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

Show all filings for MERRIMAN HOLDINGS, INC

Form 10-Q for MERRIMAN HOLDINGS, INC


14-Nov-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, CA with an additional office in New York, NY. As of September 30, 2013, we had 30 employees.

Executive Summary

Our total revenues were approximately $1,929,000 and $6,391,000 for the three and nine months ended September 30, 2013, representing a 21% and 39% 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 nine months ended September 30, 2013, commission revenues decreased 38% and 29% year-over-year, respectively, due to fewer sales producers in 2013. Principal transactions decreased 67% and 78%, respectively, from the same periods in 2012 primarily due to market volatility. Investment banking revenues for the same periods increased 4% and decreased 67% year over year, respectively, due to fewer banking transactions being closed as a result of market condition and the Company having fewer bankers. For the nine months ended September 30, 2013, due to the Company's repositioning its business model to focus on capital markets advisory and platform revenue model, we saw a 15% increase in advisory and other revenues, respectively.

For the three and nine months ended September 30, 2013, net loss was approximately $1,215,000 and $3,477,000 or $0.01 and $0.04 per share, respectively. Net loss for the three and nine months ended September 30, 2013 included stock based compensation expenses of approximately ($22,000) and $548,000, respectively.

For the three and nine months ended September 30, 2012, net loss was approximately $1,095,000 and $5,521,000 or $0.25 and $1.01 per share, respectively. Net loss for the three months ended September 30, 2012 included stock based compensation expense of approximately $172,000. Net loss for the nine months ended September 30, 2012 included stock based compensation expense and loss on equity exchange of approximately $2,048,000 and $1,086,000, respectively.

Liquidity/Going Concern

The Company incurred substantial losses during the first nine months of 2013, having net losses of $3,477,000 and negative operating cash flows of approximately $3,536,000. As of September 30, 2013, the Company had an accumulated deficit of $148,394,000. 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. On September 16, 2013, the Company issued 2,333,332 shares of common stock at $0.06 per share and 583,332 warrants for total proceeds of $140,000.

Results of Operations

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

                                       Three Months Ended                 Nine Months Ended
                                 September 30,    September 30,    September 30,    September 30,
                                      2013             2012             2013             2012

Revenues
Commissions                      $    1,057,800   $    1,716,268   $    3,276,160   $    4,615,763
Principal transactions                 (96,157)        (294,326)         (60,779)        (277,428)
Investment banking                      484,650          468,010        1,546,344        4,690,879
Advisory and other                      483,041          569,555        1,629,559        1,415,138

Total revenues                        1,929,334        2,459,507        6,391,284       10,444,352

Operating expenses
Compensation and benefits             1,531,207        2,279,700        5,530,637        9,660,592
Brokerage and clearing fees              95,218          158,199          297,994          438,782
Professional services                   113,329           80,726          260,583          535,112
Occupancy and equipment                 358,058          420,746        1,051,354        1,307,823
Communication and technology            194,667          240,808          537,942          815,202
Depreciation and amortization            39,899            5,590           46,900           16,530
Travel and entertainment                 60,605          104,304          166,241          306,556
Legal services                          303,601          159,544          369,645          495,329
Cost of underwriting capital                  -                -           49,600          152,600
Other                                   328,115            9,971          895,618          901,475

Total operating expenses              3,024,699        3,459,588        9,206,514       14,630,001

Operating loss                      (1,095,365)      (1,000,081)      (2,815,230)      (4,185,649)

Other income                                  -                -                -           15,000
Interest income                               -                -            1,566            1,763
Interest expense                       (81,849)         (64,513)        (248,894)        (179,116)
Amortization of debt discount          (35,370)         (30,290)        (109,561)         (87,027)
Loss on early extinguishment
of debt                                       -                -        (293,347)                -
Loss on equity exchange                       -                -                -      (1,086,329)

Net loss before income tax          (1,212,584)      (1,094,884)      (3,465,466)      (5,521,358)
Income tax expense                      (2,737)                -         (11,999)                -

Net loss                         $  (1,215,321)   $  (1,094,884)   $  (3,477,465)   $  (5,521,358)

For the three and nine months ended September 30, 2013, total revenues decreased by approximately $530,000 and $4,053,000, or 21% and 39% as compared to the same periods in 2012, respectively.

For the three months ended September 30, 2013, the $530,000 decrease consisted of approximately $658,000 and $87,000 decreases in commissions and advisory and other revenues, respectively, partially offset by $198,000 and $17,000 increases in principal transactions and investment banking revenues, respectively. For the nine months ended September 30, 2013, the $4,053,000 decrease consisted of approximately $1,340,000 and $3,144,000 decreases in commissions and investment banking revenues, respectively, partially offset by $217,000 and $214,000 increases in principal transactions and other revenues, respectively.

