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 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 significantly 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 two significant legal proceedings, one brought by its largest stockholder, Chicago Mercantile Exchange/ New York Mercantile Exchange (“NYMEX”), and another brought by 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; the Company’s former chief executive officer; and the Company’s former board chairman. Additionally, one of the Company’s current board members and former president along with the Company’s former chief executive officer, are defendants in a claim made by the Securities and Exchange Commission.
On August 15, 2011, a former chief executive officer of the Company plead guilty to conspiracy in violation of Title 18, United States Code, Section 371 before the United States District Court for the Southern District of New York.
On November 7, 2011, one of the Company’s current board members and former president and the Company consented to the entry of a Consent Order of Permanent Injunction, Civil Monetary Penalty and Ancillary Equitable Relief, which was entered by the United States District Court for the Southern District of New York in the matter Commodity Futures Trading Commission v. Kevin Cassidy, Edward O'Connor, Optionable, Inc., David Lee and Robert Moore (08-CIV-9962 (GBD)(JLC)).
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. It is not unlikely that 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, the Company’s obligations under its indemnification obligations and additional legal expenses incurred by the Company will exceed the Company’s resources before the end of 2012. 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, consisting primarily of 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. For 2009 through May 2010, the Company’s sole employee and full-time employee was the previous Chief Executive Officer.
RESEARCH AND DEVELOPMENT
Not applicable.
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. It is not unlikely that 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, the Company’s obligations under its indemnification obligations and additional legal expenses incurred by the Company will exceed the Company’s resources before the end of 2012. 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.
Until we find and enter into new business transactions, we have no revenues and no potential sources of future revenues.
The Company has not had operations or revenue sources since the termination of the development of its OPEX technology in 2008. 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 we can expeditiously resolve all pending litigations against the Company and after the resolution of the pending litigation 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 2007. However, we continue to incur expenses, including salaries, auditing and legal expenses necessary to maintain our reporting status and legal fees in connection with certain legal proceedings. In 2011, we incurred expenses of $1,432,924.04 in legal fees, advances paid to certain former officers and a current director for their respective legal defenses, and expenses associated with intellectual property.
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 April 10, 2009, CMEG NYMEX (“NYMEX”) filed the operative complaint in this litigation. The complaint alleged, among other things, that Optionable, certain of its former officers and directors and one current director, and other defendants defrauded NYMEX in connection with NYMEX’s purchase of $28.9 million of shares of Optionable stock pursuant to a Stock and Warrant Purchase Agreement (“SWPA”). NYMEX seeks damages in excess of $28.5 million based on the following causes of action against the Company: violations of Section 10(b) of the Securities Exchange Act; breach of contract and warranty; aiding and abetting common law fraud; and negligent misrepresentation. The Company has denied the allegations in the Complaint. On September 6, 2011, the Company filed counterclaims against NYMEX alleging, among other things, that NYMEX breached its obligations under the SWPA. The counterclaims seek unspecified damages based on the following causes of action: breach of contract; breach of the covenant of good faith and fair dealing; and refusal to pay amounts due and owed of over $740,000. NYMEX filed a motion for partial summary judgment in support of its claims, and the Company also filed a motion for summary judgment in support of its claims. Both motions are still pending. The Company is unable to predict the outcome of this litigation.
Bank of Montreal v. Optionable, Inc., et al., Civ. No. 09-07557 (S.D.N.Y.)
On August 28, 2009, Bank of Montreal (“BMO”) filed the operative complaint in this litigation. The complaint alleges, among other things, that the Company, certain of its former and current officers and directors, and other defendants conspired to defraud BMO in connection with large monetary losses experienced by BMO as a result of natural gas option trades made by one of its former employees. BMO seeks unspecified damages based on the following causes of action: fraud; negligent misrepresentation; aiding and abetting fraud; aiding and abetting breach of fiduciary duty; and breach of contract. The Company has denied the allegations in the Complaint. On September 6, 2011, the Company filed counterclaims against BMO alleging, among other things, that BMO launched an unlawful campaign to blame the Company for the losses BMO incurred due to its own fault. The counterclaims seek unspecified damages based on three, separate tortious interference causes of action. BMO field a motion to dismiss the Company’s counterclaims which is still pending. The Company is unable to predict the outcome of this litigation.
