrant’s Current Report on Firm 8-K dated as of February 27, 2009)
10.48
Employment Letter dated May 17, 2010 with respect to compensation to Brad P. O’Sullivan (incorporated by reference to the Registrant’s Current Report on Form 8-K dated as of July 2, 2010)
10.49
Stock Option Agreement dated as of November 26, 2007, by and between Optionable, Inc. and Brad P. O’Sullivan (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of July 2, 1010).
10.50
Indemnification Agreement, by and between Optionable, Inc. and Brad P. O’Sullivan (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of July 2, 1010).
10.51
Indemnification Agreement, by and between Optionable, Inc. and Andrew Samaan (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of July 2, 1010).
10.52
First Amendment to 2004 Stock Option Plan (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of March 4, 2011).
10.53
Amendment to Stock Option Agreement between Optionable, Inc. and Matthew Katzeff (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of March 4, 2011).
10.54
Amendment to Stock Option Agreement between Optionable, Inc. Brad O’Sullivan (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of March 4, 2011).
10.55
Amendment to Stock Option Agreement between Optionable, Inc. and Andrew Samaan (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of March 4, 2011).
10.56
Nonstatutory Stock Option Agreement dated March 1, 2011 between Optionable, Inc. and Andrew Samaan (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of March 4, 2011).
10.57
Nonstatutory Stock Option Agreement dated March 1, 2011 between Optionable, Inc. and Brad O’Sullivan (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of March 4, 2011).
10.58
Nonstatutory Stock Option Agreement dated March 1, 2011 between Optionable, Inc. and Matthew Katzeff (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of March 4, 2011).
10.59
Nonstatutory Stock Option Agreement dated March 1, 2011 between Optionable, Inc. and Edward O’Connor (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of March 4, 2011).
10.60
Nonstatutory Stock Option Agreement dated March 1, 2011 between Optionable, Inc. and Michael Templeton (incorporated by reference to the Registrant's Current Report on Form 8-K, dated as of March 4, 2011).
21*
Subsidiaries of the Company.
31.1*
Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
31.2*
Certification by Principal Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
32.1*
Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code
32.2*
Certification by Principal Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code
* Filed herewith
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on March 31, 2011.
Pursuant to the requirements of the Securities Act of 1933, this Report has been signed by the following persons in the capacities and on the date indicated:
Signature
Title
Date
/s/ Brad O’Sullivan
Chief Executive Officer and Director
March 31, 2011
Brad O’Sullivan, Esq
/s/ Matthew Katzeff
Chief Financial Officer and Director
March 31, 2011
Matthew Katzeff
/s/ Edward O’Connor
Director
March 31, 2011
Edward O’Connor
/s/ Andrew Samaan
Director
March 31, 2011
Andrew Samaan
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Optionable, Inc.
We have audited the accompanying consolidated balance sheets of Optionable, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Optionable, Inc. at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company’s recurring losses from operations and uncertainty regarding pending legal matters raise substantial doubt about its ability to continue as a going concern. Management’s plans as to these matters also are described in Note 1. The December 31, 2010 financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Sherb & Co., LLP
Sherb & Co., LLP
New York, New York
March 31, 2011
OPTIONABLE, INC.
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements.
OPTIONABLE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See Notes to Consolidated Financial Statements.
OPTIONABLE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From January 1, 2009 to December 31, 2010
See Notes to Consolidated Financial Statements
OPTIONABLE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements.
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1-Organization, Description of Business and Going Concern
Optionable, Inc. (“the “Company”) was formed in Delaware in February 2000. Between April 2001 and July 2007, a substantial portion of the Company’s revenues were generated from providing energy derivative brokerage services to brokerage firms, financial institutions, energy traders, and hedge funds worldwide.
The Company has not generated any revenues since the third quarter of 2007 as a result of the termination of the business relationship by its largest customer and the succession of events since then.The litigation matters listed below and discussed in Note 6 have had a significant adverse impact on its business and future results of operations and financial condition.
The Company’s management is seeking out possible business transactions and new relationships in areas unrelated to brokerage services.
The Company is a defendant to several legal proceedings, one from the Commodities and Futures Trade Commission (“CFTC”), another from its largest shareholder, Chicago Mercantile Exchange/ New York Mercantile Exchange (“NYMEX”), and a third one from its former largest customer, Bank of Montreal (“BMO”). Also named in such lawsuits, among others, are: one of the Company’s current board members and former president, as well as the Company’s former chief executive officer. The Company’s former chairman is a defendant in the latter two proceedings. Additionally, the Company’s former chief executive officer and former president are defendants in a claim made by the Securities and Exchange Commission. Furthermore, the US Department of Justice has indicted the Company’s former chief executive officer.