Investment Banking Revenue

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

                                         Three Months Ended September 30,          Nine Months Ended September 30,
                                            2013                  2012                2013                 2012
Revenue:
Capital raising                       $         355,150    $          336,843   $      1,315,116    $        3,440,112
Financial advisory                              129,500               131,167            231,228             1,250,767

Total investment banking revenue      $         484,650    $          468,010   $      1,546,344    $        4,690,879

Transaction Volumes:
Public offerings:
Capital underwritten participations   $               -    $        8,550,000   $     93,500,000    $       54,350,005
Number of transactions                                -                     1                  4                     5
Private placements:
Capital raised                        $       2,384,120    $       89,000,000   $     55,000,000    $      272,210,500
Number of transactions                                2                     1                  6                     7
Financial advisory:
Transaction amounts                   $               -    $                -   $              -    $      125,000,000
Number of transactions                                3                     1                  3                     7

For the three and nine months ended September 30, 2013, investment banking revenues were approximately $485,000 and $1,546,000 or 25% and 24% of total revenues, representing a 4% increase and 67% decrease from the same periods in 2012, respectively. The slight 4% increase was due to the timing of the deal closing whereas the 67% decrease was due to the Company completing fewer deals in 2013 as a direct result of market conditions and the Company having fewer bankers in 2013.

For the three and nine months ended September 30, 2013, investment banking revenues generated by FEP associates were $234,000 and $805,000, respectively.

During the three and nine months ended September 30, 2013, there was no investment banking client who accounted for more than 10% of our total revenues.

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 September 30,        Nine Months Ended September 30,
                                           2013                 2012                2013                2012

Commissions:
Institutional equities               $       1,057,800    $       1,716,268   $       3,276,160    $    4,615,763
Total commission revenue             $       1,057,800    $       1,716,268   $       3,276,160    $    4,615,763

Principal transactions:
Customer principal transactions,
proprietary
trading and market making            $        (72,904)    $          10,179   $          21,607    $    (129,993)
Investment portfolio                          (23,253)            (304,505)            (82,386)         (147,435)

Total principal transaction
revenue                              $        (96,157)    $       (294,326)   $        (60,779)    $    (277,428)

Transaction Volumes:
Number of shares traded                     57,653,829           93,801,235         149,573,579       294,786,836

For the three and nine months ended September 30, 2013, commission revenues were approximately $1,058,000 and $3,276,000 or 55% and 51% of total revenue, respectively, representing a $658,000 and $1,340,000 or 38% and 29% decrease from the same periods in 2012, respectively. The decreases were due the Company having fewer sales producers in 2013 and hence lower trading volume.

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 September 30, 2013, principal transaction losses were approximately $96,000 which consisted of a $23,000 loss on our investment portfolio and a $73,000 loss from customer principal transactions and proprietary trading and market making. For the nine months ended September 30, 2013, principal transaction losses were approximately $61,000 which consisted of a $83,000 loss on our investment portfolio, partially offset by a $22,00 gain from customer principal transactions and proprietary trading and market making.

During the three and nine months ended September 30, 2013, there was one 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 and nine months ended September 30, 2013 and 2012:

                                          Three Months Ended September 30,              Nine Months Ended September 30,
                                            2013                    2012                  2013                   2012

Incentive compensation and
  discretionary bonuses               $         954,005       $       1,193,571     $      2,879,860       $      4,765,579
Salaries and wages                              459,688                 710,649            1,585,941              2,152,912
Stock-based compensation                       (21,682)                 171,604              548,198              2,048,313
Payroll taxes, benefits and other               139,196                 203,876              516,638                693,788

Total compensation and benefits       $       1,531,207       $       2,279,700     $      5,530,637       $      9,660,592

Cash compensation and benefits as a
percentage of core business revenue                  77 %                    77 %                 77 %                   71 %

For the three months ended September 30, 2013 and 2012, total compensation and benefits were approximately $1,531,000 and $2,280,000, respectively, a decrease of approximately $748,000 or 33%. Incentive compensation and discretionary bonuses decreased $239,000 or 20% as a direct result of lower commissions and banking revenues. Salaries and wages decreased $251,000 or 35% due to lower headcounts and more employees are commissioned based. Stock-based compensation decreased $193,000 or 113% due to a large number of options were granted in June 2013 with immediate vesting. Payroll taxes and benefits' decrease of $65,000 or 32% directly correlated to lower compensation expenses.

For the nine months ended September 30, 2013 and 2012, total compensation and benefits were approximately $5,531,000 and $9,661,000, respectively, a decrease of approximately $4,130,000 or 43%. Incentive compensation and discretionary bonuses decreased $1,886,000 or 40% as a direct result of lower commissions and banking revenues. Salaries and wages decreased $567,000 or 26% due to lower headcounts and more employees are commissioned based. Stock-based compensation decreased $1,500,000 or 73% due to the $1,075,000 option forfeiture charge expense in 2012. Payroll taxes and benefits' decrease of $177,000 or 26% directly related to lower compensation expenses.

As of September 30, 2013 and 2012, the Company had 30 and 35 employees, respectively.