On December 9, 2009, Scott Connor, a co-defendant in the BMO Matter, filed cross-claims against the Company. Mr. Connor claimed rights to indemnity and contribution from the Company for any liability he may have to Bank of Montreal. He also brought 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 “Disputed Claims”). The Company filed a motion to dismiss the Disputed Claims on November 15, 2010. Pursuant to a Memorandum Decision and Order dated August 12, 2011, the United States District Court for the Southern District of New York granted the Company’s motion to dismiss the Disputed Claims.
United States of America v. Kevin Cassidy (08 Cr. 1101 (TPG))
On August 15, 2011, Kevin Cassidy, a former Chief Executive Officer of Optionable, Inc., plead guilty to conspiracy in violation of Title 18, United States Code, Section 371, in the matter United States of America v. Kevin Cassidy (08 Cr. 1101 (TPG)) before the United States District Court for the Southern District of New York.
SEC Matter
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 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.
While the Company intends both to defend itself vigorously against these claims and to prosecute its own counterclaims, 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.
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 an investment banking background.
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 2011, we paid approximately $1.4 million in legal fees, 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 decline as a result of Mr. Cassidy’s guilty plea, but the Company cannot determine whether the Company’s total legal fees are likely to be reduced from their 2011 levels. 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 $1.4 million from our cash reserve in 2011 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 or any litigation arising out of alleged actions or causes of actions dating before 2010. The Company anticipates that it will pay, without insurance reimbursement, substantial legal fees in 2012 and until the currently pending litigation are resolved. The Company will have to pay, without insurance reimbursement, legal fees if any new litigation against it arises with respect to any alleged cause of action dating before 2010.
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 of 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:
o
that a broker or dealer approve a person's account for transactions in penny stocks; and
o
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:
o
obtain financial information and investment experience objectives of the person; and
o
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:
o
sets forth the basis on which the broker or dealer made the suitability determination; and
o
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 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.
As is discussed below, as a result of the Consent Order (as defined below), and the payment of the penalty required thereby, the complaint by the CFTC against the Company and O’Connor was dismissed and the case closed.
The CFTC claimed that the Company was liable for violations of Section 4c(b) of the Commodity Exchange Act (“CEA”) and CFTC Regulations 33.10(a),(b) and (c). The CFTC sought a permanent injunction restraining and enjoining the Company and other defendants from directly or indirectly violating these provisions. The CFTC further sought an order directing the Company and other defendants to pay civil monetary penalties.
In order to effect a settlement of the matters alleged in the CFTC complaint, on November 7, 2011, Edward O’Connor and the Company consented to the entry of a Consent Order (the “Consent Order”) of Permanent Injunction, Civil Monetary Penalty and Ancillary Equitable Relief, which was entered by the United States District Court for the Southern District of New York in the matter Commodity Futures Trading Commission v. Kevin Cassidy, Edward O'Connor, Optionable, Inc., David Lee and Robert Moore (08-CIV-9962 (GBD)(JLC)).
Pursuant to the terms of the Consent Order, the Company is permanently restrained, enjoined, and prohibited from violating Section 4c(b) of the CEA and Regulation 33.10, and from claiming that its agreements, contracts, or transactions are exempt from the application of the CEA, pursuant to Section 2(h)(3)-(5) of the CEA, or pursuant to the CFTC's orders published in the Federal Register on September 16, 2010 (75 FR 56513) and July 19, 2011 (76 FR 42508), or as subsequently amended, and from engaging in any activity requiring such exemption or requiring it to become a registered entity, as defined in Section 1 a(40) of the CEA as amended by Section 721 of the Dodd-Frank Act.
