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MERR > SEC Filings for MERR > Form 10-Q on 14-Aug-2013All Recent SEC Filings

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Form 10-Q for MERRIMAN HOLDINGS, INC


14-Aug-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 platform company that provides capital markets advisory and research, 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 whose clients are fast growing public and private companies and the entrepreneurs that manage those companies. 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 June 30, 2013, we had 31 employees.

MERRIMAN HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

(unaudited)

Executive Summary

Our total revenues were approximately $2,326,000 and $4,462,000 for the three and six months ended June 30, 2013, representing a 13% and 44% 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.

For the three and six months ended June 30, 2013, commission revenues decreased 23% and 23% year-over-year, respectively, due to fewer sales producers in 2013. Principal transactions improved 75% and 109%, respectively, from the same periods in 2012 primarily due to improved market condition. Investment banking revenues for the same periods decreased 49% and 75% year over year, respectively, due to fewer banking transactions being closed as a result of the Company having fewer bankers. For the three and six months ended June 30, 2013, due to the Company's repositioning its business model to focus on capital markets advisory and platform revenue model, we saw a 19% and 36% increase in advisory and other revenues, respectively.

For the three and six months ended June 30, 2013, net loss was approximately $1,309,000 and $2,262,000 or $0.01 and $0.04 per share, respectively. Net loss for the three and six months ended June 30, 2013 included stock based compensation expenses of approximately $435,000 and $570,000, respectively.

For the three and six months ended June 30, 2012, net loss was approximately $2,675,000 and $4,426,000or $0.48 and $0.78 per share, respectively. Net loss for the three months ended June 30, 2012 included stock based compensation expense and loss on equity exchange of approximately $160,000 and $904,000, respectively. Net loss for the six months ended June 30, 2012 included stock based compensation expense and loss on equity exchange of approximately $1,877,000 and $1,086,000, respectively.

Liquidity/Going Concern

The Company incurred substantial losses during the first six months of 2013, having net losses of $2,262,000 and negative operating cash flows of approximately $1,921,000. As of June 30, 2013, the Company had an accumulated deficit of $147,179,000. 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 and April 26, 2013, the Company issued 60,745,824 shares of common stock at $0.03 per share and 15,186,454 warrants for total proceeds of $1,822,375. In addition, the Company issued 40,333,331 shares of common stock at $0.03 per share and 19,249,998 warrants in connection with the conversion of $1,210,000 debt.

MERRIMAN HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

(unaudited)

Results of Operations



The following table sets forth the results of operations for the three and six
months ended June 30, 2013 and 2012:



                                             Three Months Ended                 Six Months Ended
                                          June 30,         June 30,         June 30,         June 30,
                                            2013             2012             2013             2012

Revenues
Commissions                             $  1,200,179     $  1,561,771     $  2,218,360     $  2,899,495
Principal transactions                      (232,384 )       (934,724 )         35,378           16,898
Investment banking                           816,660        1,601,688        1,061,695        4,222,869
Advisory and other                           541,279          453,594        1,146,518          845,583

Total revenues                             2,325,734        2,682,329        4,461,951        7,984,845

Operating expenses
Compensation and benefits                  2,402,768        2,654,654        3,999,430        7,380,892
Brokerage and clearing fees                  116,429          122,316          202,777          280,583
Professional services                         74,225          182,803          147,255          454,386
Occupancy and equipment                      356,263          393,632          693,296          887,077
Communication and technology                 224,054          257,425          343,275          574,394
Depreciation and amortization                  2,743            5,657            7,000           10,940
Travel and entertainment                      45,459          126,709          105,636          202,252
Legal services                                49,275          125,860           66,044          335,784
Cost of underwriting capital                   3,200           35,600           49,600          152,600
Other                                        251,822          475,921          576,764          891,505

Total operating expenses                   3,526,238        4,380,577        6,191,077       11,170,413

Operating loss                            (1,200,504 )     (1,698,248 )     (1,729,126 )     (3,185,568 )

