LVPA 10-Q Quarterly Report July 31, 2010 | Alphaminr
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LVPA 10-Q Quarter ended July 31, 2010

Balance Sheet
Cash Flow
Income Statement
10-Q 1 c10710110q.htm FOR THE QUARTER ENDED JULY 31, 2010 c10710110q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

for the quarter ended July 31, 2010

Commission file number 033-20966
Finotec Group, Inc.
(Exact name of registrant as specified in Its charter)

Nevada
76-0251547
(State or other jurisdiction of
(IRS Employer
Incorporation or Organization)
Identification No.)


228 East 45 Street, Suite 1801, New York, NY 10017
(Address of principal executive offices)

Registrant's telephone number, including area code 718-513-3620

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
x
Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: - Common Series 0.001 par value

Documents incorporated by reference: None.

FINOTEC GROUP, INC.
INDEX


PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements:
Consolidated Balance Sheets
July 31, 2010 (Unaudited) and January 31, 2010
3
Consolidated Statements of Operations
Three Months and Six Months ended
July 31, 2010 (Unaudited) and 2009
4
Statements of Cash Flows – Six Months Ended July 31, 2010
and 2009
5
Notes to Consolidated Financial Statements .
6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations.
8
Item 3T
Controls and Procedures
16
PART II.
OTHER INFORMATION
Item 1.
Legal Proceedings.
18
Item 2.
Changes in Securities and Use of Proceeds.
18
Item 3.
Submission of Matters to a Vote of Security Holders.
18
Item 4.
Exhibits and Reports on Form 8-K.
18
Signature.
18


2
FINOTEC GROUP, INC.
CONSOLIDATED BALANCE SHEETS


U.S Dollars
July 31 ,
2010
January
31 , 2010
(Unaudited)
(Audited)
ASSETS
Current Assets
Cash and cash equivalents
1,332,261 4,803,767
Cash and cash equivalents held for customers
9,693,916 2,904,900
Prepaid and other current assets
1,169,847 228,311
Total Current Assets
12,196,024 7,936,978
Property and Equipment, Net
789,794 377,717
Total Assets
12,985,817 8,314,695
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses
1,271,290 1,051,354
Customers deposits
9,693,916 2,904,900
Provision for severance
287,241 291,483
Total current Liabilities
11,252,447 4,247,737
Stockholders' Equity
Common stock, $0.001 par value, 300,000,000 shares authorized,
121,030,936 shares issued and outstanding 121,031 121,031
Additional paid-in capital
13,223,250 13,223,250
Foreign currency translation adjustment
(474,095 ) (678,876 )
Accumulated Deficit
(11,136,815 ) (8,598,447 )
Total Stockholders' Equity
1,733,370 4,066,958
Total Liabilities and Stockholders' Equity
12,985,817 8,314,695

See accompanying notes to consolidated financial statements.
3

FINOTEC GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

Six months ended
Three months ended
July 31
July 31
July 31
July 31
2010
2009
2010
2009
U.S Dollars
U.S Dollars
(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)
Net Trading Revenue
1,265,757 1,288,471 710,027 601,645
Operating Expenses
General and Administrative
17,469 440,130 8,938 329,363
Salaries
1,530,961 1,475,340 770,813 958,358
Rent and office
252,990 0 130,333 0
Research and development
200,622 68,640 84,872 16,949
Technology and computer
122,195 168,914 6,925 13,906
Marketing
97,369 296,561 51,596 171,511
Professional fees
463,587 331,727 156,370 274,142
Financial data fees
267,191 79,716 220,309 60,458
Depreciation
171,207 118,282 88,926 61,248
Commodity set up costs
149,834 0 (17,656 ) 0
Other expense
147,726 34,843 49,571 (16,608 )
Total Operating Expenses
3,421,151 3,014,152 1,550,997 1,869,326
Operating Loss
(2,155,393 ) (1,725,682 ) (840,969 ) (1,267,681 )
Financing Expenses
(147,587 ) 292,666 (173,572 ) 425,177
Net Loss
(2,302,980 ) (1,433,016 ) (1,014,542 ) (842,504 )
Weighted average number of shares outstanding
121,030,936 103,812,936 121,030,936 121,030,936
Net Loss per common share
$ -0.02 $ -0.01 $ -0.01 $ -0.01
See accompanying notes to consolidated financial statements.
4
FINOTEC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


