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MERR > SEC Filings for MERR > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for MERRIMAN HOLDINGS, INC

Form 10-K for MERRIMAN HOLDINGS, INC


31-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto in Part II, Item 8 to this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations. Actual results and the timing of events may differ significantly from those projected in forward- looking statements due to a number of factors, including those set forth in Item 1A "Risk Factors" of this Annual Report on Form 10-K.

Overview

Merriman Holdings, Inc. and subsidiaries (the Company) is a financial services holding company that provides capital markets advisory and research, corporate and investment banking services 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 who 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 recognize that there is an opportunity to build an institutional quality, fully compliant platform to streamline the incredibly inefficient process of fundraising for and advising emerging companies. In the fourth quarter, we launched the Digital Capital Network, an online capital marketplace. We are now a financial technology company focused on taking a significant role in changing how high growth emerging public and private companies are funded.

We are headquartered in San Francisco, with an additional office in New York, NY. As of December 31, 2013, we had 29 employees.

Executive Summary

Our total revenues in 2013 decreased 23% to approximately $9,960,000 due to a 32% and 28% decrease in our commission and investment banking revenues, respectively, partially offset by a 60% and 11% increase in our principal transaction revenue and capital markets advisory fees, respectively. Net loss for 2013 was 42% less than that of 2012. Our net cash used in operating activities decreased by approximately $2,096,000 primarily due to a reduction in net operating loss.

Commissions - Commission revenue from institutional brokerage business decreased by 32% to $4,202,000 in 2013 from $6,200,000 in 2012. The decrease was primarily because we had fewer producers in 2013. The brokerage business continues to face increasing challenges, including the proliferation of electronic communication networks which have reduced commission rates and profitability in the brokerage industry. Many large investment banks have responded to lower margins within their equity brokerage divisions by reducing research coverage, particularly for smaller companies, consolidating sales and trading services, and reducing headcount of sales and trading professionals.

Principal Transactions - Principal transactions resulted in a $215,000 loss in 2013, 60% less than the $535,000 loss in 2012 mostly due to market performance. Principal transaction revenue consists of customer principal trades, profits from our market making and proprietary trading activities, and unrealized gain/(loss) on trading inventory and securities received in connection with certain investment banking transactions.

Our marketable security positions are accounted for on a trade date basis and marked to market value daily. Returns from market making and proprietary trading activities tend to be more volatile than those from customer agency and principal activities.

Investment Banking - Our investment banking revenues, including FEP's, decreased 28% to $3,887,000 in 2013 from $5,372,000 in 2012. The decrease is comprised of a $1,985,000 or 51% decrease in investment banking revenues partially offset by a $500,000 or 34% increase in FEP's revenues. Decrease in investment banking revenues was primarily due to the decrease in number of deals closed. There was only one large deal (over $250,000 in fees and excluding FEP's) closed in 2013 versus 4 in 2012.

Other Revenues - During 2007, MC began offering services to sponsor companies on the Domestic and International OTCQX markets. This offering has been designed to enable domestic and non-U.S. companies to obtain greater exposure to U.S. institutional investors without the expense and regulatory burdens of listing on traditional U.S. exchanges. The Domestic and International OTCQX market tiers do not require full SEC registration or Sarbanes Oxley compliance. Listing on the market requires the sponsorship of a qualified investment bank called a Designated Advisor for Disclosure (DAD) for domestic companies or a Principal American Liaison (PAL) for non-U.S. companies. MC was the first U.S. investment bank to achieve DAD and PAL designations. Revenues earned from these activities increased 11% to $2,086,000 in 2013 from $1,882,000 in 2012..

Employees -At December 31, 2013 and 2012, the Company had 29 and 32 employees, respectively.

Business Developments - We continue to invest in business areas that we believe will increase the awareness of our franchise and contribute to future revenue opportunities such as hosting investor conferences, introducing management teams of fast-growing companies to institutional investors, marketing, and other business development activities. We continue to implement cost cutting measures in 2012. We expect significant improvements in our operating results to be primarily driven by increases in our various revenue sources.