Pursuant to the terms of the Consent Order, Edward O’Connor agreed that for a period of one hundred and twenty (120) days following the entry of the Consent Order, O'Connor is prohibited from:
a) Engaging in, controlling, or directing the trading of any commodity interest (as that term is defined in Section 1(a)(4) of the Act, 7 U.S.C. § l(a)(4)) accounts for or on behalf of any other person or entity, whether by power of attorney or otherwise;
b) Soliciting or accepting any funds from any person in connection with the purchase or sale of any commodity interest contract;
c) Placing orders or giving advice or price quotations, or other information in connection with the purchase or sale of commodity interest contracts for others;
d) Introducing customers to any other person engaged in the business of commodity interest trading; and
e) Issuing statements or reports to others concerning commodity interest trading.
In addition, the Defendants paid to the CFTC a civil monetary penalty in the amount of two hundred thousand dollars ($200,000) as provided in the Consent Order.
CMEG NYMEX Inc. v. Optionable, Inc. et. al., Civ. No. 09-03677 (S.D.N.Y.)
On April 10, 2009, NYMEX filed the operative complaint in this litigation. The complaint alleged, among other things, that Optionable, certain of its former officers and directors and one current director, and other defendants defrauded NYMEX in connection with NYMEX’s purchase of $28.9 million of shares of Optionable stock pursuant to a Stock and Warrant Purchase Agreement (“SWPA”). NYMEX seeks damages in excess of $28.5 million based on the following causes of action against the Company: violations of Section 10(b) of the Securities Exchange Act; breach of contract and warranty; aiding and abetting common law fraud; and negligent misrepresentation. The Company has denied the allegations in the Complaint. On September 6, 2011, the Company filed counterclaims against NYMEX alleging, among other things, that NYMEX breached its obligations under the SWPA. The counterclaims seek unspecified damages based on the following causes of action: breach of contract; breach of the covenant of good faith and fair dealing; and refusal to pay amounts due and owed of over $740,000. NYMEX filed a motion for partial summary judgment in support of its claims, and the Company also filed a motion for summary judgment in support of its claims. Both motions are still pending. The Company is unable to predict the outcome of this litigation.
Bank of Montreal v. Optionable, Inc. et al., Civ. No. 09-07557 (S.D.N.Y.)
On August 28, 2009, BMO filed the operative complaint in this litigation. The complaint alleges, among other things, that the Company, certain of its former and current officers and directors, and other defendants conspired to defraud BMO in connection with large monetary losses experienced by BMO as a result of natural gas option trades made by one of its former employees. BMO seeks unspecified damages based on the following causes of action: fraud; negligent misrepresentation; aiding and abetting fraud; aiding and abetting breach of fiduciary duty; and breach of contract. The Company has denied the allegations in the Complaint. On September 6, 2011, the Company filed counterclaims against BMO alleging, among other things, that BMO launched an unlawful campaign to blame the Company for the losses BMO incurred due to its own fault. The counterclaims seek unspecified damages based on three, separate tortious interference causes of action. BMO field a motion to dismiss the Company’s counterclaims which is still pending. The Company is unable to predict the outcome of this litigation.
Claims from former employee
On December 9, 2009, Scott Connor, a co-defendant in the BMO Matter, filed cross-claims against the Company. Mr. Connor claimed rights to indemnity and contribution from the Company for any liability he may have to Bank of Montreal. He also brought 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 “Disputed Claims”). The Company filed a motion to dismiss the Disputed Claims on November 15, 2010. Pursuant to a Memorandum Decision and Order dated August 12, 2011, the United States District Court for the Southern District of New York granted the Company’s motion to dismiss the Disputed Claims.
United States of America v. Kevin Cassidy (08 Cr. 1101 (TPG))
On August 15, 2011, Kevin Cassidy, a former Chief Executive Officer of Optionable, Inc. (the “Company”), plead guilty to conspiracy in violation of Title 18, United States Code, Section 371, in the matter United States of America v. Kevin Cassidy (08 Cr. 1101 (TPG)) before the United States District Court for the Southern District of New York.
SEC Matter
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 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.