U.S Dollars
For the six months ended
July 31
July 31
2010
2009
(Unaudited)
(Unaudited)
Cash Flows from Operating Activities
Net Loss
(2,302,980 ) (1,836,725 )
Adjustment to reconcile Net Loss to
Net cash provided by Operating Activities
Depreciation
172,541 170,657
Changes in Operating Assets and Liabilities
Decrease (increase) in prepaid and other current assets
(941,536 ) (2,667,491 )
Increase in accrued expenses
219,935 (56,135 )
Increase in accrued severance payable
(4,242 ) (0 )
Increase (decrease) in customers deposits
6,789,016 (1,329,096 )
Net cash provided by (used in) Operating Activities
3,932,734 (5,641,237 )
Cash Flows from Investing Activities
Purchase of fixed Assets
(584,618 ) (98,295 )
Selling of fixed Assets
Net cash used in Investing Activities
(584,618 ) (98,295 )
Effect of Foreign Currency Translation
(30,609 ) 404,706
Net increase in Cash and Cash Equivalent
3,317,509 (2,240,041 )
Cash and Cash Equivalents- beginning of year
7,708,667 5,108,144
Cash and Cash Equivalents- Ending
11,026,176 2,868,103

5
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Summary of Significant Accounting Policies

Interim Financial Information

The accompanying un-audited consolidated financial statements of the Company (as defined below) should be read in conjunction with the consolidated financial statements and notes thereto filed with the U.S. Securities and Exchange Commission in the Company’s Annual Report on Form 10-KSB for the fiscal year ended January 31, 2010.  In the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the financial position of the Company and its consolidated subsidiaries at July 31, 2010, and the results of their operations and their cash flows for the six months ended July 31, 2010 and July 31, 2009.  The results of interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

Description of Business
Finotec Group, Inc. (“Finotec, Inc.), a Nevada corporation, is principally engaged, through its wholly-owned subsidiaries, in offering foreign currency market trading to professionals and retail clients over its web- based trading system and other professional trading systems.
Shares in Finotec began trading on the Over the Counter Bulletin Board listings. (OTCBB: FTGI).
Finotec Group's United Kingdom subsidiary, Finotec Trading UK, Limited(:”FTUK”), has been authorized by the UK’s Financial Services Authority (FSA) to act as a Market Maker, as defined by the FSA, in the United Kingdom. As of November 9, 2007, Finotec Trading UK, Limited, is approved by the FSA as a Market Maker and Principal, and thus Finotec Trading UK, Limited, may now offer UK clients certain regulated investment instruments such as Commodity Futures, Commodity options and options on commodity futures, Contract for Differences, Futures, Options, Rights to or interests in investments, Rolling spot Forex contracts, and Spread Bets.  As of February 2010, FTUK is approved by the FSA whereby FTUK is licensed and approved to carry out Fund Management Activities.
Risk Management
These Finotec Group activities give rise to risks which are monitored and managed as follows:
Credit Risk
Clients are required to deposit cleared funds as margin before they can trade. If the client margin falls below the minimum required to maintain a position, they will be notified that they are on margin call and can only reduce their positions or provide additional funds. At any time the client is on margin call, the company may, at its discretion, liquidate some or all of that client's positions in order to bring them back into line with their margin requirements .

The company also has potential credit risk exposure to market counterparties with which it hedges and with banks. The company has a defined risk appetite for exposure to each market counterparty and bank to which it has credit exposure.
The Company provides credit to selected Institutional Clients.
6

FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Liquidity risk

The company has significant net cash balances as at the balance sheet date and continually monitors its capital adequacy.
Foreign currency risk

The company has financial instruments which are denominated predominantly in US dollars. The gains and losses arising from the company's exposure are recognised in the profit and loss account.

Market price risk

Market risk arises from open contracts with customers and counterparties. Exposure to market risk is closely monitored in accordance with limits and reduced through hedging.

Principles of Consolidation
The consolidated financial statements include the accounts of Finotec Inc. and its wholly owned subsidiaries, Finotec Trading, Inc. (“Finotec Trading”) and its owned subsidiary, Finotec USA Inc., Fino Consulting Ltd, Finotec Trading UK Ltd, and Finotec Ltd’s 99.7% owned subsidiary, FinoLogic Ltd (formerly Forexcash Global Trading Ltd). (“Forexcash”) (collectively referred to as the “Company”, unless otherwise indicated).  All material inter company transactions and balances have been eliminated in consolidation.

