10-Q 1 a91519110q.txt FOR THE QUARTER ENDED JULY 31, 2009 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the quarter ended July 31, 2009 Commission file number 033-20966 -------------------------------- Finotec Group, Inc. ------------------------------------------------------ (Exact name of registrant as specified in Its charter) Nevada 76-0251547 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 228 East 45 Street, Suite 1801, New York, NY 10017 ----------------------------------------------------- (Address of principal executive offices and zip code) 718-513-3620 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock of $0.001 par value per share Indicate by, check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [_] No [_] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [_] Smaller reporting company [X] (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X] Indicate the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: - 111,812,936 Common Series 0.001 par value Documents incorporated by reference: None. FINOTEC GROUP, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets July 31, 2009 (unaudited) and January 31, 2009 ...................4 Consolidated Statements of Operations Three Months and Six Months ended July 31, 2009 and 2008 (unaudited)................................5 Statements of Cash Flows - Six Months Ended July 31, 2009 and 2008 (unaudited)..............................................6 Notes to Consolidated Financial Statements .......................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................11 Item 3T Controls and Procedures...............................................19 PART II. OTHER INFORMATION Item 1. Legal Proceedings ...................................................21 Item 2. Changes in Securities and Use of Proceeds ...........................21 Item 3. Submission of Matters to a Vote of Security Holders .................21 Item 4. Exhibits and Reports on Form 8-K ....................................22 Signature ..............................................................22 2 Consolidated Financial Statements: Balance Sheets - July 31, 2009 (Unaudited) and January 31, 2008.......4 Statements of Operations - Three Months and Six Months Ended July 31, 2009 and 2008 (Unaudited)................................5 Statements of Cash Flows - Six Months Ended July 31, 2009 and 2008 (Unaudited)..............................................6 Notes to Consolidated Financial Statements (Unaudited)................7 3
CONSOLIDATED BALANCE SHEETS ---------------------------------------------------------------------------------------------------------------- --------------------------------------------- U.S Dollars --------------------------------------------- July 31 , January 31 , 2009 2009 --------------------------------------------- (Unaudited) (Audited) --------------------------------------------- ASSETS Current Assets Cash and cash equivalents 2,868,104 5,108,144 Prepaid and other current assets 3,140,153 472,662 ---------------------------------------------------------------------------------------------------------------- Total Current Assets 6,008,257 5,580,806 Property and Equipment, Net 527,518 599,879 Forward transaction-Hedging 407,258 441,090 ---------------------------------------------------------------------------------------------------------------- Total Assets 6,943,032 6,621,775 ================================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities short term bank credit - 216 Accounts payable and accrued expenses 939,685 995,820 Customers deposits 3,595,220 4,924,316 Forward transaction-Customers and Hedging 71,371 27,649 Provision for severance 261,063 261,063 ---------------------------------------------------------------------------------------------------------------- Total current Liabilities 4,867,338 6,209,064 ---------------------------------------------------------------------------------------------------------------- Stockholders' Equity Common stock, $0.001 par value, 100,000,000 shares authorized, 103,812,936 shares issued and outstanding 109,189 92,098 Treasury stock Additional paid-in capital 8,935,968 5,858,059 Foreign currency translation adjustment (327,636) (732,344) Retained earnings (6,641,828) (4,805,102) ---------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 2,075,694 412,711 ---------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity 6,943,032 6,621,775 ================================================================================================================
See accompanying notes to consolidated financial statements. 4
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS Six months ended Three months ended -------------------------------- --------------------------------- July 31 July 31 July 31 July 31 2009 2008 2009 2008 -------------------------------- --------------------------------- U.S Dollars U.S Dollars -------------------------------- --------------------------------- Revenues Net (losses) gain from foreign currency future operations 1,290,989 618,183 606,208 1,030,959 Consulting 2,045 3,004 (0) 2,028 --------------------------------------------------------------------------------------------------------------------------------- Total Revenues 1,293,034 1,032,987 606,208 1,032,987 --------------------------------------------------------------------------------------------------------------------------------- Operating Expenses General and Administrative 440,130 584,909 329,363 256,744 Salaries 1,475,340 1,794,172 958,358 959,164 Research and Development 68,640 207,075 16,949 97,420 Technology and computer 168,914 246,629 13,906 48,960 Commissions Brokers 4,563 98,620 4,563 64,199 Bonuses & cash back 0 356,856 0 267,599 Marketing 296,561 1,160,116 171,511 564,192 Professional fees 331,727 370,652 274,142 174,861 Financial data 79,716 150,290 60,458 70,984 Depreciation 118,282 142,573 61,248 93,268 Exceptional 403,710 10,603 403,710 10,603 Other expense 34,843 384,074 (16,608) 214,805 --------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 3,422,425 5,506,569 2,277,599 2,822,800 --------------------------------------------------------------------------------------------------------------------------------- Operating P&L (2,129,392) (4,885,382) (1,671,391) (1,789,813) Financing Expenses Interest (expense) income 589,693 42,921 582,836 (115,856) Finance Charges (605,400) (139,432) (466,032) (128,793) --------------------------------------------------------------------------------------------------------------------------------- Financing P&L (15,706) (96,512) 116,805 (244,650) Exceptional Expenses Exceptional (expense) - Previous years 308,372 0 308,372 0 Profit & Loss before income taxes (1,836,725) (4,981,893) (1,246,213) (2,034,463) 0 Income tax expense 0 0 0 --------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) (1,836,725) (4,981,893) (1,246,213) (2,034,463) ================================================================================================================================= Weighted average number of shares outstanding Basic 103,812,936 73,197,381 103,812,936 73,197,381 Net Income per common share- Basic -$0.018 -$0.028 -$0.012 -$0.028 =================================================================================================================================