Results of Operations

The following table sets forth the results of operations for the years ended December 31, 2013 and 2012:

                                                         Year Ended December 31,
                                                          2013             2012

   Revenues
   Commissions                                        $  4,201,980     $  6,199,912
   Principal transactions                                 (215,347 )       (535,458 )
   Investment banking                                    3,887,147        5,372,046
   Advisory and other                                    2,086,127        1,882,485

   Total revenues                                        9,959,907       12,918,985

   Operating expenses
   Compensation and benefits                             8,024,014       12,084,591
   Brokerage and clearing fees                             440,098          593,681
   Professional services                                   383,989          599,121
   Occupancy and equipment                               1,385,377        1,673,686
   Communications and technology                           727,286        1,084,234
   Depreciation and amortization                            82,664           20,787
   Travel and entertainment                                231,122          401,860
   Legal services and litigation settlement expense        520,200          427,023
   Cost of underwriting capital                             49,600          197,600
   Other                                                 1,345,572        1,261,417

   Total operating expenses                             13,189,922       18,344,000

   Operating loss                                       (3,230,015 )     (5,425,015 )

   Other income                                                  -           15,000
   Interest expense                                       (340,381 )       (250,194 )
   Amortization of debt discount                          (128,326 )       (122,742 )
   Loss on early extinguishment of debt                   (293,347 )              -
   Loss on equity exchange                                       -       (1,086,329 )

   Net loss                                             (3,992,069 )     (6,869,280 )
   Preferred stock cash dividend                                 -          (42,061 )

   Net loss attributable to common shareholders       $ (3,992,069 )   $ (6,911,341 )

Our total revenues in 2013 decreased 23% to approximately $9,960,000 due to a 32% and 28% decrease in our commission and investment banking revenues, respectively, partially offset by a 60% and 11% increase in our principal transaction revenue and capital markets advisory fees, respectively.

Investment Banking Revenue

Our investment banking activity includes the following:

Capital Raising - Capital raising includes private placements of equity and debt instruments and underwritten public offerings.

Financial Advisory - Financial advisory includes advisory assignments with respect to mergers and acquisitions, divestures, restructurings and spin-offs.

The following table sets forth our revenue and transaction volumes from our investment banking activities for the years ended December 31:

                                                  2013              2012
        Revenue:
        Capital raising                       $   3,196,419     $   4,082,279
        Financial advisory                          690,728         1,289,767

        Total investment banking revenue      $   3,887,147     $   5,372,046

        Transaction Volumes:
        Public offerings:
        Capital underwritten participations   $  93,500,000     $  54,350,005
        Number of transactions                            4                 5
        Private placements:
        Capital raised                        $ 159,180,000     $ 288,460,500
        Number of transactions                           14                10
        Financial advisory:
        Transaction amounts                   $           -     $ 125,000,000
        Number of transactions                            3                 7

Our investment banking revenues, including FEP's, decreased 28% to $3,887,000 in 2013 from $5,372,000 in 2012. The decrease is comprised of a $1,985,000 or 51% decrease in investment banking revenues partially offset by a $500,000 or 34% increase in FEP's revenues. Decrease in investment banking revenues was primarily due to the decrease in number of deals closed and our strategic shift to having FEP become our core banking revenue. There was only one large deal (over $250,000 in fees and excluding FEP's) closed in 2013 versus 4 in 2012. As a percentage of total revenues, investment banking revenues, including FEP's, contributed 39% in 2013 comparing to 42% in 2012.

During the years ended December 31, 2013 and 2012, no one single investment banking client accounted for more than 10% of our total revenues.

Commissions and Principal Transactions Revenue

Our broker-dealer activities include the following:

Commissions - Commissions include revenue resulting from executing stock trades for 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. Principal transactions also include gains and losses resulting from market price fluctuations that occur while holding positions in our trading security inventory.

The following table sets forth our revenue and losses and several operating metrics which we utilize in measuring and evaluating performance and the results of our trading operations:

                                                               2013              2012

Commissions:
Commissions on institutional equities                      $   4,201,980     $   6,199,912


Principal transactions:
Customer principal transactions, proprietary trading and
market making                                              $      67,313     $    (171,160 )
Investment portfolio                                            (282,660 )        (364,298 )

Total principal transaction revenue                        $    (215,347 )   $    (535,458 )

Transaction Volumes:
Number of shares traded                                      271,991,648       359,157,876

Commission revenue was approximately $4,202,000 or 42% of total revenue in 2013, representing a $1,998,000 or 32% decrease from that in 2012. The decrease was primarily due to lower trading volume as a result of the Company having fewer sales producers in 2013, as well as the dramatic overall decline in equity trading volumes in the U.S.