Since the liabilities of FinoLogic Ltd exceed its assets, and the owner of the 0.3% minority interest has no obligation to supply additional capital, no minority interest has been recorded in the consolidated financial statements.
2. Property and Equipment

Property and equipment consist of the following :

Estimated
Useful
Life
July 31,
2010
January 31,
2010
years
(un-audited)
(audited)
Computer equipment
3 $ 797,053 $ 771,703
Purchased software
3 $ 491,168 $ 184,951
Office furniture and equipment
7 $ 613,337 $ 518,844
Leasehold improvements
10 $ 119,553 $ 0
Total Property and Equipment at Cost
$ 2,021,111 $ 1,475,498
Less accumulated depreciation and amortization
$ 1,231,317 $ 1,097,781
Property and Equipment - Net
$ 789,794 $ 377,717
7
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.
Legal Proceedings

In the normal course of business, a few Finotec clients have claims for alleged trading profits or losses that these clients are considered to due to them.  The current amounts in question are in no more than US$ 200,000. Finotec’s view is that there is in-sufficient basis for these claims

Management does not expect any of these claims to have a material effect on the Company's financial position or results of operations.
ISSUANCES OF EQUITY SECURITIES
On September 2, 2009, the Company entered into a definitive agreements for the sale of 17,218,000 Common Shares at a price of $0.25 per share. The shares of Common Stock sold in the private placement offering have not been registered under the Act and may not be offered or sold absent registration or an applicable exemption from such registration requirements. All such shares are subject as well to a registration rights agreement. The summary description of the financing described above does not purport to be complete and is qualified in its entirety by reference to the Stock Purchase Agreement filed as an Exhibit hereto.
On July 31st 2009, the Company entered into a definitive agreement for the sale of 11,111,111 Common Shares at a price of $0.18 per share as well as 2,780,000 Common Shares at a price of $0.25 per share. The shares of Common Stock sold in the private placement offering have not been registered under the Act and may not be offered or sold absent registration or an applicable exemption from such registration requirements. All such shares are subject as well to a registration rights agreement. The transaction closed on July 31st 2009.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements of Finotec Group, Inc. and its subsidiaries contained herein. The results of operations for an interim period are not necessarily indicative of results for the year, or for any subsequent period.


RESULTS OF OPERATIONS

THREE MONTHS ENDED JULY 31, 2010 AND 2009


NET TRADING REVENUE

Net trading revenue are comprised primarily of spread-based brokerage fees earned from our clients' brokerage transactions. Total net revenue from operations was $710,028 for the three months ended July 31, 2010, as compared to a net gain from operations of $601,645 for the three months ended July 31, 2009. This increase is attributable to a variety of factors, including the commencement of the institutional FX activities.

The Company had net losses of $1,014,542 for the three months ended July 31, 2010, as compared to a net loss of $842,504 for the three months ended July 31, 2009.
8

FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

OPERATING EXPENSES

Operating expenses were $1,550,997 for the three months ended July 31, 2010, as compared to $1,869,326 for the three months ended July 31, 2009. This decrease was due to the company’s continued effort to reduce its overhead costs.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s cash balance increase by $3,317,509 from a cash balance as of January 31, 2010 of
$ 7,708,667 to $11.026.175 as of July 31, 2010. This increase is primarily due increased customer deposits less trading losses.

Net cash provided by operating activities amounted to $3.932,734 for the six months ended July 31, 2010. This is due to an increase in customer deposits less trading losses.  It is noted that Market conditions remain difficult – mainly attributable to a variety of factors.

Future capital requirements and the adequacy of available funds will depend on numerous factors, increased revenues - including the successful commercialization of our the new business divisions , successful technology upgrades to our systems, products, competing technological and market developments, and the development of strategic alliances for the development and marketing of our products.

The Company has successfully launched its Institutional Forex Business and set up the infrastructure for the Institutional Commodity Business. More Information can be obtained on the web site www.finotrade.com Following the launch of these businesses; the Company will have sufficient funds to satisfy their cash requirements until July 2011 assuming monthly expenses of the Company at $500,000 and basic revenue generation in the amount of US$ 300,000 by the Company. The company expects to be in a break even position by 1q ’2011.