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 2011, the Company incurred approximately $1.43 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 2012 could be comparable to 2011 or higher.
While the Company intends both to defend itself vigorously against these claims and to prosecute its own counterclaims, 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 Financial Industry Regulatory Authority (“FINRA”). 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 21, 2012, the closing price for our common stock was $0.023.
At March 22, 2012, there were 48,333,128 shares of our common stock outstanding. There were approximately 22 stockholders of record at March 22, 2012.
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, 2011:
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).
The Company granted 500,000 options in March 2011, as follows: 100,000 options were granted to each of CEO Brad O'Sullivan, CFO Matthew Katzeff, Director Andrew Samaan, Director and former President Edward O’Connor and Comptroller Michael Templeton. On August 3, 2011, the Company granted 100,000 options to Andrew Samaan, a non-employee Director. These were the only options granted during the twelve-month period ended December 31, 2011.
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, 2011 COMPARED TO YEAR ENDED DECEMBER 31, 2010
Results of Operations
General and administrative expenses
General and administrative expenses consist primarily of legal fees, incurred in connection with the Company’s attention to the legal proceedings described in Part 1, Item 3, expenses incurred in connection with the handling of certain matters which occur during the course of our operations and compensation of personnel supporting our operations. Legal fees incurred during the twelve-month periods ending December 31, 2011 and 2010 amounted to $1,432,924 and $2,269,125, respectively.
The decrease of $402,163 in general and administrative expenses during the twelve-month period ended December 31, 2011, in comparison to the comparable period in 2010, is due to decreases in expenses associated with payroll, including the consolidation of the controller and office manager into a single, full-time position in 2010 the effects of which were fully realized in 2011, accounting services, insurance, telecommunications, investor relations and other third party services, as well as the effect of Management’s implementation of a general cost reduction policy, offset by the accrual of $200,000 in the twelve-month period ended December 31, 2011 for the payment owed to the CFTC as described in Part I, Item 3 and certain other non-recurring expenses.
As a result of the matters discussed above, we believe that our legal fees for 2012 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 2010 or 2011.
Interest income
Interest income consists primarily of interest earned on interest-bearing cash and cash equivalents. The increase in interest income during 2011 when compared to 2010, is primarily due to the increase in the interest rate paid to the Company on account of its cash and cash equivalents held in interest bearing-accounts.
Interest expense to related parties
Interest expense to related parties consists of interest charges associated with amounts due to related parties. As of December 31, 2011, the only remaining related party note payable is due to Edward O’Connor, a Director and former President. The increase in interest expense to related parties during the twelve-month period ended December 31, 2011 in comparison to the comparable period in 2010 is due to the amortization of the discount. See Note 4 to Financial Statements.
Income tax
Income tax benefit/expense consists of federal and state current and deferred income tax or benefit based on our net income. The decrease in our deferred income tax benefit during the twelve-month period ended December 31, 2011 when compared to the comparable prior-year period is primarily due to the Federal income tax refund receivable at the end of 2010. At December 31, 2010, the Company had recorded a Federal income tax refund receivable of $92,393 based on the carry back of the 2009 net operating loss to earlier profitable years. During 2011, the Internal Revenue Service informed the Company that the carry back to the earlier years is barred by statute, and that the Company will need to carry forward this net operating loss to be applied against taxable income of future years. However, since the Company cannot be assured at this time that there will be a future taxable income available to which this loss may be offset, the Company has reserved the full amount of the tax benefit attributable to this loss carry forward. See Note 2 to Financial Statements.
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. It is not unlikely that 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, the Company’s obligations under its indemnification obligations and additional legal expenses incurred by the Company will exceed the Company’s resources before the end of 2012. 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, 2011 amounts to approximately $1.3 million.
During 2011, we used cash for operating activities of approximately $1.76 million, resulting from the net loss incurred by the Company of approximately $2.3 million, adjusted for:
·
the amortization of debt discount of approximately $127,076 and share-based compensation expense of approximately $12,380;
·
a decrease in prepaid expenses of approximately $277,033;
·
the decrease in the write off of income tax refund receivable of $92,393; and
·
an increase in accounts payable and accrued expenses of approximately $12,720.