Other income                                       -                -                -           15,000
Interest income                                  775            3,745            1,559            4,978
Interest expense                             (74,972 )        (48,556 )       (167,038 )       (117,819 )
Amortization of debt discount                (34,518 )        (28,609 )        (74,192 )        (56,736 )
Loss on early extinguishment of debt               -                -         (293,347 )              -
Loss on equity exchange                            -         (903,553 )              -       (1,086,329 )

Net loss                                $ (1,309,219 )   $ (2,675,221 )   $ (2,262,144 )   $ (4,426,474 )

Total revenues during the second quarter of 2013 decreased by approximately $357,000, or 13% compared to the same period in 2012. The decrease consisted of approximately $362,000 and $785,000 decreases in commissions and investment banking revenues, respectively, partially offset by $702,000 and $88,000 increases in principal transactions and other revenues, respectively.

The 19% increase in other revenues was primarily due to the expansion of our CMAG services as we sponsored more companies in the OTCQX Markets.

MERRIMAN HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

(unaudited)

Investment Banking Revenue



The following table sets forth our revenue and transaction volumes from our
investment banking activities for the three months ended June 30, 2013 and 2012:



                                          Three Months Ended June 30,          Six Months Ended June 30,
                                             2013               2012             2013             2012
Revenue:
Capital raising                         $       808,332     $  1,595,688     $    959,967     $   3,103,269
Financial advisory                                8,328            6,000          101,728         1,119,600

Total investment banking revenue        $       816,660     $  1,601,688     $  1,061,695     $   4,222,869

Transaction Volumes:
Public offerings:
Capital underwritten participations     $    72,500,000     $ 21,200,005     $ 93,500,000     $  45,800,005
Number of transactions                                3                2                4                 4
Private placements:
Capital raised                          $    41,615,880     $ 56,000,000     $ 42,615,880     $ 183,210,500
Number of transactions                                3                4                4                 6
Financial advisory:
Transaction amounts                     $             -     $          -     $          -     $ 125,000,000
Number of transactions                                -                -                -                 6

Investment banking revenue was approximately $817,000 or 35% of total revenues during the second quarter of 2013, representing a 49% 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 $817,000 investment banking revenue, approximately$344,000 was generated by FEP during the second quarter of 2013.

During the three months ended June 30, 2013, two investment banking clients accounted for more than 10% of our total revenues.

MERRIMAN HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

(unaudited)

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 June 30,          Six Months Ended June 30,
                                             2013               2012             2013             2012

Commissions:
Institutional equities                  $     1,200,179     $  1,561,771     $  2,218,360     $   2,899,495

Total commission revenue                $     1,200,179     $  1,561,771     $  2,218,360     $   2,899,495

Principal transactions:
Customer principal transactions,
proprietary trading and market making   $        52,943     $   (343,289 )   $     94,511     $    (140,171 )
Investment portfolio                           (285,327 )       (591,435 )        (59,133 )         157,069

Total principal transaction revenue     $      (232,384 )   $   (934,724 )   $     35,378     $      16,898

Transaction Volumes:
Number of shares traded                      43,310,020       89,438,110       91,919,750       200,985,601

Commission revenue was approximately $1,200,000 or 52% of total revenue during the second quarter of 2013, representing a $362,000 or 23% 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 June 30, 2013, principal transaction losses were approximately $232,000, consisting of a $285,000 loss on our investment portfolio, partially offset by a $53,000 gain from customer principal transactions and proprietary trading and market making. For the same period in 2012, principal transaction losses were approximately $935,000, consisting of a $592,000 loss on our investment portfolio and a $343,000 loss from customer principal transactions and proprietary trading and market making.

During the second quarter of 2013 and 2012, there was one brokerage customer that accounted for more than 10% of our total revenue.