For the three and nine months ended September 30, 2013, of the total compensation and benefits, $312,000 and $558,000 were for FEP associates, respectively. For the three and nine months ended September 30, 2012, the amounts were $210,000 and $1,013,000 respectively.

During the three and nine months ended September 30, 2013, one and two sales professionals accounted for more than 10% of total revenue (approximately $684,000 and $2,426,000, respectively) and one customer accounted for more than 10% of total revenue (approximately $217,000 and $731,000, respectively). During the three and nine months ended September 30, 2012, three and one sales professionals accounted for more than 10% of total revenue (approximately $1,545,000 and $1,670,000, respectively) 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. For the three and nine months ended September 30, 2013, brokerage and clearing fees decreased $63,000 and $141,000 or 40% and 32%, respectively, as compared to the same periods in 2012 due to reduction in trading volume.

Professional services expense includes audit, accounting fees and various consulting fees. For the three months ended September 30, 2013, professional services expense increased $33,000 or 40% as compared to the same period in 2012 due to the Company using outside consultants to upgrade its computer and phone systems. For the nine months ended September 30, 2013, professional services expense decreased $275,000 or 51% as compared to the same period in 2012 primarily due to a number of consulting agreements expiring in 2012 which more than offset the increase in the three months ended September 30, 2013.

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. For the three and nine months ended September 30, 2013, occupancy and equipment expenses decreased $63,000 and $256,000 or 15% and 20%, respectively, as compared to the same periods in 2012 due to more subtenants being procured.

Communications and technology expense includes market data and quote services, voice, data and internet service fees, and data processing costs. For the three and nine months ended September 30, 2013, communications and technology expense decreased $46,000 and $277,000 or 19%, respectively, as compared to the same periods in 2012 due to headcount reduction and cancellation of certain services as part of the Company's cost reduction measures.

Depreciation and amortization expenses relate to the depreciation of our fixed assets and amortization of leasehold improvements and are mostly fixed in nature. For the three and nine months ended September 30, 2013, depreciation expenses increased $34,000 and $30,000, respectively, as compared to the same periods in 2012 due to certain capital leases were entered into during the third quarter of 2013. Depreciation expenses in 2012 were de-minimis since the majority of the fixed assets were fully depreciated and the additions were minimal, thus significantly 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. For the three and nine months ended September 30, 2013, travel and entertainment expenses decreased approximately $44,000 and $140,000 or 42% and 46 %, respectively, as compared to the same periods in 2012 due to lower headcount, fewer deals closed and continued cost reduction measures.

Legal services and litigation settlements relate to our ongoing litigations. For the three months ended September 30, 2013, legal services and litigation settlements increased $144,000 and decreased $126,000 or 90% and 25%, respectively, as compared to the same periods in 2012 due to a settlement reached in August 2013, more than offset by reduction in legal fees since the number of litigations had significantly decreased.

Cost of underwriting capital represents borrowing cost of capital to supplement MC's net capital to enable it to underwrite banking deals. For the three months ended September 30, 2013, no costs of underwriting capital were incurred due to the fact that the banking deals closed did not require underwriting capital. For the nine months ended September 30, 2013, costs of underwriting capital decreased $103,000 or 68% as compared to the same period in 2012 due to fewer banking deals closed and of the deals closed, fewer required underwriting capital

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

                                         Three Months Ended September 30,         Nine Months Ended September 30,
                                           2013                 2012                2013                 2012

Insurance                             $       130,170    $           126,980   $       387,070    $          378,306
Regulatory & filing fees                       35,527                 48,945           124,348               156,978
Provision for uncollectible
accounts receivable                           106,525               (35,000)           228,558               245,275
Investor conference                                 -                      -                 -               210,317
Recruiting                                      9,000                      -             9,000             (111,500)
Other                                          46,893              (130,954)           146,642                22,099

  Total other operating expenses      $       328,115    $             9,971   $       895,618    $          901,475

Other operating expenses include insurance, regulatory & filing fees, provision for uncollectible accounts receivable, investor conference and other miscellaneous expenses.

For the three months ended September 30, 2013, other operating expenses increased $318,000 as compared to the same period in 2012 due to a $140,000 increase in write-off of receivables deemed uncollectible and a $178,000 increase in miscellaneous other expenses. For the nine months ended September 30, 2013, other operating expenses decreased $6,000 as compared to the same period in 2012 due to (i) a $120,000 increase in recruiting due to a reversal of the fees in 2012, (ii) a $125,000 increase in miscellaneous other expenses, mostly offset by (iii) a $210,000 decrease in investor conference due to the fact that no conference was held in 2013, and (iv) a $41,000 decrease in insurance, regulatory & filing fees and provision for uncollectible accounts receivable.

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 and nine months ended September 30, 2013, amortizations of debt discounts for the remaining debt and related warrants were $35,000 and $110,000, respectively.

Off-Balance Sheet Arrangements

We were not a party to any off-balance sheet arrangements during the three and nine months ended September 30, 2013. In particular, we do not have any interest . . .

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