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MERR > SEC Filings for MERR > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for MERRIMAN HOLDINGS, INC

Form 10-Q for MERRIMAN HOLDINGS, INC


15-May-2014

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. 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.

With DCN, we are creating a turnkey solution for investors to screen dozens of investment opportunities across multiple investment strategies, sectors, deal sizes and locations. By increasing the number of investment opportunities available to them, institutions and family offices will be able to focus on evaluating deals rather than sourcing them. As a result, they will be able to make better investment decisions and improve the diversification of their portfolios. DCN also enables Issuers with the ability to have their deals viewed immediately by dozens of qualified investors, something that previously would have taken months of travel, lengthy conference calls, and expensive road shows.

We are headquartered in San Francisco, with an additional office in New York, NY. As of March 31, 2014, we had 29 employees.

Executive Summary

Our total revenues were approximately $4,565,000 for three months ended March 31, 2014, representing a $2,248,000 or 114% increase from total revenues of $2,136,000 for three months ended March 31, 2013. The increase was primarily due to higher banking revenues.

For the three months ended March 31, 2014, commission revenues increased $364,000 or 36% over the same period in 2013 primarily due to favorable market conditions. Investment banking revenues increased $2,174,000 or 887% over the same period in 2013 primarily due to more banking transactions being closed as a result of favorable market conditions. Other revenues decreased $90,000 or 15% over the same period in 2013 primarily due to capital markets advisory business.

For the three months ended March 31, 2014 and 2013, net income (loss) was approximately $653,000 and ($953,000) or $0.0052 and ($0.10) per share, respectively. Net income (loss) for the three months ended March 31, 2014 and 2013 included stock based compensation expenses of approximately $89,000 and $135,000, respectively.

Liquidity/Going Concern

Although the Company turned a profit of $653,000 and had positive operating cash flows of $375,000 during the first three months of 2014, it incurred substantial losses in 2013, having net losses of $3,992,000 and negative operating cash flows of $2,836,000. As of March 31, 2014, the Company had an accumulated deficit of $148,256,000. These facts raise substantial doubt as to the Company's ability to continue as a going concern.

The accompanying 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.

In March and April 2014, the Company issued 833,333 and 10,416,663 shares of common stock at $0.06 per share and 208,333 and 2,604,163 warrants for total proceeds of $50,000 and $625,000, respectively.

Results of Operations

The following table sets forth the results of operations for the three months ended March 31, 2014 and 2013:

                                                               Three Months Ended March 31
                                                                  2014               2013

Revenues
Commissions                                                  $     1,381,817      $ 1,018,181
Principal transactions                                               248,612          267,762
Investment banking                                                 2,419,233          245,035
Advisory and other                                                   514,818          605,239

Total revenues                                               $     4,564,480      $ 2,136,217

Operating expenses
Compensation and benefits                                    $     2,508,751      $ 1,596,663
Brokerage and clearing fees                                          124,709           86,348
Professional services                                                113,106           73,029
Occupancy and equipment                                              301,259          337,032
Communications and technology                                        186,838          119,222
Depreciation and amortization                                         39,412            4,257
Travel and entertainment                                              42,451           60,176
Legal services                                                        40,191           16,769
Cost of underwriting capital                                               -           46,400
Other                                                                180,502          324,942

Total operating expenses                                           3,537,219        2,664,838

Operating income/(loss)                                            1,027,261         (528,621 )

Interest expense                                                     (93,748 )        (91,282 )
Amortization of debt discount                                        (18,676 )        (39,674 )
Loss on debt modification                                           (262,299 )              -
Loss on early extinguishment of debt                                       -         (293,347 )

Net income/(loss) attributable to common shareholders        $       652,538      $  (952,924 )

For the three months ended March 31, 2014, total revenues increased by approximately $2,428,000 or 114% as compared to the same periods in 2013. The $2,428,000 increase primarily consisted of approximately (a) a $2,174,000 increase in investment banking revenues, (b) a $364,000 increase in commission revenues, partially offset by (c) a ($90,000) decrease in other revenues and (d) ($19,000) decrease in principal transactions.

