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MERR > SEC Filings for MERR > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for MERRIMAN HOLDINGS, INC


15-May-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "may," "should," "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," "predicts," "potential" or "continue," variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are referred to risks and uncertainties identified under "Risk Factors" beginning on page 36 and elsewhere herein. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Numbers expressed herein may be rounded to thousands of dollars.

Overview

Merriman Holdings, Inc. (the Company) is a financial services holding company that provides capital markets services, corporate services, and investment banking through its wholly-owned operating subsidiary, Merriman Capital, Inc. (hereafter MC). MC is an investment bank and securities broker-dealer focused on fast growing companies and institutional investors. MC is registered with the Securities and Exchange Commission (SEC) as a broker-dealer and is a member of the Financial Industry Regulatory Authority (FINRA) and Securities Investor Protection Corporation (SIPC).

Our mission is to be the leader in advising, financing, trading and investing in fast-growing companies under $1 billion in market capitalization. We originate differentiated equity research, brokerage and trading services primarily to institutional investors, as well as investment banking and advisory services to our fast-growing corporate clients.

We are headquartered in San Francisco, with an additional office in New York, NY. As of March 31, 2013, we had 26 employees.

Executive Summary

Our total revenues were approximately $2,136,000 for the three months ended March 31, 2013 representing a 60% decrease over the same period in 2012. The decrease was primarily due to the Company's reorganizing and repositioning of its business segments, including the discontinuance of certain non-profitable businesses and reduction in force. Our commission revenues for the same period decreased 24% year-over-year due to fewer sales producers in 2013. Investment banking revenue decreased 91% year over year due to fewer banking transactions being closed as a result of the Company having fewer bankers. Principal transactions decreased 72% from the same period in 2012 primarily due to market volatility. Due to the Company's repositioning its business model to focus on capital markets advisory and platform revenue model, we saw a 54% increase in revenue in those areas.For the three months ended March 31, 2013, net loss was approximately$953,000 or $0.10 per share. Net loss for the three months ended March 31, 2012 included stock based compensation expense of approximately $1,717,000, of which $1,075,000 was due to option cancellation.

Liquidity/Going Concern

The Company incurred substantial losses during the first three months of 2013, having net losses of $953,000 and negative operating cash flows of approximately $1,269,000. As of March 31, 2013, the Company had an accumulated deficit of $145,870,000. These facts raise substantial doubt as to the Company's ability to continue as a going concern.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and do not include any adjustments that might result from uncertainty about the Company's ability to continue as a going concern.

Management's plan to alleviate the going-concern uncertainty includes, but is not limited to, the issuance of equity and debt instruments for working capital. The Company's continued existence is also dependent upon its ability to increase revenues generated from operations which will enable the Company to achieve a profitable level of operations.

If anticipated operating results are not achieved, management has the intent, and believes it has the ability, to further delay or reduce expenditures. In such case, the further reduction in operating expenses might need to be substantial. Failure to generate sufficient cash flows from operations, raise additional capital, or reduce certain discretionary spending would have a material adverse effect on the Company's ability to achieve its intended business objectives. The Company can give no assurance that it will be successful in its plans and can give no assurance that additional financing will be available on terms advantageous to the existing terms or that additional financing will be available at all. Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all of its operational activities and/or contemplate the sale of its assets if necessary.

On March 28, 2013, the Company issued 36,279,163 shares of common stock and 9,069,788 warrants for total proceeds of $1,088,375. In addition, the Company issued 40,333,331 shares of common stock and 19,249,998 warrants in connection with the conversion of $1,210,000 debt.

Results of Operations



The following table sets forth the results of operations for the three months
ended March 31, 2013 and 2012:



                                                    Three Months Ended
                                                31-Mar-13       31-Mar-12
Revenues
Commissions                                    $ 1,018,181     $  1,337,724
Principal transactions                             267,762          951,622
Investment banking                                 245,035        2,621,181
Advisory and other                                 605,239          391,989

Total revenues                                   2,136,217        5,302,516

Operating expenses
Compensation and benefits                        1,596,663        4,726,238
Brokerage and clearing fees                         86,348          158,267
Professional services                               73,029          271,583
Occupancy and equipment                            337,032          493,445
Communications and technology                      119,222          316,969
Depreciation and amortization                        4,257            5,283
Travel and entertainment                            60,176           75,542
Legal services                                      16,769          209,924
Cost of underwriting capital                        46,400          117,000
Other                                              324,942          415,585

Total operating expenses                         2,664,838        6,789,836

Operating loss                                    (528,621 )     (1,487,320 )

Other income                                             -           15,000
Interest income                                        784            1,234
Interest expense                                   (92,066 )        (69,264 )
Amortization of debt discount                      (39,674 )        (28,127 )
Loss on early extinguishment of debt              (293,347 )              -
Loss on equity exchange                                  -         (182,776 )

Net loss                                       $  (952,924 )   $ (1,751,253 )
Preferred stock cash dividend                            -          (42,061 )

Net loss attributable to common shareholders   $  (952,924 )   $ (1,793,314 )

Total revenues during the first quarter of 2013 decreased by approximately $3,166,000, or 60% compared to the same period in 2012. The decrease consisted of approximately $2,376,000, $684,000 and $319,000 decreases in investment banking revenues, principal transactions and commissions, respectively, partially offset by a $213,000 increase in other revenues.