See accompanying notes to consolidated financial statements. 5
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS U.S Dollars ---------------------------------- For the six months ended July 31 July 31 --------------- --------------- 2009 2008 --------------- --------------- Cash Flows from Operating Activities Net Income ( Loss) (1,836,725) (4,981,893) Adjustment to reconcile Net Loss to Net cash Used in Operating Activities Depreciation 170,657 (142,571) Loss on sold assets Changes in Operating Assets and Liabilities Decrease (increase) in prepaid and other current assets (2,667,491) (244,788) Increase in accrued expenses (56,135) (49,190) Decrease in other current liabilities 1,671,360 Increase in accrued severance payable (0) 351,414 Increase (decrease) in receivable forward Clients Trs 33,832 8,404 Increase (decrease) in payable forward Hedging Trs/option 43,722 217,233 Decrease (increase) in marketable securities 0 486,151 Increase (decrease) in customers Deposits (1,329,096) (339,119) --------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) Operating Activities (5,641,237) (3,022,999) --------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Purchase of fixed Assets (98,295) 67,664 Selling of fixed Assets --------------------------------------------------------------------------------------------------------------- Net cash provided by Investing Activities (98,295) 67,664 --------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Short term bank credit (216) 4,862 Proceeds from treasury shares 0 Stock issuance 3,095,000 2,000,000 --------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) Financing Activities 3,094,784 2,004,862 --------------------------------------------------------------------------------------------------------------- Effect of Foreign Currency Translation 404,706 419,176 --------------------------------------------------------------------------------------------------------------- Net decrease in Cash and Cash Equivalent (2,240,041) (531,297) Cash and Cash Equivalents- beginning of year 5,108,144 9,135,591 --------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents- Ending 2,868,103 8,604,294 =============================================================================================================== Supplemental disclosure of cash flow information: Cash paid during the period for interest, net 2,205 40,873 ===============================================================================================================
See accompanying notes to consolidated financial statements. 6 FINOTEC GROUP, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ================================================================================ 1. Summary of Significant Accounting Policies Interim Financial Information The accompanying unaudited consolidated financial statements of the Company (as defined below) should be read in conjunction with the consolidated financial statements and notes thereto filed with the U.S. Securities and Exchange Commission in the Company's Annual Report on Form 10-KSB for the fiscal year ended January 31, 2009. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the financial position of the Company and its consolidated subsidiaries at July 31, 2009, and the results of their operations and their cash flows for the three months ended July 31, 2009 and July 31, 2008. The results of interim periods are not necessarily indicative of the results that may be expected for the year ending January 31, 2009. Description of Business Finotec Group, Inc. ("Finotec, Inc.), a Nevada corporation, is principally engaged, through its wholly-owned subsidiaries, in offering foreign currency market trading to professionals and retail clients over its web-based trading system. Shares in Finotec began trading on the Over the Counter Bulletin Board listings. (OTCBB: FTGI). Finotec Group's United Kingdom subsidiary, Finotec Trading UK, Limited, has been authorized by the UK's Financial Services Authority (FSA) to act as a Market Maker, as defined by the FSA, in the United Kingdom. As of November 9, 2007, Finotec Trading UK, Limited, is approved by the FSA as a Market Maker and Principal, and thus Finotec Trading UK, Limited, may now offer UK clients certain regulated investment instruments such as Commodity Futures, Commodity options and options on commodity futures, Contract for Differences, Futures, Options, Rights to or interests in investments, Rolling spot forex contracts, and Spread Bets. Risk Management These Finotec Group activities give rise to risks which are monitored and managed as follows: Credit risk Clients are required to deposit cleared funds as margin before they can trade. If the client margin falls below the minimum required to maintain a 7 position, they will be notified that they are on margin call and can only reduce their positions or provide additional funds. At any time the client is on margin call, the company may, at its discretion, liquidate some or all of that client's positions in order to bring them back into line with their margin requirements. The company also has potential credit risk exposure to market counterparties with which it hedges and with banks. The company has a defined risk appetite for exposure to each market counterparty and bank to which it has credit exposure. Liquidity risk The company has significant net cash balances as at the balance sheet date and continually monitors its capital adequacy. Foreign currency risk The company has financial instruments which are denominated predominantly in US dollars. The gains and losses arising from the company's exposure are recognised in the profit and loss account. Market price risk Market risk arises from open contracts with customers and counterparties. Exposure to market risk is closely monitored in accordance with limits and reduced through hedging. Principles of Consolidation The consolidated financial statements include the accounts of Finotec Inc. and its wholly owned subsidiaries, Finotec Trading, Inc. ("Finotec Trading") and its owned subsidiary Finotec Trading Cyprus Ltd., Finotec Ltd., Finotec USA Inc., Finotec Trading Polska S.A., Finotec Trading UK Ltd, and Finotec Ltd.'s 99.7% owned subsidiary, Forexcash Global Trading Ltd. ("Forexcash") (collectively referred to as the "Company", unless otherwise indicated). All material intercompany transactions and balances have been eliminated in consolidation. Since the liabilities of Forexcash exceed its assets, and the owner of the 0.3% minority interest has no obligation to supply additional capital, no minority interest has been recorded in the consolidated financial statements. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. 8 1. Summary of Significant Accounting Policies (Continued) Earning Per Common Share Basic earnings per share is based on the weighted effect of all common shares issued and outstanding, and is calculated by dividing net income (loss) by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming exercise or conversion of all stock options. The dilutive effect of stock options was not assumed for the three months ended July 31, 2009 and 2008, because the effect of these securities is antidilutive. Marketable Marketable securities consist principally of Securities corporate stocks. Management has classified the Company's marketable securities as available for sale securities in the accompanying consolidated financial statements. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity. Realized gains and losses on available-for-sale securities are included in interest income. Gains and losses, both realized and unrealized, are measured using the specific identification method. Market value is determined by the most recently traded price of the security at the balance sheet date. As of July 31, 2009 the market value of the security equals its cost. 2. Property and Equipment Property and equipment consist of the following:
Estimated Useful Life July 31 , 2009 January 31 , 2009 years (unaudited) (audited) Computer equipment 3 $ 935,619 $ 862,272 Purchased software 3 $ 234,245 $ 222,647 Office furniture and equipment 7 $ 222,982 $ 234,909 Leasehold improvements 10 $ 131,448 $ 117,666 ---------- ---------- Total Property and Equipment at Cost $1,524,293 $1,437,494 Less accumulated depreciation and amortization $ 996,775 $ 837,615 ---------- ---------- Property and Equipment - Net $ 527,518 $ 599,879 ========== ==========
9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ================================================================================ 3. Legal Proceedings In September 2008, a Finotec customer filed a claim for approx NIS 148 thousand for alleged trading profits the company cancelled. The company claimed there was no basis for the claim and the source of these alleged profits were erroneous data in the computer system.. Management does not expect any of these claims to have a material effect on the Company's financial position or results of operations. ISSUANCES OF EQUITY SECURITIES By July 31, 2009, the Company entered into a definitive agreement for the sale of 11,111,111 Common Shares at a price of $0.18 per share as well as 2,780,000 Common Shares at a price of $0.25 per share. The shares of Common Stock sold in the private placement offering have not been registered under the Act and may not be offered or sold absent registration or an applicable exemption from such registration requirements. All such shares are subject as well to a registration rights agreement. The transaction closed by July 31th 2009. The summary description of the financing described above does not purport to be complete and is qualified in its entirety by reference to the Stock Purchase Agreement filed as an Exhibit hereto. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements of Finotec Group, Inc. and its subsidiaries contained herein. The results of operations for an interim period are not necessarily indicative of results for the year, or for any subsequent period. RESULTS OF OPERATIONS THREE MONTHS ENDED JULY 31, 2009 AND 2008 NET GAINS (LOSSES) FROM FOREIGN CURRENCY FUTURE OPERATIONS Net gains from foreign currency future operations are comprised primarily of spread-based brokerage fees earned from our clients' brokerage transactions. Total net revenue from foreign currency future operations was $606,208 for the three months ended July 31, 2009, as compared to a net gain from foreign currency future operations of $1,030,959 for the three months ended July 31, 2008 This decrease of $ 424,751 is attributable to a variety of factors, including the general global downturn in the financial markets,. The Company had net losses of $1,246,213 for the three months ended July 31, 2009, as compared to a net loss of $2,034,463 for the three months ended July 31, 2008, an increase of $ 788,250. This increase is primarily attributable to a reduction in operating expenses. OPERATING EXPENSES Operating expenses were $2,277,599 for the three months ended July 31, 2009, as compared to $2,822,800 for the three months ended July 31, 2008. This decrease of $545,201 was due management efforts to reduce costs. LIQUIDITY AND CAPITAL RESOURCES The Company's cash balance decreased by $2,240,041 from a cash balance at January 31, 2009 of $ 8,604,294 to $2,868,103 as of July 31, 2009. This decrease is primarily attributable to the Company's losses during the six months ended July 31, 2009. Net cash used in operating activities amounted to $5,641,237 for the six months ended July 31, 2009, compared to net cash used in operating activities of $3,022,999 for the six months ended July 31, 2008. This increase is attributable to a variety of factors, including the general global downturn in the financial markets, client reactions to market uncertainties, an increase in customer withdrawals during the quarter as well as technical problems with the Company's internal hedging system. These problems have now been corrected. Net cash provided in financing activities for the six months ended July 31, 2009, was $ 3,094,784_ as compared to net provided in investing activities of $ 2,004,862 for the six months ended July 31, 2008.. This cash was provided by the issuance of new shares. 