Furthermore, The Company is continuing its efforts to increase revenues will are centered on the following activities.

o
Expansion of  our market share in our retail FX, CFD activities
o
Expansion of the Institutional brokerage trading activity for the same products which was launched in April 2010.
o
.
On the technology side, the activities have been re-branded as under the FinoLogic Brand Name and the proposed activities are to “
o
Continue to improve the platform and solutions offered – Sky trader and Sky mobile
o
Continue to improve on the easy white label version of our retail margin trading solutions
o
Incorporate other trading platforms such as MT4 into its suite of products with intention on offering clients the choice of a selection of trading platforms


Finotec expects that it will take 3-6 months before the effect of the will show a positive impact on its cash flow and operations.

9

FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ISSUES, UNCERTAINTIES AND RISK FACTORS

The Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in this report should be read and evaluated together with the issues, uncertainties and risk factors relating to our business described below. While we have been and continue to be confident in our business and business prospects, we believe it is very important that anyone who reads this report consider the issues, uncertainties and risk factors described below, which include business risks relevant both to our industry and to us in particular. These issues, uncertainties and risk factors are not intended to be exclusive. This report also contains statements that are forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "believes," "plans," "estimates," "expects," "intends," "designed," "anticipates," "may," "will," "should," "could," "become," "upcoming," "potential," "pending," and similar expressions, if and to the extent used, are intended to identify the forward-looking statements. All forward-looking statements are based on current expectations and beliefs concerning future events that are subject to risks and uncertainties. Actual results may differ materially from the results suggested in this report. Factors that may cause or contribute to such differences, and our business risks and uncertainties generally, include, but are not limited to, the items described below, as well as in other sections of this report and in our other public filings and our press releases.


THERE ARE SEVERAL FACTORS THAT MAY CAUSE FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS, WHICH WOULD LIKELY RESULT IN SIGNIFICANT VOLATILITY IN OUR STOCK PRICE

Causes of such significant fluctuations may include, but are not limited to:

·
cash flow problems that may occur;
·
the quality and success of, and potential continuous changes in, sales or marketing strategies (which have undergone significant changes recently and are expected to continue to evolve) and the costs allocated to marketing campaigns and the timing of those campaigns;
·
the timing, completion, cost and effect of our development and launch of planned enhancements to the Finotec trading platform;
·
the size and frequency of any trading errors for which we ultimately suffer the economic burden, in whole or in part;
·
changes in demand for our products and services due to the rapid pace in which new technology is offered to customers in our industry;
·
demand of customers to transact business on our platform;
·
actions taken by our competitors, including new product introductions, fee schedules, pricing policies and enhancements;
·
costs or adverse financial consequences that may occur with respect to regulatory compliance or other regulatory issues, particularly relating to laws, rules or regulations that may be enacted with a   focus on the active trader market; and
·
General economic and market factors that affect active trading, including changes in the securities and financial markets.

10

FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

OUR SUCCESS IS DEPENDENT UPON OUR RECEIPT AND MAINTENANCE OF REGULATORY APPROVALS IN THE MAJOR CUSTOMER MARKETS AROUND THE WORLD.

The Company believes that its success, in large part, depends upon its ability to receive and retain regulatory approvals in the major markets around the world.  Such approvals both expand the variety of services which the Company can offer and bolster the Company’s reputation among potential customers.

In November 2007, Finotec UK received authorization from the FSA to offer certain financial services in the UK. In connection therewith, Finotec has received regulatory approval to offer cross border investment services in the various European countries, from its UK office. In order to retain its FSA authorization, the Company must comply with numerous requirements, including financial covenants as well as those related to its ongoing operations.  The Company’s failure to meet these ongoing obligations could lead to the loss of its FSA authorization which would have a material adverse effect on the Company and its operations.

WE MUST MAINTAIN POSITIVE BRAND NAME AWARENESS.

We believe that establishing and maintaining our brand names is essential to expanding business. We also believe that the importance of brand name recognition will increase in the future because of the growing number of online companies that will need to differentiate themselves. Promotion and enhancement of our brand names will depend largely on our ability to provide consistently high quality software and related technology. If we are unable to provide software and technology of comparable or superior quality to those of our competition, the value of our brand name may suffer.