The 54% increase in other revenues was primarily due to the expansion of our CMAG services as we sponsored more companies in the OTCQX Markets.

Investment Banking Revenue



The following table sets forth our revenue and transaction volumes from our
investment banking activities for the three months ended March 31, 2013 and
2012:



                                            Three Months Ended
                                       31-Mar-13         31-Mar-12
Revenue:
Capital raising                       $    151,635     $   1,507,581
Financial advisory                          93,400         1,113,600

Total investment banking revenue      $    245,035     $   2,621,181

Transaction Volumes:
Public offerings:
Capital underwritten participations   $ 21,000,000     $  24,600,000
Number of transactions                           1                 2
Private placements:
Capital raised                        $  1,000,000     $ 127,210,500
Number of transactions                           1                 2
Financial advisory:
Transaction amounts                   $          -     $ 125,000,000
Number of transactions                           1                 6

Investment banking revenue was approximately $245,000 or 11% of total revenues during the first quarter of 2013, representing a 91% decrease from the same quarter in 2012 due to fewer banking transactions being closed as a result of the Company having fewer bankers in 2013. Of the $245,000 investment banking revenue, approximately$73,000 was generated by FEP during the first quarter of 2013.

During the three months ended March 31, 2013, no investment banking client accounted for more than 10% of our total revenue.

Commission and Principal Transaction Revenue

Our broker-dealer activity includes the following:

Commissions - Commissions include revenue resulting from executing trades in exchange-listed securities, over-the-counter securities and other transactions as agent.

Principal Transactions - Principal transactions consist of a portion of dealer spreads attributed to our securities trading activities as principal in NASDAQ-listed and other securities, and include transactions derived from our activities as a market-maker. Additionally, principal transactions include gains and losses resulting from market price fluctuations that occur while holding positions in our securities trading inventory.

The following table sets forth our revenue and several operating metrics, which we utilize in measuring and evaluating performance of our trading activity:

                                                                   Three Months Ended
                                                              31-Mar-13         31-Mar-12

Commissions:
Institutional equities                                       $  1,018,181     $   1,337,724

Total commission revenue                                     $  1,018,181     $   1,337,724

Principal transactions:
Customer principal transactions, proprietary trading and
market making                                                $     41,568     $     203,118
Investment portfolio                                              226,194           748,504

Total principal transaction revenue                          $    267,762     $     951,622

Transaction Volumes:
Number of shares traded                                        48,609,730       111,547,491

Commission revenue was approximately $1,018,000 or 48% of total revenue during the first quarter of 2013, representing a $319,000 or 24% decrease from the same period in 2012. The decrease was due to lower trading volume as a result of the Company having fewer sales producers in 2013.

Principal transaction revenue consists of four different activities - customer principal trades, market making, and realized and unrealized gains and losses in our investment portfolio. As a broker-dealer, we account for all of our marketable security positions on a trading basis and as a result, all security positions are marked to fair market values. Returns from market making activities tend to be more volatile than acting as agent or principal for customers. For the three months ended March 31, 2013, principal transaction gains were approximately $268,000, consisting of a $226,000 gain on our investment portfolio and a $42,000 gain from customer principal transactions and proprietary trading and market making. For the same period in 2012, principal transaction gains were approximately $952,000, consisting of a $749,000 gain on our investment portfolio and a $203,000 gain from customer principal transactions and proprietary trading and market making.

During the first quarter of 2013 and 2012, there was no brokerage customer that accounted for more than 10% of our total revenue.

Compensation and Benefit Expenses

Compensation and benefit expenses represent the largest component of our operating expenses and includes incentive compensation paid to sales, trading, research and investment banking professionals, as well as discretionary bonuses, salaries and wages, and stock-based compensation. Incentive compensation varies primarily based on revenue production. Discretionary bonuses paid to investment bankers and research analysts vary with revenue production, but also include other qualitative factors and are determined by management. Salaries, payroll taxes and employee benefits vary based primarily on overall headcount.