Going Concern
The Company is unable to determine whether it will have sufficient funds to meet its obligations for at least the next twelve months. The combination of its anticipated legal costs to defend against current legal proceedings, the potential amounts the Company would have to pay if there are negative outcomes in one or more of such legal proceedings and the Company’s obligations under its indemnification obligations could exceed the Company’s resources. The legal proceedings also negatively impact the Company’s ability to enter into strategic transactions with other companies. The Company’s future depends on its ability to satisfactorily resolve the aforementioned legal issues and there is no assurance it will be able to do so. If the Company fails for any reason, it would not be able to continue as a going concern and could potentially be forced to seek relief through a filing under the US Bankruptcy Code.
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principles of consolidation
The accompanying consolidated financial statements include the results of operations of Opex International, Inc. and Hydra Commodity Services, Inc. during 2009. Hydra Commodity Services, Inc. was dissolved in January 2010 and Opex International, Inc. was dissolved in December 2009. All material intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Concentration of Credit Risks
The Company is subject to concentrations of credit risk primarily from cash and cash equivalents.
The Company's cash and cash equivalents accounts are held at financial institutions. The Federal Deposit Insurance Corporation ("FDIC") insured up to $100,000 between January 2007 and October 2008. After October 2008, it insured up to $250,000 for interest-bearing accounts and an unlimited amount for noninterest-bearing accounts after October 2008. During 2010 and 2009, the Company had bank balances exceeding the FDIC insurance limit. While the Company periodically evaluates the credit quality of the financial institutions in which it holds deposits, it cannot reasonably alleviate the risk associated with the sudden failure of such financial institutions. The Company’s cash and cash equivalents held at financial institutions exceeded the FDIC insurance limit amount at December 31, 2010 and 2009.
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- Summary of Significant Accounting Policies
Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted Financial Accounting Statement Board (“FASB”) Accounting Standard Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” , for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1:
Observable inputs such as quoted market prices in active markets for identical assets or liabilities
Level 2:
Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3:
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
The Company did not have any Level 2 or Level 3 assets or liabilities as of December 31, 2010 and 2009, with the exception of its due to director. The Company deems that the carrying value of the due to director approximates the fair value as of December 31, 2010.
Cash and cash equivalents include money market securities that are considered to be highly liquid and easily tradable as of December 31, 2010 and 2009, respectively. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy.
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, ASC 825-10-25, “Fair Value Option,” was effective January 1, 2008. ASC 825-10-25 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value options for any of its qualifying financial instruments.
Income Taxes
Income taxes are accounted for in accordance with "Accounting for Income Taxes", which requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company's assets and liabilities result in a deferred tax asset, ASC 740 requires an evaluation of the probability of being able to realize the future benefits indicated by such assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some or all deferred tax assets will not be realized. Penalties and interest on underpayment of taxes are reflected in the Company’s effective tax rate.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management include, but are not limited to, the realization of receivables and share-based payments. Actual results will differ from these estimates.
Basic and Diluted Earnings per Share
Basic earnings per share are calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of common shares and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise of stock options and warrants (calculated using the modified-treasury stock method). The outstanding options amounted to 1,683,000 and 1,233,000 at December 31, 2010 and 2009, respectively. The outstanding warrants amounted to 0 and 100,000 at December 31, 2010 and 2009, respectively. The options and warrants outstanding at December 31, 2010 and 2009 , respectively, have been excluded from the computation of diluted earnings per share due to their antidilutive effect.
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- Summary of Significant Accounting Policies-Continued
Stock Compensation
Under ASC 718- Compensation-Stock Compensation, companies are required to measure the 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. In March 2005, the SEC issued SAB 107. SAB 107 expresses views of the staff regarding the interaction between ASC 718 and certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment arrangements for public companies. Compensation cost is measured on the date of grant as its fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant.
Contingencies
The outcomes of legal proceedings and claims brought against the Company are subject to significant uncertainty. FASB ASC 450-20-25-2 “Contingencies- Loss Contingencies-Recognition”, requires that an estimated loss from a loss contingency such as a legal proceeding or claim should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred.
In determining whether a loss should be accrued the Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. While the Company believes that it will continue to incur losses from such legal proceedings, it is unable to make a reasonable estimate of the amount of loss.
Recent Accounting Pronouncements
A variety of accounting standards have been issued or proposed by FASB that do not require adoption until a future date. The Company does not expect the adoption of any of these standards to have a material impact once adopted.
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3- Prepaid expenses
Prepaid expenses primarily consists of retainers paid to certain law firms which represent the Company and certain former and current directors in connection with legal proceedings which are described in Note 6-Litigation and Contingencies.