THE INTERNATIONAL NATURE OF OUR BUSINESS ADDS ADDITIONAL COMPLEXITY AND RISKS TO OUR BUSINESS.

The nature of the foreign currency business brings us into contact with different countries and markets. We hope to expand further in international markets. Our international business may be subject to a variety of risks, including:

· market risk or loss of uncovered transactions;
· governmental regulation and political instability;
· collecting international accounts receivable and income;
· the imposition of barriers to trade and taxes; and
· difficulties associated with enforcing contractual obligations and intellectual property rights.

These factors may have a negative effect on any future international operations and may adversely affect our business and operations.

11

FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OUR INDUSTRY IS INTENSELY COMPETITIVE, WHICH MAKES IT DIFFICULT TO ATTRACT AND RETAIN CUSTOMERS

The markets for online brokerage services, client software and Internet-based trading tools, and real-time market data services are intensely competitive and rapidly evolving, and there has been substantial consolidation of those three products and services occurring in the industry. We believe that competition from large online brokerage firms and smaller brokerage firms focused on active traders, as well as consolidation, will substantially increase and intensify in the future. Competition may be further intensified by the size of the active trader market, We believe our ability to compete will depend upon many factors both within and outside our control. These include: price pressure; the timing and market acceptance of new products and services and enhancements developed by us and our competitors; the development and support of efficient, materially error-free Internet-based systems; product and service functionality; data availability and cost; clearing costs; ease of use; reliability; customer service and support; and sales and marketing decisions and efforts.

WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR PRESERVE OUR RIGHTS IN INTELLECTUAL PROPERTY

Our success is and will continue to be heavily dependent on proprietary technology, including existing trading-tool, Internet, Web-site and order-execution technology, and those types of technology currently in development. We view our technology as proprietary, and rely, and will be relying, on a combination of trade secret and trademark laws, nondisclosure agreements and other contractual provisions and technical measures to protect our proprietary rights. Policing unauthorized use of our products and services is difficult, however, and we may be unable to prevent, or unsuccessful in attempts to prevent, theft, copying or other unauthorized use or exploitation of our product and service technologies. There can be no assurance that the steps taken by us to protect (or defend) our proprietary rights will be adequate or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technologies or products and services.

THE NATURE OF OUR BUSINESS RESULTS IN POTENTIAL LIABILITY TO CUSTOMERS

Many aspects of the securities brokerage business, including online trading services, involve substantial risks of liability. In recent years there has been an increasing incidence of litigation involving the securities brokerage industry, including class action and other suits that generally seek substantial damages, including in some cases punitive damages. In particular, our proprietary order routing technology is designed to automatically locate, with immediacy, the best available price in completing execution of a trade triggered by programmed market entry and exit rules.

There are risks that the electronic communications and other systems upon which these products and services rely, and will continue to rely, or our products and services they, as a result of flaws or other imperfections in their designs or performance, may operate too slowly, fail or cause confusion or uncertainty to the user. Major failures of this kind may affect all customers who are online simultaneously. Any such litigation could have a material adverse effect on our business, financial condition, results of operations and prospects.
12
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONCERNS REGARDING SECURITY OF TRANSACTIONS AND TRANSMITTING CONFIDENTIAL INFORMATION OVER THE INTERNET MAY ADVERSELY AFFECT OUR E-COMMERCE BUSINESS

We believe that concern regarding the security of confidential information transmitted over the Internet, including, for example, business requirements, credit card numbers and other forms of payment methods, prevents many potential customers from engaging in online trading. If we do not add sufficient security features to future product releases, our services may not gain market acceptance or we may face additional legal exposure.

Despite the measures we have taken in the areas of encryption and password or other authentication software devices, our infrastructure, like others, is potentially vulnerable to physical or electronic break-ins, computer viruses, hackers or similar problems caused by employees, customers or other Internet users. If a person circumvents our security measures, that person could misappropriate proprietary information or cause interruptions in our operations. Security breaches that result in access to confidential information could damage our reputation and expose us to a risk of loss or liability. These risks may require us to make significant investments and efforts to protect against or remedy security breaches, which would increase the costs of maintaining our websites.