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
Based upon an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), our Chief Executive Officer and our Principal Financial Officer concluded that, as of December 31, 2011, 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 Principal 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, 2011. 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, 2011, 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, 2011.
Brad P. O’Sullivan, Esq. was appointed Interim Chief Executive Officer and Director of the Company on May 13, 2010, effective May 17, 2010, by the Board of Directors. Mr. O’Sullivan has over twenty years experience in the field of finance, real estate, and law. He was most recently Managing Partner of Patriot Title & Abstract, Inc., a Real Estate Professional Services Company he established and operated for almost seven years. He was responsible for initiating and maintaining all client relationships, as well as successfully closing over 500 transactions. Prior to this, Mr. O’Sullivan was Vice President at Brean Murray Carret & Co., LLC, a boutique investment banking firm in Manhattan with offices in Beijing, China as well as an associate in the Corporate Practice Group at O'Melveny & Myers, LLP. Mr. O’Sullivan also holds a JD from the Georgetown University Law Center, an MBA from Columbia University Business School and graduated with a Bachelor of Arts 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 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 experience 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 CEO 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.
DIRECTOR INDEPENDENCE, COMMITTEES OF THE BOARD OF DIRECTORS
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, 2011, all of our officers, directors and significant stockholders have timely filed all required forms under Section 16(a) of the Exchange Act.
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:
o
compliance with laws, rules and regulations,
o
conflicts of interest,
o
insider trading,
o
corporate opportunities,
o
competition and fair dealing,
o
discrimination and harassment,
o
health and safety,
o
record keeping,
o
confidentiality,
o
protection and proper use of company assets,
o
payments to government personnel,
o
waivers of the Code of Business Conduct and Ethics,
o
reporting any illegal or unethical behavior, and
o
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:
o
disclosures made in our filings with the SEC,
o
deficiencies in internal controls or fraud involving management or other employees who have a significant role in our financial reporting, disclosure or internal controls,
o
conflicts of interests, and
o
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 principal financial officer, our only two executive officers who were serving as such at December 31, 2011. The value attributable to any option awards is computed in accordance with ASC 718.
EMPLOYMENT AGREEMENTS
On June 29, 2010, Optionable, Inc. executed a compensation agreement with Brad P. O’Sullivan for his services as Interim 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.
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 $10,417 per month from July 1, 2009 through March 31, 2010.
On July 27, 2010, Optionable, Inc. 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.
During 2010, Mr. O’Sullivan and Mr. Katzeff received other compensation from the Company for the provision of business development services in the amounts of $26,982 and $7,200, respectively. These amounts were included as expenses in the Company’s financial statements for the relevant periods, including as presented in the Company’s Form 10K for the period ended December 31, 2010. However, this information was mistakenly omitted from Item 11 - “Executive Compensation” of the Company’s Form 10-K for the period ended December 31, 2010.
During 2011, Mr. O’Sullivan and Mr. Katzeff received other compensation from the Company for the provision of business development services in the amounts of $26,682 and $23,600, respectively.
OUTSTANDING EQUITY AWARDS AT 2011 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, 2011.
(1) The remaining 125,000 options shall vest on June 29, 2012.
(2) Notwithstanding any other vesting provision, the options shall vest immediately (i) upon a Change of Control of the Company, (ii) on the effective date of optionee's resignation or termination of optionee’s services to the Company if he resigns for Good Reason or is terminated without Cause, or (iii) if optionee is not nominated for re-election to the Board of Directors without Cause. “Cause” and “Good Reason” have the meanings ascribed thereto in the 2004 Stock Option Plan, as amended. “Change of Control” has the meaning ascribed thereto in the Stock Option Agreement pursuant to which this option was granted.