11 Future capital requirements and the adequacy of available funds will depend on numerous factors, including the successful commercialization of our products, competing technological and market developments, and the development of strategic alliances for the development and marketing of our products. Following the completion of the private placements described below, the Company will have sufficient funds to satisfy their cash requirements until June 2010 assuming monthly expenses of the Company at $600,000 and no revenue generation by the Company. The Company has identified new strategies and opportunity which should start to provide revenue in the quarter ending January 31, 2010. The Company has received commitments for additional share issue of 8,000,000 shares at .25 cents per share totaling US$2,000,000. The aim of the utilization of the new share issues is to: - To increase our market share in our retail FX activity - Start a Delivery vs. Payment business for Forex, Metals and Energy contracts - Start an Institutional brokerage trading activity for the same products - Start an Hedge Fund FSA regulated. - On the technology side o To develop an ECN (matching order system) o To create an easy white label version of our retail margin trading solution Finotec expects that it will take 6-12 months before the effect of the will show a positive impact on its cash flow and operations. ISSUES, UNCERTAINTIES AND RISK FACTORS The Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in this report should be read and evaluated together with the issues, uncertainties and risk factors relating to our business described below. While we have been and continue to be confident in our business and business prospects, we believe it is very important that anyone who reads this report consider the issues, uncertainties and risk factors described below, which include business risks relevant both to our industry and to us in particular. These issues, uncertainties and risk factors are not intended to be exclusive. This report also contains statements that are forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "believes," "plans," "estimates," "expects," "intends," "designed," "anticipates," "may," "will," "should," "could," "become," "upcoming," "potential," "pending," and similar expressions, if and to the extent used, are intended to identify the forward-looking statements. All forw ard-looking statements are based on current expectations and beliefs concerning future events that are subject to risks and uncertainties. Actual results may differ materially from the results suggested in this report. Factors that may cause or contribute to such differences, and our business risks and uncertainties generally, include, but are not limited to, the items described below, as well as in other sections of this report and in our other public filings and our press releases. 12 THERE ARE SEVERAL FACTORS THAT MAY CAUSE FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS, WHICH WOULD LIKELY RESULT IN SIGNIFICANT VOLATILITY IN OUR STOCK PRICE Causes of such significant fluctuations may include, but are not limited to: o cash flow problems that may occur; o the quality and success of, and potential continuous changes in, sales or marketing strategies (which have undergone significant changes recently and are expected to continue to evolve) and the costs allocated to marketing campaigns and the timing of those campaigns; o the timing, completion, cost and effect of our development and launch of planned enhancements to the Finotec trading platform; o the size and frequency of any trading errors for which we ultimately suffer the economic burden, in whole or in part; o changes in demand for our products and services due to the rapid pace in which new technology is offered to customers in our industry; o demand of customers to transact business on our platform; o actions taken by our competitors, including new product introductions, fee schedules, pricing policies and enhancements; o costs or adverse financial consequences that may occur with respect to regulatory compliance or other regulatory issues, particularly relating to laws, rules or regulations that may be enacted with a focus on the active trader market; and o general economic and market factors that affect active trading, including changes in the securities and financial markets. OUR SUCCESS IS DEPENDENT UPON OUR RECEIPT AND MAINTENANCE OF REGULATORY APPROVALS IN THE MAJOR CUSTOMER MARKETS AROUND THE WORLD. The Company believes that its success, in large part, depends upon its ability to receive and retain regulatory approvals in the major markets around the world. Such approvals both expand the variety of services which the Company can offer and bolster the Company's reputation among potential customers. In November 2007, Finotec UK received authorization from the FSA to offer certain financial services in the UK. In connection therewith, Finotec has received regulatory approval to offer cross border investment services in the various European countries, from its UK office. In order to retain its FSA authorization, the Company must comply with numerous requirements, including financial covenants as well as those related to its ongoing operations. The Company's failure to meet these ongoing obligations could lead to the loss of its FSA authorization which would have a material adverse effect on the Company and its operations. In addition, in the United States, Finotec USA Inc. has applied for registration with the National Futures Association ("NFA") as a Futures Commission Merchant (FCM). Such application is currently pending. Failure to receive such authorization could have a material adverse effect on the Company's ability to expand its operations. In addition, if such authorization is received, in order to retain its NFA authorization, the Company must comply with numerous 13 requirements, including financial covenants as well as those related to its ongoing operations. The Company's failure to meet these ongoing obligations could lead to the loss of its NFA authorization which would have a material adverse effect on the Company and its operations. WE MUST MAINTAIN POSITIVE BRAND NAME AWARENESS. We believe that establishing and maintaining our brand names is essential to expanding business. We also believe that the importance of brand name recognition will increase in the future because of the growing number of online companies that will need to differentiate themselves. Promotion and enhancement of our brand names will depend largely on our ability to provide consistently high quality software and related technology. If we are unable to provide software and technology of comparable or superior quality to those of our competition, the value of our brand name may suffer. THE INTERNATIONAL