OUR E-COMMERCE CAPABILITY DEPENDS ON REAL-TIME ACCURATE PRODUCT INFORMATION

We may be responsible for loading information into our database and categorizing the information for trading purposes. This process entails a number of risks, including dependence on our suppliers both to provide us in a timely manner with accurate, complete and current information and to update this information promptly when it changes. If our suppliers do not provide us in a timely manner with accurate, complete and current information, our database may be less useful to our customers and users and may expose us to liability. We cannot guarantee that the information available in our database will always be accurate, complete and current or comply with governmental regulations either due to third-party or internal errors.

This could expose us to liability or result in decreased acceptance of our products and services, which could have a material and adverse affect on our business and operations. We are aware of cases in which the data provided to us by third parties has not been consistently accurate and, as a result of which, we have experienced customer dissatisfaction and lawsuits by customers.  In addition, our contracts with the third-party data suppliers must be renewed on a regular basis and the costs for such information may increase, with the Company having little or no negotiating influence in such a situation.

OUR MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE, AND WE MAY NOT BE ABLE TO KEEP UP WITH SUCH CHANGE IN A COST-EFFECTIVE WAY

The e-commerce market is characterized by rapid technological change and frequent new product announcements. Significant technological changes could render our existing technology obsolete. If we are unable to respond successfully to these developments or do not respond in a cost-effective way, our business and operations will suffer. To be successful, we must adapt to our rapidly changing market by continually improving the responsiveness, services and features of our products and services, by developing or acquiring new features to meet customer needs and by successfully developing and introducing new versions of our Internet-based e-commerce business software on a timely basis. The life cycles of the software used to support our e-commerce services are difficult to predict because the market for our e-commerce is new and emerging and is characterized by changing customer needs and industry standards.  The introduction of on-line products employing new technologies and industry standards could render our existing system obsolete and unmarketable. If a new software language becomes the industry standard, we may need to rewrite our software to remain competitive, which we may not successfully accomplish in a timely and cost-effective manner.
13

FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OUR MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE, AND WE MAY NOT BE ABLE TO KEEP UP WITH SUCH CHANGE IN A COST-EFFECTIVE WAY (CONTINUED)

In addition, as traffic in our e-commerce business increases, we may need to expand and upgrade our technology, transaction processing systems and network hardware and software. We may not be able to project accurately the rate of growth in our on-line businesses. We also may not be able to expand and upgrade our systems and network hardware and software capabilities to accommodate increased use of our on-line businesses, which would have a material and adverse affect on our business and operations.

An unexpected event, such as a power or telecommunications failure, fire or flood, or physical or electronic break-in at any of our facilities or those of any third parties on which we rely, could cause a loss of critical data and prevent us from offering services. If our hosting and information technology services were interrupted, including from failure of other parties' software that we integrate into our technology, our business and the businesses of our e-commerce marketplaces using these services would be disrupted, which could result in decreased revenues, lost customers and impaired business reputation for us and them. As a result, we could experience greater difficulty attracting new customers. A failure by us or any third parties on which we rely to provide these services satisfactorily would impair our ability to support the operations of our services and could subject us to legal claims.

In addition, to a large extent, the Company’s profits are dependent upon the operation of its internal risk management system.  There is no guarantee that such system will operate successfully in every eventuality.

LIMITED INTERNET INFRASTRUCTURE MAY AFFECT SERVICE .

The accelerated growth and increasing volume of Internet traffic may cause performance problems, slowing the adoption of our Internet-based services. The growth of Internet traffic due to very high volumes of use over a relatively short period of time has caused frequent periods of decreased Internet performance, delays and, in some cases, system outages. This decreased performance is caused by limitations inherent in the technology infrastructure supporting the Internet and the internal networks of Internet users. In addition, recently, there have been several instances of entire countries losing Internet access as a result of natural disasters or accidents. If Internet usage continues to grow rapidly, the infrastructure of the Internet and its users may be unable to support the demands of growing e-commerce usage, and the Internet's performance and reliability may decline. If our existing or potential customers experience frequent or continuing outages or delays on the Internet, the adoption or use of our Internet-based products and services may grow more slowly than we expect or even decline. Our ability to increase the speed and reliability of our Internet-based business model is limited by and depends upon the reliability of both the Internet and the internal networks of our existing and potential customers. As a result, if improvements in the infrastructure supporting both the Internet and the internal networks of our customers and suppliers are not made in a timely fashion, we may have difficulty obtaining new customers, or maintaining our existing customers, either of which could reduce our potential revenues and have a negative impact on our business and operations.