(3) The options shall terminate (even if vested) upon the earliest to occur of (i) the effective date of optionee's resignation without Good Cause, (ii) the effective date of termination of services to the Company if such services were terminated for Cause, (iii) the second anniversary of the effective date of optionee’s resignation for Good Reason, (iv) the second anniversary of the effective date of the termination of optionee’s services without Cause, (v) the second anniversary of the termination of optionee’s services as a director after the Board fails without Cause to nominate optionee for re-election to the Board, (vi) the first anniversary of the termination of optionee’s services due to disability, and (vii) the first anniversary of optionee’s death if such death occurred while still he was employed with or serving the Company. “Cause” and “Good Reason” have the meanings ascribed thereto in the 2004 Stock Option Plan, as amended.
(4) The remaining options shall vest as follows: 20,000 on March 1, 2012 and an additional 20,000 on August 1, 2012.
(5) The remaining options shall vest as follows: 112,500 on January 27, 2012 and an additional 112,500 on July 27, 2012.
Director Compensation
The following table sets forth with respect to the named directors, compensation information inclusive of equity awards and payments made for the fiscal year ended December 31, 2011.
Director Compensation
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. Those options have all vested as of March 29, 2011. On March 1, 2011, the Company granted Mr. Samaan 100,000 options. On August 3, 2011, the Company granted Mr. Samaan 100,000 more options.
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. On March 1, 2011, the Company granted Mr. O’Sullivan 100,000 options.
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. On March 1, 2011, the Company granted Mr. Katzeff 100,000 options.
Edward J. O'Connor has served as a director since March 2001. Mr. O'Connor previously served as our CEO between March 2004 and October 2005 and as our President between March 2001 and January 2009. On March 1, 2011, the Company granted Mr. O’Connor 100,000 options.
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 December 31, 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 31, 2012 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 31, 2012 have been exercised and converted.
* Based upon 48,333,128 shares outstanding as of March 22, 2012.
(1) Includes shares issuable pursuant to the exercise of stock options exercisable within 60 days.
(2) 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.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
In 2011, the Company advanced approximately $993,874 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 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.” 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, 2011 and 2010. 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 2010 and 2011.
(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 STATEMENT SCHEDULES.
* Filed herewith
** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections
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 23, 2012.
Pursuant to the requirements of the Securities Act of 1933, this registration statement 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
March 23, 2012
Brad O’Sullivan, Esq
Director
/s/ Matthew Katzeff
Chief Financial Officer and Director
March 23, 2012
Matthew Katzeff
/s/ Edward O’Connor
Director
March 23, 2012
Edward O’Connor
/s/ Andrew Samaan
Director
March 23, 2012
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, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years ended December 31, 2011 and 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Optionable, Inc. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the years ended December 31, 2010 and 2009, 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, 2011 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Sherb & Co., LLP
Certified Public Accountants
New York, New York
March 20, 2012
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, 2010 to December 31, 2011
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.
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.
Note 2- Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Concentration of Credit Risks
The Company is subject to concentrations of credit risk primarily from cash and cash equivalents.
The Company's cash and cash equivalents accounts are held at financial institutions. 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 2011 and 2010, 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, 2011 and 2010.
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, 2011 and 2010, 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, 2011.
Cash and cash equivalents include money market securities that are considered to be highly liquid and easily tradable as of December 31, 2011 and 2010, 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.
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.
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. 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 2,283,000 and 1,683,000 at December 31, 2011 and 2010, respectively. The outstanding warrants amounted to 0 and 0 at December 31, 2011 and 2010, respectively. The options and warrants outstanding at December 31, 2011 and 2010, respectively, have been excluded from the computation of diluted earnings per share due to their antidilutive effect.
The weighted average number of shares for the year ended December 31, 2010 has been corrected from the number previously reported in the prior year’s Form 10-K. This change in the weighted average number of shares had no impact on either the basic or diluted loss per common share that was previously reported.
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.