MERRIMAN HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

(unaudited)

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 June 30, 2013 and 2012:

                                          Three Months Ended June 30,          Six Months Ended June 30,
                                             2013               2012              2013             2012

Incentive compensation and
discretionary bonuses                   $     1,184,363      $ 1,605,812     $    1,925,855     $ 3,572,008
Salaries and wages                              589,737          714,528          1,126,252       1,442,264
Stock-based compensation                        434,464          159,551            569,881       1,876,709
Payroll taxes, benefits and other               194,204          174,763            377,442         489,911

Total compensation and benefits         $     2,402,768      $ 2,654,654     $    3,999,430     $ 7,380,892

Cash compensation and benefits as a
percentage of core business revenue                  77 %             69 %               77 %            69 %

Total compensation and benefits were approximately $2,403,000 and $2,655,000 for the three months ended June 30, 2013 and 2012, respectively, a decrease of approximately $252,000 or 9%. Incentive compensation and discretionary bonuses decreased $421,000 or 26% as a direct result of lower commissions and banking revenues. Salaries and wages decreased $125,000 or 17% due to lower headcounts. As of June 30, 2013 and 2012, the Company had 31 and 35 employees, respectively. Stock-based compensation increased $275,000 or 172% due to a large number of options were granted in June 2013 with immediate vesting. Payroll taxes and benefits' decrease of $19,000 or 11% directly correlated to lower compensation expenses.

Of the total compensation and benefits for the three months ended June 30, 2013 and 2012, $215,000 and $276,000 were for FEP personnel, respectively.

During the three month ended June 30, 2013, two sales professionals accounted for more than 10% of total revenue (approximately $978,000) and one customer accounted for more than 10% of total revenue (approximately $411,000). During the three month ended June 30, 2012, three sales professionals accounted for more than 10% of total revenue (approximately $1,214,000) and no customer accounted for more than 10% of total revenue.

MERRIMAN HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

(unaudited)

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. For the three months ended June 30, 2013, brokerage and clearing fees remained flat as compared to the same period in 2012.

Professional services expense includes audit, accounting fees and various consulting fees. Professional services expense decreased $109,000 or 59% compared to 2012 primarily due to the fact that there was number of consulting agreements which expired in 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 $37,000 or 9% 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 $33,000 or 13% 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 $81,000 or 64% 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 $77,000 or 61% 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 $32,000 or 91% compared to 2012 due to the fact that the banking deals closed in the second quarter of 2013 did not require underwriting capital.

The following expenses are included in other operating expenses for the three and six months ended June 30, 2013 and 2012:

                                            Three Months Ended June 30,            Six Months Ended June 30,
                                             2013                 2012              2013               2012

Insurance                               $      130,155       $      125,283     $     256,900       $   251,326
Regulatory & filing fees                        49,696               46,775            88,821           108,034
Provision for uncollectible accounts
receivable                                           -              241,386           122,033           280,275
Investor conference                                  -                    -                 -           210,317
Other                                           71,971               62,477           109,010            41,553

Total other operating expenses          $      251,822       $      475,921     $     576,764       $   891,505

Other operating expenses include insurance, regulatory & filing fees, provision for uncollectible accounts receivable, investor conference and other miscellaneous expenses. The decrease of approximately $233,000 or 49% compared to 2012 was mostly due the fact that there was no receivables were reserved for during the second quarter of 2013.

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 June 30, 2013 and 2012, amortizations of debt discounts for the remaining debt and related warrants were $35,000 and $29,000, respectively.

Off-Balance Sheet Arrangements

We were not a party to any off-balance sheet arrangements during the three months ended June 30, 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 June 30, 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   $ 1,718,300     $   820,056     $  394,144     $  2,932,500
             2014       987,000         960,000        302,450        2,249,450
             2015       579,333         960,000         42,410        1,581,743
             2016             -         960,000              -          960,000
             2017             -       1,018,667              -        1,018,667
       Thereafter             -       2,645,333              -        2,645,333
Total Commitments     3,284,633       7,364,056        739,004       11,387,693
Interest               (424,633 )             -              -         (424,633 )
Net Commitments     $ 2,860,000     $ 7,364,056     $  739,004     $ 10,963,060

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 . . .

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