INTERNET GOVERNANCE, REGULATION AND ADMINISTRATION ARE UNCERTAIN AND MAY ADVERSELY AFFECT OUR BUSINESS.

The future success of our business is dependent on our ability to use the Internet to implement our e-commerce growth strategy. Because the original role of the Internet was to link the government's computers with academic institutions' computers, the Internet was historically administered by organizations that were involved in sponsoring research. Over time, private parties have assumed larger roles in the enhancement and maintenance of the Internet infrastructure. Therefore, it is unclear what organization, if any, will govern the administration of the Internet in the future, including the authorization of domain names.

The lack of an appropriate organization to govern the administration of the Internet infrastructure and the legal uncertainties that may follow pose risks to the commercial Internet industry and our specific website business.
14
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
INTERNET GOVERNANCE, REGULATION AND ADMINISTRATION ARE UNCERTAIN AND MAY ADVERSELY AFFECT OUR BUSINESS. (CONTINUED)

In addition, the effective operation of the Internet and our business is also dependent on the continued mutual co-operation among several organizations that have widely divergent interests, including the government, Internet service providers and developers of system software and software language. These organizations may find that achieving a consensus may become difficult, impossible, time-consuming and costly.

CHANGES IN THE REGULATORY ENVIRONMENT GOVERNING THE INTERNET, EITHER IN THE US OR ABROAD, COULD HAVE A SIGNIFICANT EFFECT ON OUR BUSINESS

We cannot predict whether or to what extent any new regulation affecting e-commerce will occur. New regulations could increase our costs or restrict our activities in a materially adverse manner. One or more states or countries may seek to impose sales tax collection obligations on out-of-state/foreign companies like ours that engage in or facilitate e-commerce. A successful assertion by one or more states or any foreign country that we should collect sales and other taxes on our system could increase costs that we could have difficulty recovering from users of our websites.

Governmental agencies and their designees regulate the acquisition and maintenance of web addresses generally. For example, in the United States, the National Science Foundation had appointed Network Solutions, Inc. as the exclusive registrar for the ".com," ".net" and ".org" generic top-level addresses. Although Network Solutions no longer has exclusivity, it remains the dominant registrar. The regulation of web addresses in the United States and in foreign countries is subject to change. As a result, we may not be able to acquire or maintain relevant web addresses in all countries where we conduct business that are consistent with our brand names and marketing strategy. Furthermore, the relationship between regulations governing website addresses and laws protecting trademarks is unclear.

WE MAY BE SUBJECT TO LEGAL LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER THE INTERNET

Our e-commerce businesses may be subject to legal claims relating to the content of our on-line websites, or the distribution of content. Providers of Internet products and services have been sued in the past, sometimes successfully, based on the content of material. The representations as to the origin and ownership of licensed content that we generally obtain may not adequately protect us.

In addition, we draw some of the content provided in our on-line business communities from data compiled by other parties. This data may have errors. If our content is improperly used or if we supply incorrect information, it could result in unexpected liability. Our insurance may not cover claims of this type or may not provide sufficient coverage. We are aware of cases in which the data provided to us by third parties has not been consistently accurate and, as a result of which, we have experienced customer dissatisfaction and lawsuits by customers.  Costs from these claims could damage our business and limit our financial resources. In addition, there can be no assurance that we will not make internal errors that could result in liability.


15
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ITEM 4T                  CONTROLS AND PROCEDURES
(a)     Evaluation of Disclosure Controls and Procedures
Management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), as of April 30, 2010. Based upon this evaluation, the Chief Executive Officer and s the Chief Financial Officer) has concluded that the Company’s disclosure controls and procedures were not effective as of January 31, 2010 due to the material weaknesses in internal control over financial reporting as described below.
There are material weaknesses in internal control over financial reporting as described below.
(b)  Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness represents a significant deficiency (as defined in the Public Company Accounting Oversight Board’s Auditing Standard No. 5), or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of January 31, 2010 based on the framework published by the Committee of Sponsoring Organizations of the Tread way Commission, Internal Control — Integrated Framework. Management has identified the following material weaknesses in the Company’s internal control over financial reporting as of January 31, 2010.