Note 4-Due to Related Parties
The terms and amounts of due to related parties at December 31, 2010 and 2009, respectively, are as follows:
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Due to Stockholder and former Chairman of the Board: In February 2009, the Company satisfied its obligations to its former Chairman of the Board, who is also one of the Company’s largest stockholder, by paying him $2,575,000 and repurchasing 4,095,075 shares of the Company’s common stock, valued at approximately $45,000 based on the closing price of the shares on the date of repurchase. Due to Director and former President: non-interest bearing, unsecured, payable by March 12, 2014. If the Company obtains additional equity or debt financing of at least $1,000,000 following a Capital Raise, the Company will repay its Director up to 5.3% of the Capital Raise, up to $381,250, with the remaining balance and accrued interest of 4.68% from the date of the Capital Raise due on March 12, 2014:
During April 2005, the Company modified the terms of its due to related parties. The modified terms provide that, in the event of a Capital Raise, among other things, the annual interest rate accrued after such event is reduced from 12% to 4.68%. Additionally, the modified terms provide that the Company may make principal repayments towards the due to a stockholder and former Chairman of the Board and the due to Director amounting to approximately 25% of its cash flows from operating cash flows less capital expenditures. During April 2006, the Company modified the terms of its due to related parties to allow the Company to make principal repayments at its discretion.
The amortization of the discount on the due to related parties amounted to approximately $58,219 and $155,000 during 2010 and 2009, respectively.
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5- Stockholders' Equity
Stock Compensation Plan
During November 2004, the Company adopted the 2004 Stock Option Plan ("2004 Plan"), and amended it in March 2011. The 2004 Plan allows for the grant of both incentive stock options and nonstatutory stock options. The 2004 Plan may be administered, interpreted and constructed by the Board of Directors. The number of shares of common stock which may be issued pursuant to options granted under the 2004 Plan may not exceed 7,500,000 shares.
During 2010 and 2009, the Company recorded share-based payment expenses amounting to approximately $8,000 and $19,000, respectively, in connection with all options outstanding at the respective measurement dates. The amortization of share-based payment was recorded in general and administrative expenses during 2010 and 2009.
The fair value of the options is based on the Black Scholes Model using the following assumptions :
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5- Stockholders' Equity-continued
A summary of the activity during 2010 and 2009 of the Company’s stock option plan is presented below:
* This reflects the revised exercise price from $0.015 as a result of changes in the terms of the options subsequent to December 31, 2011.
The total compensation cost related to nonvested options not yet recognized amounted to approximately $ 2,262 at December 31, 2010 and the Company expects that it will be recognized over the following weighted-average period of 15 months.
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5- Stockholders' Equity-continued
If any options granted under the 2004 Plan, as amended, expire or terminate without having been exercised or cease to be exercisable, such options will be available again under the 2004 Plan. All employees of the Company and its subsidiaries are eligible to receive incentive stock options and nonstatutory stock options. Non-employee directors and outside consultants who provided bona-fide services not in connection with the offer or sale of securities in a capital raising transaction are eligible to receive nonstatutory stock options. Incentive stock options and nonstatutory stock options may not be granted below the fair market value of the Company's common stock at the time of grant or, if to an individual who beneficially owns more than 10% of the total combined voting power of all stock classes of the Company or a subsidiary, the option price may not be less than 110% of the fair value of the common stock at the time of grant. The expiration date of an incentive stock option may not be longer than ten years from the date of grant. Option holders, or their representatives, may exercise their vested incentive stock options up to three months after their employment termination or one year after their death or permanent and total disability. With respect to the current directors and officers of the Company, their nonstatutory stock options do not expire until the second year anniversary of their resignation from the Company for Good Reason or termination without Cause (as these terms are defined in the Plan), or upon the occurrence of certain other events. The Plan provides for adjustments upon changes in capitalization.
The Company's policy is to issue shares pursuant to the exercise of stock options from its available authorized but unissued shares of common stock. It does not issue shares pursuant to the exercise of stock options from its treasury shares.
Note 6- Litigation and Contingencies
Commodity Futures Trading Commission v. Cassidy et al.
On November 18, 2008, the Commodity Futures Trading Commission (“CFTC”) filed a complaint in the United States District Court for the Southern District of New York, against the Company; former employees of the Company, including its former Chief Executive Officer, Kevin Cassidy, and its former President (currently a Director), Edward O’Connor; and two former employees of BMO, David Lee and Robert Moore. The CFTC claims that the Company is liable for violations of Section 4c(b) of the Commodity Exchange Act (“CEA”) and CFTC Regulations 33.10(a),(b) and (c). The CFTC seeks a permanent injunction restraining and enjoining the Company and other defendants from directly or indirectly violating these provisions. The CFTC further seeks an order directing the Company and other defendants to pay civil monetary penalties, in an undetermined amount. The Company is unable to predict the outcome of this matter.
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6- Litigation and Contingencies-continued
CMEG NYMEX Inc. v. Optionable, Inc. et. al.