The following table sets forth the major components of our compensation and benefits for the three months ended March 31, 2013 and 2012:

                                                                 Three Months Ended
                                                              31-Mar-13       31-Mar-12

Incentive compensation and discretionary bonuses             $   741,493     $ 1,966,196
Salaries and wages                                               536,515         727,736
Stock-based compensation                                         135,416       1,717,158
Payroll taxes, benefits and other                                183,239         315,148

Total compensation and benefits                              $ 1,596,663     $ 4,726,238

Cash compensation and benefits as a percentage of core
business revenue                                                      78 %            69 %

Total compensation and benefits were approximately $1,597,000 and $4,726,000 for the three months ended March 31, 2013 and 2012, respectively, a decrease of approximately $3,130,000 or 66%. Incentive compensation and discretionary bonuses decreased $1,225,000 or 62% as a direct result of lower commissions and banking revenues. Salaries and wages decreased $191,000 or 26% due to lower headcounts. As of March 31, 2013 and 2012, the Company had 26 and 34 employees, respectively. Stock-based compensation decreased $1,582,000 or 92% primarily due to the $1,075,000 option cancellation charge and $507,000 restricted stock grants made in March 2012. Payroll taxes and benefits' decrease of $132,000 or 42% directly correlated to lower compensation expenses.

Of the total compensation and benefits for the three months ended March 31, 2013 and 2012, $22,000 and $526,000 were for FEP personnel, respectively.

During the three month ended March 31, 2013, three sales professionals accounted for more than 10% of total revenue (approximately $969,000) and three customer accounted for more than 10% of total revenue (approximately $355,000). During the three month ended March 31, 2012, two sales professionals accounted for more than 10% of total revenue (approximately $978,000) and no customer accounted for more than 10% of total revenue.

Other Operating Expenses

Brokerage and clearing fees include trade processing expenses paid to our clearing broker, and execution fees paid to floor brokers and electronic communication networks. MC is a fully-disclosed broker-dealer which contracts a third party clearing broker to perform all of the clearance functions. The clearing broker-dealer processes and settles all of MC's customer transactions and maintains the detailed customer records. These expenses are almost entirely variable, and are based on commission revenue and trade volume. Brokerage and clearing fees decreased approximately $72,000 or 45% compared to 2012 as a direct result of decreases in trading volume and commission revenue.

Professional services expense includes audit, accounting fees and various consulting fees. Professional services expense decreased $199,000 or 73% compared to 2012 primarily due to the fact that there was number of consulting agreements which expired during the 1st quarter of 2012 and were not renewed.

Occupancy and equipment include rents and related costs of our office premises, equipment, software and leasehold improvements. Occupancy expense is largely fixed in nature while equipment expense can vary somewhat in relation to our business operations. Occupancy and equipment expenses decreased $156,000 or 32% compared to 2012 as a result of certain subleases that took effect in 2012.

Communications and technology expense includes market data and quote services, voice, data and internet service fees, and data processing costs. Communications and technology expense decreased $198,000 or 62% compared to 2012 due to headcount reduction and cancellation of certain services.

Depreciation and amortization relate to the depreciation of our fixed assets and amortization of leasehold improvements. Depreciation and amortization are mostly fixed in nature. The expenses were de-minimis in 2013 due to minimal fixed asset additions and the full depreciation of certain assets, reducing the depreciable asset base.

Travel and business development expenses include business development costs by our sales professionals, investment bankers and non-deal road show expenses. Non-deal road shows are meetings in which management teams of our corporate clients present directly to our institutional investors. The decrease of approximately $15,000 or 20% compared to 2012 was due to lower headcount, fewer deals closed and continued cost reduction measures.

Legal services and litigation settlement expenses relate to our ongoing litigations. The decrease of $193,000 or 92% compared to 2012 was due to the fact that most litigation was settled in 2012.

Cost of underwriting capital represents borrowing cost of capital to supplement MC's net capital to enable it to underwrite banking deals. Costs of underwriting capital decreased $71,000 or 60% compared to 2012 due to less banking deals closed in 2013.

The following expenses are included in other operating expenses for the three months ended March 31, 2013 and 2012:

                                                  31-Mar-13      31-Mar-12

Insurance                                         $  126,745     $  126,043
Regulatory & filing fees                              39,125         61,259
Provision for uncollectible accounts receivable      122,033         38,889
Investor conference                                        -        210,317
Other                                                 37,039        (20,923 )

Total other operating expenses                    $  324,942     $  415,585

Other operating expenses include insurance, regulatory & filing fees, provision for uncollectible accounts receivable, investor conference and other miscellaneous expenses. The decrease of approximately $91,000 or 22% compared to 2012 was due to (i) a decrease of $22,000 in regulatory & filing fees due to lower number of registered employees and lower revenue resulting in lower regulatory fee assessment, (ii) an increase of $83,000 in provision for uncollectible accounts receivable due to write-off of certain CMAG and banking receivables, (iii) a decrease of $210,000 in investor conference due to the fact that no investor conference was held in 2013, (iv) and a increase of $58,000 in other miscellaneous expenses primarily due to reduction in recruiting and commercial rent tax expenses in 2012.