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 trade date 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 2013, principal transaction losses were approximately $215,000, consisting of a $283,000 net loss on our investment portfolios and a $116,000 net loss in proprietary trading and market making, partially offset by a $184,000 gain from customer principal transactions. For 2012, principal transaction losses were approximately $535,000, consisting of a $364,000 net loss on our investment portfolios and a $926,000 net loss in proprietary trading and market making, partially offset by a $755,000 gain from customer principal transactions.

For the years ended December 31, 2013, no customer accounted for more than 10% of total revenues. For the year ended December 31, 2012, one customer accounted for more than 10% of total revenues.

Compensation and Benefit Expenses

Compensation and benefits expenses represent the majority of our operating expenses and include commissions, base salaries, discretionary bonuses and stock-based compensation. Sales professionals are paid commissions based on their production. Incentive compensation varies primarily based on revenue production. Investment banking, research and support staff and executives are paid base salaries and may participate in the discretionary bonus plans. 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 years ended December 31, 2013 and 2012:

                                                                2013             2012

Incentive compensation and discretionary bonuses             $ 4,614,822     $  6,215,340
Salaries and wages                                             2,079,128        2,739,579
Stock-based compensation                                         642,436        2,224,693
Payroll taxes, benefits and other                                687,628          904,979

Total compensation and benefits                              $ 8,024,014     $ 12,084,591

Total compensation and benefits as a percentage of revenue            81 %             94 %
Cash compensation and benefits as a percentage of revenue             74 %             76 %

Total compensation and benefits were approximately $8,024,000 and $12,084,000 for the years ended December 31, 2013 and 2012, respectively, a decrease of approximately $4,060,000 or 34%. The decrease consisted of (i) a $1,600,000 (26%) decrease in incentive compensation and discretionary bonuses directly relating to the decrease in revenue, (ii) a $661,000 (24%) and $217,000 (24%) decrease in salaries and wages, and payroll taxes, benefits and other, respectively, primarily due to headcount reduction and more producers are on commission based compensation structure , (iii) a $1,582,000 (71%) decrease in stock-based compensation which was primarily due to option forfeiture recorded in 2012.

Of the total compensation and benefits for the year ended December 31, 2013, $1,577,000 was for FEP personnel.

In 2013 and 2012, the Company significantly reduced its operating expenses by eliminating certain non-revenue generating personnel, administrative positions and technology related costs. The Company continues to focus on decreasing the ratio of total cash compensation and benefits as a percentage of revenue and anticipate a lower metric in 2014.

Incentive compensation directly correlates to commission revenue earned and discretionary bonuses primarily correlate to investment banking revenues earned. Cash compensation and benefits exclude stock-based compensation which is a non-cash expense.

In 2013 and 2012, one and two sales professionals accounted for more than 10% of total revenues, respectively.

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 $154,000 or 26% compared to 2012 as a direct result of decreases in trading volume and commission revenue.

Professional services expense includes audit and accounting fees, expenses related to investment banking transactions, and various consulting fees. Professional services expense decreased $215,000 or 36% compared to 2012 primarily due to decrease in outside consulting fees as the Company continues to control expenses and improve productivity.

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 $288,000 or 17% compared to 2012 as a result of more New York office space was subleased in 2013.

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 $357,000 or 33% compared to 2012 due to headcount reduction and renegotiation and cancellation of a number of market data 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 increase of approximately $62,000, or 298% as compared to 2012 was due to a number of capital equipment leases entered into in 2013.

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 $171,000 or 42% on a year over year basis 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 increase of $93,000 or 22% as compared to 2012 was due to $390,000 legal settlements in 2013, mostly offset by a decrease of $297,000 in legal fees.

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 $148,000 or 75% as compared to 2012 due to certain temporary borrowings in 2012 remained outstanding longer than anticipated.