NATURE OF OUR BUSINESS ADDS ADDITIONAL COMPLEXITY AND RISKS TO OUR BUSINESS. The nature of the foreign currency business brings us into contact with different countries and markets. We hope to expand further in international markets. Our international business may be subject to a variety of risks, including: o market risk or loss of uncovered transactions; o governmental regulation and political instability; o collecting international accounts receivable and income; o the imposition of barriers to trade and taxes; and o difficulties associated with enforcing contractual obligations and intellectual property rights. These factors may have a negative effect on any future international operations and may adversely affect our business and operations. INSTABILITY IN THE MIDDLE EAST REGION MAY ADVERSELY AFFECT OUR BUSINESS Political, economic and military conditions in Israel directly affect the Company's operations. The Company could be adversely affected by hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners, or a significant downturn in the economic or financial condition of Israel. These conditions could disrupt the Company's operations in Israel and its business, financial condition and results of operations could be adversely affected. The Company's costs of operations have at times been affected by changes in the cost of its operations in Israel, resulting from changes in the value of the Israeli shekel relative to the United States dollar, and from difficulties in attracting and retaining qualified scientific, engineering and technical personnel in Israel, where the availability of such personnel has at times been severely limited. Changes in these cost factors have from time to time been significant and difficult to predict, and could in the future have a material adverse effect on the Company's results of operations. 14 OUR INDUSTRY IS INTENSELY COMPETITIVE, WHICH MAKES IT DIFFICULT TO ATTRACT AND RETAIN CUSTOMERS The markets for online brokerage services, client software and Internet-based trading tools, and real-time market data services are intensely competitive and rapidly evolving, and there has been substantial consolidation of those three products and services occurring in the industry. We believe that competition from large online brokerage firms and smaller brokerage firms focused on active traders, as well as consolidation, will substantially increase and intensify in the future. Competition may be further intensified by the size of the active trader market,. We believe our ability to compete will depend upon many factors both within and outside our control. These include: price pressure; the timing and market acceptance of new products and services and enhancements developed by us and our competitors; the development and support of efficient, materially error-free Internet-based systems; product and service functionality; data availability and cost; clearing costs; ease of use; reliability; customer service and support; and sales and marketing decisions and efforts. WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR PRESERVE OUR RIGHTS IN INTELLECTUAL PROPERTY Our success is and will continue to be heavily dependent on proprietary technology, including existing trading-tool, Internet, Web-site and order-execution technology, and those types of technology currently in development. We view our technology as proprietary, and rely, and will be relying, on a combination of trade secret and trademark laws, nondisclosure agreements and other contractual provisions and technical measures to protect our proprietary rights. Policing unauthorized use of our products and services is difficult, however, and we may be unable to prevent, or unsuccessful in attempts to prevent, theft, copying or other unauthorized use or exploitation of our product and service technologies. There can be no assurance that the steps taken by us to protect (or defend) our proprietary rights will be adequate or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technologies or products and services. THE NATURE OF OUR BUSINESS RESULTS IN POTENTIAL LIABILITY TO CUSTOMERS Many aspects of the securities brokerage business, including online trading services, involve substantial risks of liability. In recent years there has been an increasing incidence of litigation involving the securities brokerage industry, including class action and other suits that generally seek substantial damages, including in some cases punitive damages. In particular, our proprietary order routing technology is designed to automatically locate, with immediacy, the best available price in completing execution of a trade triggered by programmed market entry and exit rules. There are risks that the electronic communications and other systems upon which these products and services rely, and will continue to rely, or our products and services themselves, as a result of flaws or other imperfections in their designs or performance, may operate too slowly, fail or cause confusion or uncertainty to the user. Major failures of this kind may affect all customers who are online simultaneously. Any such litigation could have a material adverse effect on our business, financial condition, results of operations and prospects. WE DO NOT HAVE A LONG OPERATING HISTORY AS AN ONLINE BROKERAGE FIRM We launched the Forexcash direct access online trading platform during the first quarter of 2002. Prior to that, our operations consisted mainly of developing the software and technology. Accordingly, the online brokerage business, as currently conducted, has a very short operating history. This lack of operating history, and our lack of historical profitable results, should be taken into account when evaluating our financial condition and results of operations. 