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, 2011 and 2010, respectively, are as follows:
One of the Company’s current board members and former president is entitled to a payment of $508,697 (the “Principal Amount”), plus interest, if applicable, upon the following terms. In the event that the Company secures financing of at least $1,000,000 (the “Capital Raise”), this person will be entitled to a payment equal to the lesser of (i) 12.5% of the Capital Raise, (ii) $381,250, and (iii) any unpaid Principal Amount. In the event that upon a Capital Raise, the entire Principal Amount has not been repaid, then this person shall be issued a promissory note (the “Capital Raise Note”) in the principal amount of any then unpaid Principal Amount remaining after the payments described in the preceding sentence. The Capital Raise Note shall be due and payable on April 1, 2014 and shall bear interest at a rate of 4.68% annually. In the event that no Capital Raise shall have occurred prior to April 1, 2014, then the unpaid Principal Amount shall be due and payable as of such date. This liability is recorded on the Company’s balance sheets as follows:
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 $127,076 and $58,219 during 2011 and 2010, respectively.
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 2011 and 2010, the Company recorded share-based payment expenses amounting to approximately $12,000 and $8,000, 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 2011 and 2010.
The fair value of the options is based on the Black Scholes Model using the following assumptions:
A summary of the activity during 2011 and 2010 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 $12,972 at December 31, 2011 and the Company expects that it will be recognized over the following weighted-average period of 15 months.
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.
As a result of the Consent Order (as defined below), and the payment of the penalty required thereby, the complaint by the CFTC against the Company and O’Connor was dismissed and the case closed.
The CFTC claimed that the Company was liable for violations of Section 4c(b) of the Commodity Exchange Act (“CEA”) and CFTC Regulations 33.10(a),(b) and (c). The CFTC sought a permanent injunction restraining and enjoining the Company and other defendants from directly or indirectly violating these provisions. The CFTC further sought an order directing the Company and other defendants to pay civil monetary penalties.
In order to effect a settlement of the matters alleged in the CFTC complaint, on November 7, 2011, Edward O’Connor and the Company consented to the entry of a Consent Order (the “Consent Order”) of Permanent Injunction, Civil Monetary Penalty and Ancillary Equitable Relief, which was entered by the United States District Court for the Southern District of New York in the matter Commodity Futures Trading Commission v. Kevin Cassidy, Edward O'Connor, Optionable, Inc., David Lee and Robert Moore (08-CIV-9962 (GBD)(JLC)).
Pursuant to the terms of the Consent Order, the Company is permanently restrained, enjoined, and prohibited from violating Section 4c(b) of the CEA and Regulation 33.10, and from claiming that its agreements, contracts, or transactions are exempt from the application of the CEA, pursuant to Section 2(h)(3)-(5) of the CEA, or pursuant to the CFTC's orders published in the Federal Register on September 16, 2010 (75 FR 56513) and July 19, 2011 (76 FR 42508), or as subsequently amended, and from engaging in any activity requiring such exemption or requiring it to become a registered entity, as defined in Section 1 a(40) of the CEA as amended by Section 721 of the Dodd-Frank Act.
Pursuant to the terms of the Consent Order, Edward O’Connor agreed that for a period of one hundred and twenty (120) days following the entry of the Consent Order, O'Connor is prohibited from:
a) Engaging in, controlling, or directing the trading of any commodity interest (as that term is defined in Section la(4) of the Act, 7 U.S.C. § la(4)) accounts for or on behalf of any other person or entity, whether by power of attorney or otherwise;
b) Soliciting or accepting any funds from any person in connection with the purchase or sale of any commodity interest contract;
c) Placing orders or giving advice or price quotations, or other information in connection with the purchase or sale of commodity interest contracts for others;
d) Introducing customers to any other person engaged in the business of commodity interest trading; and
e) Issuing statements or reports to others concerning commodity interest trading.
In addition, the Defendants paid to the CFTC a civil monetary penalty in the amount of two hundred thousand dollars ($200,000) as provided in the Consent Order.
CMEG NYMEX Inc. v. Optionable, Inc. et. al. Civ. No. 09-03677 (S.D.N.Y.)