The following expenses are included in other operating expenses for the years ended December 31, 2013 and 2012:

                                                         2013            2012

    Insurance                                         $   520,518     $   504,229
    Regulatory & filing fees                              203,615         220,216
    Provision for uncollectible accounts receivable       277,308         337,436
    Investor conference                                         -         210,317
    Other                                                 344,131         (10,781 )

    Total other operating expenses                    $ 1,345,572     $ 1,261,417

Other operating expenses include insurance, regulatory & filing fees, provision for uncollectible accounts receivable, investor conference and other miscellaneous expenses. The increase of approximately $84,000 or 7% on a year over year basis was due to (i) a decrease of $60,000 in provision for uncollectible accounts receivable, (ii) a decrease of $210,000 in investor conference due to the fact that no investor conference was held in 2013, and
(iii) an increase of $355,000 in other miscellaneous expenses primarily due to a non-recurring expense and office moving costs.

Interest Income

Interest income represents interest earned on our cash balances maintained at financial institutions.

Amortization of Debt Discounts

In 2011 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.

In November and December 2011, certain debt and related warrants were exchanged for common shares and new warrants to purchase common shares. The discounts related to the debt being exchanged were written off as part of the loss recognized as a result of the transaction.

For the years ended December 31, 2013 and 2013, amortizations of debt discounts for the remaining debt and related warrants were $128,000 and $123,000, respectively.

Income Tax Expense

Income tax expenses of $0 were recorded in 2013 and 2012 resulting in zero effective tax rates. The effective tax rate differs from the statutory rate primarily due to the net operating loss carry-forwards offset by a 100% valuation allowance resulting in a tax provision equal to our expected current benefit for the year.

The Company accounts for income taxes under the provisions of Accounting Standards Codification ("ASC") 740 - Income Taxes. ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and tax basis of assets and liabilities and the expected future tax benefit to be derived from tax loss and tax credit carry-forwards. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.

Critical Accounting Policies and Estimates

The consolidated financial statements are prepared in accordance with U. S. GAAP 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 consolidated financial statements.

Revenue Recognition

Investment banking revenue includes underwriting and private placement agency fees earned through the Company's participation in public offerings and private placements of equity and convertible debt securities and fees earned as financial advisor in mergers and acquisitions and similar transactions. Underwriting revenue is earned in securities offerings in which the Company acts as an underwriter and includes management fees, underwriting fees and selling concessions. Fee revenue relating to underwriting commitments is recorded when all significant items relating to the underwriting cycle have been completed and the amount of the underwriting revenue has been determined.

Syndicate expenses related to securities offerings in which the Company acts as underwriter or agent are deferred until the related revenue is recognized or we determine that it is more likely than not that the securities offerings will not ultimately be completed. Underwriting revenue is recorded net of related expenses. As co-manager for registered equity underwriting transactions, management must estimate the Company's share of transaction related expenses incurred by the lead manager in order to recognize revenue. Transaction-related expenses are deducted from the underwriting fee and therefore reduce the revenue that is recognized as co-manager. Such amounts are adjusted to reflect actual expenses in the period in which the Company receives the final settlement, typically 90 days following the closing of the transaction.

Merger and acquisition fees and other advisory service revenue are generally earned and recognized only upon successful completion of the engagement. Unreimbursed expenses associated with private placement and advisory transactions are recorded as expenses as incurred.

Commission revenues and related clearing expenses are recorded on a trade-date basis as security transactions occur. Principal transactions in regular-way trades are recorded on the trade date, as if they had settled. Profit and loss arising from all securities transactions entered into for the account and risk of our Company are recorded on a trade-date basis.

Fair Value of Financial Instruments

Substantially all of the Company's financial instruments are recorded at fair value or contract amounts that approximate fair value. The carrying amounts of the Company's financial instruments, which include cash and cash equivalents, securities owned, restricted cash, due from clearing broker, accounts receivable, accounts payable, commissions and bonus payable, accrued expenses and other, securities sold, not yet purchased, deferred revenue, and capital lease obligation, approximate their fair values.

Fair Value Measurement-Definition and Hierarchy

The Company follows the provisions of Accounting Standards Codification (ASC) 820, Fair Value Measurement and Disclosures, for its financial assets and liabilities. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.

Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments' complexity. Assets and liabilities recorded at fair value in the consolidated statement of financial condition are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of . . .

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