15 WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITH OTHER PROVIDERS OF E-COMMERCE SERVICES Competition for Internet products and services and e-commerce business is intense. If the market for e-commerce grows, we expect that competition will intensify, and Finotec will continue to compete with other technology companies and traditional service providers that seek to integrate on-line business technologies with their traditional service mix. Barriers to entry into the e-commerce environment are minimal, and competitors can launch websites and offer products and services at relatively low costs. The companies with which Finotec competes often have significantly greater name recognition and financial, marketing and other resources than Finotec which may place our e-commerce marketplaces at a disadvantage in responding to competitors' pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiative. If Finotec fails to differentiate itself from other Internet industry participants, the value of its brand name could decline, it may be unable to attract a critical mass of buyers and sellers, and its prospects for future growth would diminish, which could materially and adversely affect our business and operations. CONCERNS REGARDING SECURITY OF TRANSACTIONS AND TRANSMITTING CONFIDENTIAL INFORMATION OVER THE INTERNET MAY ADVERSELY AFFECT OUR E-COMMERCE BUSINESS We believe that concern regarding the security of confidential information transmitted over the Internet, including, for example, business requirements, credit card numbers and other forms of payment methods, prevents many potential customers from engaging in online trading. If we do not add sufficient security features to future product releases, our services may not gain market acceptance or we may face additional legal exposure. Despite the measures we have taken in the areas of encryption and password or other authentication software devices, our infrastructure, like others, is potentially vulnerable to physical or electronic break-ins, computer viruses, hackers or similar problems caused by employees, customers or other Internet users. If a person circumvents our security measures, that person could misappropriate proprietary information or cause interruptions in our operations. Security breaches that result in access to confidential information could damage our reputation and expose us to a risk of loss or liability. These risks may require us to make significant investments and efforts to protect against or remedy security breaches, which would increase the costs of maintaining our websites. OUR E-COMMERCE CAPABILITY DEPENDS ON REAL-TIME ACCURATE PRODUCT INFORMATION We may be responsible for loading information into our database and categorizing the information for trading purposes. This process entails a number of risks, including dependence on our suppliers both to provide us in a timely manner with accurate, complete and current information and to update this information promptly when it changes. If our suppliers do not provide us in a timely manner with accurate, complete and current information, our database may be less useful to our customers and users and may expose us to liability. We cannot guarantee that the information available in our database will always be accurate, complete and current or comply with governmental regulations either due to third-party or internal errors. This could expose us to liability or result in decreased acceptance of our products and services, which could have a material and adverse affect on our business and operations. We are aware of cases in which the data provided to us by third parties has not been consistently accurate and, as a result of which, we have experienced customer dissatisfaction and lawsuits by customers. In addition, our contracts with the third-party data suppliers must be renewed on a regular basis and the costs for such information may increase, with the Company having little or no negotiating influence in such a situation. 16 OUR MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE, AND WE MAY NOT BE ABLE TO KEEP UP WITH SUCH CHANGE IN A COST-EFFECTIVE WAY The e-commerce market is characterized by rapid technological change and frequent new product announcements. Significant technological changes could render our existing technology obsolete. If we are unable to respond successfully to these developments or do not respond in a cost-effective way, our business and operations will suffer. To be successful, we must adapt to our rapidly changing market by continually improving the responsiveness, services and features of our products and services, by developing or acquiring new features to meet customer needs and by successfully developing and introducing new versions of our Internet-based e-commerce business software on a timely basis. The life cycles of the software used to support our e-commerce services are difficult to predict because the market for our e-commerce is new and emerging and is characterized by changing customer needs and industry standards. The introduction of on-line products employing new technologies and industry standards could render our existing system obsolete and unmarketable. If a new software language becomes the industry standard, we may need to rewrite our software to remain competitive, which we may not successfully accomplish in a timely and cost-effective manner. In addition, as traffic in our e-commerce business increases, we may need to expand and upgrade our technology, transaction processing systems and network hardware and software. We may not be able to project accurately the rate of growth in our on-line businesses. We also may not be able to expand and upgrade our systems and network hardware and software capabilities to accommodate increased use of our on-line businesses, which would have a material and adverse affect on our business and operations. An unexpected event, such as a power or telecommunications failure, fire or flood, or physical or electronic break-in at any of our facilities or those of any third parties on which we rely, could cause a loss of critical data and prevent us from offering services. If our hosting and information technology services were interrupted, including from failure of other parties' software that we integrate into our technology, our business and the businesses of our e-commerce marketplaces using these services would be disrupted, which could result in decreased revenues, lost customers and impaired business reputation for us and them. As a result, we could experience greater difficulty attracting new customers. A failure by us or any third parties on which we rely to provide these services satisfactorily would impair our ability to support the operations of our services and could subject us to legal claims. In addition, to a large extent, the Company's profits are dependent upon the operation of its internal risk management system. There is no guarantee that such system will operate successfully in every eventuality. LIMITED INTERNET INFRASTRUCTURE MAY AFFECT SERVICE. The accelerated growth and increasing volume of Internet traffic may cause performance problems, slowing the adoption of our Internet-based services. The growth of Internet traffic due to very high volumes of use over a relatively short period of time has caused frequent periods of decreased Internet performance, delays and, in some cases, system outages. This