On April 10, 2009, NYMEX filed the operative complaint in this litigation. The complaint alleged, among other things, that Optionable, certain of its former officers and directors and one current director, and other defendants defrauded NYMEX in connection with NYMEX’s purchase of $28.9 million of shares of Optionable stock pursuant to a Stock and Warrant Purchase Agreement (“SWPA”). NYMEX seeks damages in excess of $28.5 million based on the following causes of action against the Company: violations of Section 10(b) of the Securities Exchange Act; breach of contract and warranty; aiding and abetting common law fraud; and negligent misrepresentation. The Company has denied the allegations in the Complaint. On September 6, 2011, the Company filed counterclaims against NYMEX alleging, among other things, that NYMEX breached its obligations under the SWPA. The counterclaims seek unspecified damages based on the following causes of action: breach of contract; breach of the covenant of good faith and fair dealing; and refusal to pay amounts due and owed of over $740,000. NYMEX filed a motion for partial summary judgment in support of its claims, and the Company also filed a motion for summary judgment in support of its claims. Both motions are still pending. The Company is unable to predict the outcome of this litigation.
Bank of Montreal v. Optionable, Inc. et al. Civ. No. 09-07557 (S.D.N.Y.)
On August 28, 2009, BMO filed the operative complaint in this litigation. The complaint alleges, among other things, that the Company, certain of its former and current officers and directors, and other defendants conspired to defraud BMO in connection with large monetary losses experienced by BMO as a result of natural gas option trades made by one of its former employees. BMO seeks unspecified damages based on the following causes of action: fraud; negligent misrepresentation; aiding and abetting fraud; aiding and abetting breach of fiduciary duty; and breach of contract. The Company has denied the allegations in the Complaint. On September 6, 2011, the Company filed counterclaims against BMO alleging, among other things, that BMO launched an unlawful campaign to blame the Company for the losses BMO incurred due to its own fault. The counterclaims seek unspecified damages based on three, separate tortious interference causes of action. BMO field a motion to dismiss the Company’s counterclaims which is still pending. The Company is unable to predict the outcome of this litigation.
Claims from former employee
On December 9, 2009, Scott Connor, a co-defendant in the BMO Matter, filed cross-claims against the Company. Mr. Connor claimed rights to indemnity and contribution from the Company for any liability he may have to Bank of Montreal. He also brought 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 “Disputed Claims”). The Company filed a motion to dismiss the Disputed Claims on November 15, 2010. Pursuant to a Memorandum Decision and Order dated August 12, 2011, the United States District Court for the Southern District of New York granted the Company’s motion to dismiss the Disputed Claims.
United States of America v. Kevin Cassidy (08 Cr. 1101 (TPG))
On August 15, 2011, Kevin Cassidy, a former Chief Executive Officer of Optionable, Inc. (the “Company”), plead guilty to conspiracy in violation of Title 18, United States Code, Section 371, in the matter United States of America v. Kevin Cassidy (08 Cr. 1101 (TPG)) before the United States District Court for the Southern District of New York.
SEC Matter
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 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.
While the Company intends both to defend itself vigorously against these claims and to prosecute its own counterclaims, 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.
Legal Fees in Dispute
The financial statements do not reflect approximately $192,000 of legal fees that are claimed pursuant to an indemnification agreement by the law firm defending a former officer of the Company in various legal actions. The ultimate amount for which the Company will be liable for these disputed amounts is not currently determinable.
Note 7-Income Taxes
The components of the Tax Provision 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:
At December 31, 2010, the Company had recorded a Federal income tax refund receivable of $92,393 based on the carry back of the 2009 net operating loss to earlier profitable years. During 2011, the Internal Revenue Service informed the Company that the carry back to the earlier years is barred by statute, and that the Company will need to carry forward this net operating loss to be applied against taxable income of future years. However, since the Company cannot be assured at this time that there will be a future taxable income available to which this loss may be offset, the Company has reserved the full amount of the tax benefit attributable to this loss carry forward.
The Company has net operating losses of approximately $5,354,000 for both federal and state tax purposes that expire in 2031.
The valuation allowance of deferred tax assets increased by approximately $971,000 during 2011.
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.