On April 10, 2009, NYMEX filed a complaint against the Company, its former President (who is currently a Director) Edward O’Connor, its former Chief Executive Officer and its former Chairman Mark Nordlicht in the United States District Court for the Southern Districtof New York. The complaint claims that all defendants are liable for securities fraud, common-law fraud, aiding and abetting common-law fraud, negligent misrepresentation, and breach of warranty in connection with an April 2007 transaction in which the individual defendants ( who were officers and/or directors of the Company at the time) sold beneficially owned shares of the Company to NYMEX and the Company issued NYMEX warrants for the purchase of additional shares. The complaint seeks rescission, compensatory damages of at least $28.5 million, and/or punitive damages of $28.5 million. The Company is unable to predict the outcome of this matter. The Court denied our motion to dismiss the complaint on March 31, 2010.
Bank of Montreal v. Optionable, Inc. et al.
On August 28, 2009, the Bank of Montreal (“BMO”) filed a complaint against the Company and other defendants in the United States District Court for the Southern District of New York. The other defendants include former Company employees Scott Connor and Ryan Woodgate, former Chief Executive Officer Kevin Cassidy, former Chairman Mark Nordlicht, and former President (and current Director) Edward O’Connor , as well as MF Global Inc. and one of its employees. The complaint claims that the Company is liable for fraud, negligent misrepresentation, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and breach of contract. It demands compensatory and punitive damages in an undetermined amount, including indemnification from the Company for certain of BMO’s trading losses and attorneys’ fees. The Company is unable to predict the outcome of this litigation. The Court denied out motion to dismiss the complaint on June 18, 2010.
Claims from former employee
On December 7, 2009, Scott Connor, a co-defendant in the BMO action, filed cross-claims against the Company and other co-defendants in the United States District Court for the Southern District of New York. Mr. Connor claims rights to indemnity and contribution from the Company for any liability he may have to BMO. He also lays claims of breach of contract, quantum meruit, and unjust enrichment, on the basis of an allegation that the Company failed to pay him the full amount of salary and commissions that was due to him for 2007. The Company is unable to predict the outcome of this matter. The Company filed a motion to dismiss Mr. Connor’s claims against it on November 15, 2010, which is currently pending before the Court.
On November 18, 2008, the Securities and Exchange Commission filed a complaint against the Company’s former Chief Executive Officer, Kevin Cassidy, its former President (and current Director), Edward O’Connor, and its former employee Scott Connor in the United States District Court for the Southern District of New York. The complaint claims that Mr. Cassidy and Mr. O’Connor are liable for violations of Rules 10b-5, 12b-20, 13a-1, 13a-14, 13a-16, 13b2-1, and 13b2-2 and Section 10(b), Section 13(a), Section 13(b)(2), and Section 13(b)(5) of the Exchange Act and Section 17(a) of the Securities Act. The complaint demands, among other things, that Mr. Cassidy and Mr. O’Connor disgorge their alleged ill-gotten gains, be permanently enjoined from certain activities, pay civil penalties, be prohibited from being an officer or director of any issuer that has registered securities or an issuer that is required to file reports pursuant to Section 15(d) of the Exchange Act.
On or about November 13, 2008, the Department of Justice indicted the Company’s former Chief Executive Officer, Kevin Cassidy, in the United States District Court for the Southern District of New York, for wire fraud, conspiracy to commit wire fraud and securities fraud, among other charges that were later dismissed by a superseding indictment and/or the Department of Justice.
While the Company intends to defend itself vigorously against such claims and cross-claims, there exists the possibility of adverse outcomes that the Company cannot determine. These matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
OPTIONABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7-Income Taxes
The components of the benefit for income taxes are as follows
A reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows:
The tax effects of principal temporary differences between the carrying amount of assets and their tax bases are summarized below.
Management believes it is more likely than not that it will be able to offset certain deductions associated with these deferred tax assets to its prior or future years’ taxable income:
The components of the deferred tax assets are as follows:
The recoverable income tax amounting to approximately $900,000 as of December 31, 2009 is recoverable from applications for carryback refund from the Company’s 2006 federal tax returns of which a substantial amount was received during the year ended 2010.
The Company has net operating losses of approximately $2.3 million for both federal and state tax purposes.
The valuation allowance of deferred tax assets increased by approximately $886,000 during 2010,.
Note 8 - Subsequent Events
In accordance with ASC 855, “Subsequent Events” the Company evaluated subsequent events after the balance sheet date for disclosure or recognition purposes.
In March 2011, the Company amended the 2004 Stock Option Plan and amended each of Andrew Samaan’s, Brad O’Sullivan and Matthew Katzeff’s stock option agreements.
Also in March 2011, the Company granted 100,000 stock options to each board member as well as the Company’s controller, with an exercise price of $0.02 per share.
Copies of the amendment to the Plan, the amendments to these stock option agreements and the new stock options agreements dated March 1, 2011 have been filed on a Form 8-K dated March 4, 2011.