decreased performance is caused by limitations inherent in the technology infrastructure supporting the Internet and the internal networks of Internet users. In addition, recently, there have been several instances of entire countries losing Internet access as a result of natural disasters or accidents. If Internet usage continues to grow rapidly, the infrastructure of the Internet and its users may be unable to support the demands of growing e-commerce usage, and the Internet's performance and reliability may decline. If our existing or potential customers experience frequent or continuing outages or delays on the Internet, the adoption or use of our Internet-based products and services may grow more slowly than we expect or even decline. Our ability to increase the speed and reliability of our Internet-based business model is limited by and depends upon the reliability of both the Internet and the internal networks of our existing and potential customers. As a result, if improvements in the infrastructure supporting both the Internet and the internal networks of our customers and suppliers are not made in a timely fashion, we may have difficulty obtaining new customers, or maintaining our existing customers, either of which could reduce our potential revenues and have a negative impact on our business and operations. 17 INTERNET GOVERNANCE, REGULATION AND ADMINISTRATION ARE UNCERTAIN AND MAY ADVERSELY AFFECT OUR BUSINESS. The future success of our business is dependent on our ability to use the Internet to implement our e-commerce growth strategy. Because the original role of the Internet was to link the government's computers with academic institutions' computers, the Internet was historically administered by organizations that were involved in sponsoring research. Over time, private parties have assumed larger roles in the enhancement and maintenance of the Internet infrastructure. Therefore, it is unclear what organization, if any, will govern the administration of the Internet in the future, including the authorization of domain names. The lack of an appropriate organization to govern the administration of the Internet infrastructure and the legal uncertainties that may follow pose risks to the commercial Internet industry and our specific website business. In addition, the effective operation of the Internet and our business is also dependent on the continued mutual cooperation among several organizations that have widely divergent interests, including the government, Internet service providers and developers of system software and software language. These organizations may find that achieving a consensus may become difficult, impossible, time-consuming and costly. CHANGES IN THE REGULATORY ENVIRONMENT GOVERNING THE INTERNET, EITHER IN THE US OR ABROAD, COULD HAVE A SIGNIFICANT EFFECT ON OUR BUSINESS We cannot predict whether or to what extent any new regulation affecting e-commerce will occur. New regulations could increase our costs or restrict our activities in a materially adverse manner. One or more states or countries may seek to impose sales tax collection obligations on out-of-state/foreign companies like ours that engage in or facilitate e-commerce. A successful assertion by one or more states or any foreign country that we should collect sales and other taxes on our system could increase costs that we could have difficulty recovering from users of our websites. Governmental agencies and their designees regulate the acquisition and maintenance of web addresses generally. For example, in the United States, the National Science Foundation had appointed Network Solutions, Inc. as the exclusive registrar for the ".com," ".net" and ".org" generic top-level addresses. Although Network Solutions no longer has exclusivity, it remains the dominant registrar. The regulation of web addresses in the United States and in foreign countries is subject to change. As a result, we may not be able to acquire or maintain relevant web addresses in all countries where we conduct business that are consistent with our brand names and marketing strategy. Furthermore, the relationship between regulations governing website addresses and laws protecting trademarks is unclear. WE MAY BE SUBJECT TO LEGAL LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER THE INTERNET Our e-commerce businesses may be subject to legal claims relating to the content of our on-line websites, or the distribution of content. Providers of Internet products and services have been sued in the past, sometimes successfully, based on the content of material. The representations as to the origin and ownership of licensed content that we generally obtain may not adequately protect us. In addition, we draw some of the content provided in our on-line business communities from data compiled by other parties. This data may have errors. If our content is improperly used or if we supply incorrect information, it could result in unexpected liability. Our insurance may not cover claims of this type or may not provide sufficient coverage. We are aware of cases in which the data provided to us by third parties has not been consistently accurate and, as a 18 result of which, we have experienced customer dissatisfaction and lawsuits by customers. Costs from these claims could damage our business and limit our financial resources. In addition, there can be no assurance that we will not make internal errors that could result in liability. ITEM 4T CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Management of the Company, with the participation of the Chief Executive Officer (who also serves as the Chief Financial Officer), evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), as of July 31, 2009. Based upon this evaluation, the Chief Executive Officer (who also serves as the Chief Financial Officer) has concluded that the Company's disclosure controls and procedures were not effective as of July 31, 2009 due to the material weaknesses in internal control over financial reporting as described below. (b) Management's Report on Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness represents a significant deficiency (as defined in the Public Company Accounting Oversight Board's Auditing Standard No. 5), or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Management conducted an assessment of the effectiveness of the Company's internal control over financial reporting as of July 31, 2009 based on the framework published by the Committee of Sponsoring Organizations of the Tread way Commission, Internal Control -- Integrated Framework. Management has identified the following material weaknesses in the Company's internal control over financial reporting as of July 31, 2009. Material weaknesses identified in Finotec Group, Inc: Entity Level Controls: ---------------------- o The Audit Committee is inactive. o There is no internal audit function. o Management does not perform a periodic check of the access rights of all users to ensure that their access is suitable to their positions and functions. Remediation Plan: o The Audit Committee will be activated. o The Company will implement an internal audit function. o The CFO will extract from the information system an access list for all employees and ensure that each function, screen and field is suitable to the employee's job description. o The CFO will ensure that the access rights are adequately segregated. Financial Statements: --------------------- o The CFO does not use a clearly defined timeline and closing procedure checklist each quarter. 