Material weaknesses identified in Finotec Group, Inc are as follows:

Audit Committee, Internal Audit and Entity Level Controls:

·
The Audit Committee is not fully active.
·
The internal controller /audit function is not fully active.
·
Management does perform a periodic check of the access rights of all users to ensure that their access is suitable to their positions and functions. Segregation rights still need be further fine-tuned.

Remediation Plan:
·
The Audit Committee will be fully activated.
·
The Company has appointed an internal controller / auditor who have commenced a review and enforcement of the required tasks. .
·
The CFO will extract from the information system an access list for all employees and ensure that each function, screen and field is suitable to the employee's job description.
·
The CFO will ensure that the access rights are adequately segregated.

16
FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ITEM 4T                  CONTROLS AND PROCEDURES (CONTINUED)


Information Technology:
·
The Company does have adequate permission and access right tables specifying group authorizations. Some employees have more authorizations than their role definition. There is an adequate authorization procedure.
·
The Company does have password complexity procedure. User passwords require complexity, and there is a requirement for password change.
·
No adequate formal system development, acquisition and program change policies and procedures exist for development/acquisitions of new systems and changes to existing systems.
·
The developers have access to the production.

Remediation Plan:
·
The Company will continue to examine and minimize user rights and will prepare permissions table and access rights that includes group permissions and prepare access to programs and data procedures.
·
The Company will update "Access to Programs and Data" procedure. Passwords to the database will be managed.
·
The Company will write a methodology for system development, acquisitions and change management.
·
The Company will prevent the developers from accessing the production environment.

Information Technology:
·
The passwords of accounts with privileged access are not limited or unique.
·
The Company does not have permission and access right table specifying group authorizations. Some employees have more authorizations than their role definition. There is no authorization procedure.
·
The same read-only password is valid for all the IT employees. There is no requirement to change the password within a limited period of time.
·
The Company does not have password complexity procedure. User passwords do not require any complexity, and there is no requirement for password change.
·
Segregation of duties is inadequate.
·
No Formal system development, acquisition and program change policies and procedures exist for development/acquisitions of new systems and changes to existing systems.
·
The developers have access to the production.

Remediation Plan:
·
Users and passwords will be unique and limited to all the systems.
·
The Company will examine and minimize user rights and will prepare permissions table and access rights that includes group permissions and prepare access to programs and data procedures.
·
The Company will apply a different user id/password for every employee. The Company will document each request and authorization. The Company will set an expiration date to each password upon creation.
·
The Company will prepare "Access to Programs and Data" procedure. Passwords to the database will be managed and complex.
·
The Company will create a formal position for Information Security role. IT manager and IT Security roles will be held by different employees. Development and testing will carried out by different employees. The Company will create a formal position for quality assurance manager is necessary.
·
The Company will write a methodology for system development, acquisitions and change management.
·
The Company will prevent the developers from accessing the production environment.


17

FINOTEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of business, a few Finotec clients have claims for alleged trading profits or losses that these clients are considered to due to them.  The current amounts in question are in no more than US$ 200,000. Finotec’s view is that is in-sufficient basis for these claims

Management does not expect any of these claims to have a material effect on the Company's financial position or results of operations.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(A) SALES OF UNREGISTERED SECURITIES

On September 2, 2009, the Company entered into definitive agreements for the sale of 17,218,000 Common Shares at a price of $0.25 per share. The shares of Common Stock sold in the private placement offering have not been registered under the Act and may not be offered or sold absent registration or an applicable exemption from such registration requirements. All such shares are subject as well to a registration rights agreement. The transaction closed on September 2nd 2009.

On July 31st 2009, the Company entered into a definitive agreement for the sale of 11,111,111 Common Shares at a price of $0.18 per share as well as 2,780,000 Common Shares at a price of $0.25 per share. The shares of Common Stock sold in the private placement offering have not been registered under the Act and may not be offered or sold absent registration or an applicable exemption from such registration requirements. All such shares are subject as well to a registration rights agreement. The transaction closed on July 31st 2009.

ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On July 16, 2008, a majority of the Company’s shareholders provided their written consent to increase the authorized capital of the Company from 100 million shares to 300 million shares of Common Stock.


ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K

(A) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:

31.1 Section 302 certification
31.2 Section 302 certification
32.1 Section 906 certification
32.2 Section 906 certification

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Finotec Group, Inc., Registrant
Date: October 4, 2010
/s/ Xavier Alexandre
Xavier Alexandre
Chief Executive Officer

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