Amortization of Debt Discounts

We issued various debts with stocks or warrants, for which total proceeds were allocated to individual instruments based on the relative fair values of each instrument at the time of issuance. The value of the stocks or warrants was recorded as discount on the debt and amortized over the term of the respective debt using the effective interest method.

For the three months ended March 31, 2013 and 2012, amortizations of debt discounts for the remaining debt and related warrants were $36,000 and $28,000, respectively.

Off-Balance Sheet Arrangements

We were not a party to any off-balance sheet arrangements during the three months ended March 31, 2013 and 2012. In particular, we do not have any interest in so-called limited purpose entities, which include special purpose entities and structured finance entities.

Commitments

Other Commitments

The following table summarizes our significant commitments as of March 31, 2013, consisting of future minimum lease payments under all non-cancelable operating leases and other non-cancelable commitments with initial or remaining terms in excess of one year.

                       Notes          Office        Operating
                      Payable         Leases          Leases          Total

             2013   $ 1,747,300     $   986,085     $  398,299     $  3,131,684
             2014       987,000         960,000        298,452        2,245,452
             2015       579,333         960,000         42,418        1,581,751
             2016             -         960,000              -          960,000
             2017             -       1,018,667              -        1,018,667
       Thereafter             -       2,645,333              -        2,645,333
Total Commitments     3,313,633       7,530,085        739,169       11,582,887
Interest               (453,633 )             -              -         (453,633 )
Net Commitments     $ 2,860,000     $ 7,530,085     $  739,169     $ 11,129,254

Critical Accounting Policies and Estimates

The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to the valuation of securities owned and deferred tax assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

Securities Owned

Corporate Equities - are comprised primarily of exchange-traded equity securities that the Company takes selective proprietary positions based on expectations of future market movements and conditions. They are generally valued based on quoted prices from the exchange. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized in Level 1 of the fair value hierarchy. Certain securities are traded infrequently and therefore do not have observable prices based on actively traded markets. These securities are classified as Level 3 securities, if pricing inputs or adjustments are both significant to the fair value measurement and unobservable. The Company determines the fair value of infrequently trading securities using the observed closing price at measurement date, discounted for the put option value calculated through the Black-Scholes model or similar valuation techniques.

Stock Warrants - represent warrants to purchase equity in a publicly traded company. Such positions are considered illiquid and do not have readily determinable fair values, and therefore require significant management judgment or estimation. For these securities, the Company uses the Black-Scholes valuation methodology or similar techniques. They are classified within Level 3 of the fair value hierarchy.

Underwriters' Purchase Options - represent the overallotment of units for a publicly traded company for which the Company acted as an underwriter. Such positions are considered illiquid and do not have readily determinable fair values, and therefore require significant management judgment or estimation. For these securities, the Company uses the Black-Scholes valuation methodology. They are classified within Level 3 of the fair value hierarchy.

Valuation of Securities Owned

Securities owned and securities sold, not yet purchased are reflected in the condensed consolidated statements of financial condition on a trade-date basis. Related unrealized gains or losses are generally recognized in principal transactions in the condensed consolidated statements of operations. The use of fair value to measure financial instruments is fundamental to our condensed consolidated financial statements and is one of our most critical accounting policies.

The fair value of a financial instrument is the amount 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 (the exit price). Instruments that we own (long positions) are marked to bid prices, and instruments that we have sold, but not yet purchased (short positions), are marked to offer prices. Fair value measurements are not adjusted for transaction costs. Fair values of our financial instruments are generally obtained from quoted market prices in active markets, broker or dealer price quotations, or alternative pricing sources with reasonable levels of price transparency. To the extent certain financial instruments trade infrequently or are non-marketable securities and, therefore, have little or no price transparency, we value these instruments based on management's estimates.

Substantially all of our financial instruments are recorded at fair value or contract amounts that approximate fair value. Securities owned and securities sold, not yet purchased, are stated at fair value, with any related changes in unrealized appreciation or depreciation reflected in principal transactions in the consolidated statements of operations. Financial instruments carried at contract amounts include cash and cash equivalents and amounts due from and to brokers, dealers and clearing brokers.

Stock-based Compensation Expense

The Company measures and recognizes compensation expense based on estimated fair values for all stock-based awards made to employees and directors, including stock options, restricted stock and warrants. The Company estimates fair value of stock-based awards on the date of grant using the Black-Scholes option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company's consolidated . . .

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