19 o The CFO does not use a period-end and a consolidation checklist to ensure all closing and consolidation procedures are performed. o Lack of documentation at the financial statement preparation process creates the potential of the occurrence of a material error occurring in the financial statements. Remediation Plan: o The CFO will use a clearly defined timeline and closing procedure checklist each quarter and will distribute the list to the relevant employees o The CFO will ensure that all steps on the timeline have been completed each quarter. o The CFO will use a period-end and a consolidation checklist to ensure all closing and consolidation procedures were performed. o The Company will retain evidence of all the controls performed in the financial statement preparation process. Treasury and Cash Management: ----------------------------- o The CEO can sign checks for an unlimited amount, with no second signature required. o Lack of documentation in the Treasury and Cash Management process creates the potential of the occurrence of a material error occurring in the financial statements. Remediation Plan: o All material financial transactions with 3rd parties will be authorized by two authorized signatories of the Company, such as the CEO and the CFO. o The Company will retain evidence of all the controls performed in the process. Revenue: -------- o Lack of documentation in the Order to Cash process creates the potential of the occurrence of a material error occurring in the financial statements. Remediation Plan: o The Company will retain evidence of all the controls performed in the process. Human Resources & Payroll: -------------------------- o Lack of documentation in the human resources and payroll processes creates the potential of the occurrence of a material error occurring in the financial statements. Remediation Plan: o The Company will retain evidence of all the controls performed in the process. Information Technology: ----------------------- o The passwords of accounts with privileged access are not limited or unique. o The Company does not have permission and access right table specifying group authorizations. Some employees have more authorizations than their role definition. There is no authorization procedure. o The same read-only password is valid for all the IT employees. There is no requirement to change the password within a limited period of time. o The Company does not have password complexity procedure. User passwords do not require any complexity, and there is no requirement for password change. o Segregation of duties is inadequate. o No Formal system development, acquisition and program change policies and procedures exist for development/acquisitions of new systems and changes to existing systems. o The developers have access to the production. 20 Remediation Plan: o Users and passwords will be unique and limited to all the systems. o The Company will examine and minimize user rights and will prepare permissions table and access rights that includes group permissions and prepare access to programs and data procedures. o The Company will apply a different user id/password for every employee. The Company will document each request and authorization. The Company will set an expiration date to each password upon creation. o The Company will prepare "Access to Programs and Data" procedure. Passwords to the database will be managed and complex. o The Company will create a formal position for Information Security role. IT manager and IT Security roles will be held by different employees. Development and testing will carried out by different employees. The Company will create a formal position for quality assurance manager is necessary. o The Company will write a methodology for system development, acquisitions and change management. o The Company will prevent the developers from accessing the production environment. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In September 2008, a Finotec customer filed a claim for approx NIS 148,000 for alleged trading profits the company cancelled. The company claimed there was no basis for the claim and the source of these alleged profits were erroneous data in the computer system. Management does not expect any of these claims to have a material effect on the Company's financial position or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (A) SALES OF UNREGISTERED SECURITIES On July 31st 2009, the Company entered into a definitive agreement for the sale of 11,111,111 Common Shares at a price of $0.18 per share as well as 2,780,000 Common Shares at a price of $0.25 per share. The shares of Common Stock sold in the private placement offering have not been registered under the Act and may not be offered or sold absent registration or an applicable exemption from such registration requirements. All such shares are subject as well to a registration rights agreement. The transaction closed on July 31st 2009.. ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On July 16, 2008, a majority of the Company's shareholders provided their written consent to increase the authorized capital of the Company from 100 million shares to 300 million shares of Common Stock. 21 ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K (A) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT: 31.1 Section 302 certification 31.2 Section 302 certification 32.1 Section 906 certification 32.2 Section 906 certification SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Finotec Group, Inc. Registrant Date: September 15, 2009 /s/ Didier Essemini -------------------------- Didier Essemini Chief Executive Officer 22