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, 2014 and
2013:



                                               Three Months Ended March 31,
                                                  2014                2013
       Revenue:
       Capital raise                         $     2,160,337      $    151,635
       Financial advisory                            258,896            93,400

       Total investment banking revenue      $     2,419,233      $    245,035

       Transaction volumes:
       Public offerings:
       Capital underwritten participations   $             -      $ 21,000,000
       Number of transactions                              -                 1
       Private placements:
       Capital raise                         $    26,795,606      $  1,000,000
       Number of transactions                              7                 1
       Financial advisory:
       Transaction amounts                   $             -      $          -
       Number of transactions                              -                 1

For the three months ended March 31, 2014 and 2013, investment banking revenues were approximately $2,419,000 and $245,000 or 50% and 11% of total revenues, representing a $2,174,000 or 887% increase as a result of more banking transactions being closed.

For the three months ended March 31, 2014 and 2013, investment banking revenues generated by FEP associates were $467,000 and $73,000, respectively.

During the three months ended March 31, 2014, there was one investment banking client who accounted for more than 10% of total revenues. During the three months ended March 31, 2013, there was no investment banking client who accounted for more than 10% of 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 March 31,
                                                        2014               2013

   Commissions:
   Institutional equities                         $      1,381,817     $  1,018,181

   Total commission revenue                       $      1,381,817     $  1,018,181

   Principal transactions:
   Customer principal transactions, proprietary
   trading and market making                      $          8,442     $     41,568
   Investment portfolio                                    240,170          226,194

   Total principal transaction revenue            $        248,612     $    267,762


   Transaction Volumes:
   Number of shares traded                             109,448,058       48,609,730

For the three months ended March 31, 2014 and 2013, commission revenues were approximately $1,382,000 and $1,018,000 or 30% and 48% of total revenue, respectively, representing a $364,000 or 36% increase primarily due to favorable market conditions.

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, 2014, principal transaction gains were approximately $249,000 which consisted of (a)

a $240,000 gain on our investment portfolio, (b) a $93,000 gain from customer principal transactions, and (c) partially offset by a ($84,000) loss from proprietary trading and market making. For the three months ended March 31, 2013, principal transaction gains were approximately $268,000 which consisted of
(a) a $226,000 gain on our investment portfolio, (b) a $48,000 gain from customer principal transactions, and (c) partially offset by a ($6,000) loss from proprietary trading and market making.

During the three months ended March 31, 2014, there was no brokerage customer that accounted for more than 10% of our total revenue.

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 three months ended March 31, 2014 and 2013:

                                                      Three Months Ended March 31,
                                                         2014                2013

 Incentive compensation and discretionary bonuses   $     1,689,538       $   741,493
 Salaries and wages                                         519,477           536,515
 Stock-based compensation                                    88,542           135,416
 Payroll taxes, benefits and other                          211,194           183,239

 Total compensation and benefits                    $     2,508,751       $ 1,596,663

 Total compensation and benefits as a
 percentage of core business revenue                             58 %              85 %
 Cash compensation and benefits as a
 percentage of core business revenue                             56 %              78 %

For the three months ended March 31, 2014 and 2013, total compensation and benefits were approximately $2,509,000 and $1,597,000, respectively, an increase of approximately $912,000 or 57%. Incentive compensation and discretionary bonuses increased $948,000 or 128% as a direct result of higher commission and banking revenues. Salaries and wages decreased a minimal ($17,000) or 3%. Stock-based compensation decreased ($47,000) or 35% primarily due to terminated employees. Payroll taxes and benefits' increase of $28,000 or 15% directly correlated to higher compensation expenses.

As of March 31, 2014 and 2013, the Company had 29 and 29 employees, respectively.

For the three months ended March 31, 2014 and 2013, of the total compensation and benefits, $343,000 and $22,000 were for FEP associates, respectively.

During the three months ended March 31, 2014, one sales professional accounted for more than 10% of total revenue (approximately $903,000) and no customer accounted for more than 10% of total revenue. During the three month ended March 31, 2013, three sales professionals accounted for more than 10% of total revenue (approximately $969,000) and three customers accounted for more than 10% of total revenue (approximately $355,000).

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 March 31, 2014, brokerage and clearing fees increased $38,000 or 44% as compared to the same period in 2013 as a direct result of higher trading volume and commission revenues.

Professional services expense includes audit, accounting fees and various consulting fees. For the three months ended March 31, 2014, professional services expense increased $40,000 or 55% as compared to the same period in 2013 due to the Company using outside consultants to upgrade its computer and phone systems and general ledger conversion.

Occupancy and equipment include rents and related costs of our office premises, equipment, 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 months ended March 31, 2014, occupancy and equipment expenses decreased $36,000 or 11%, as compared to the same period in 2013 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 months ended March 31, 2014, communications and technology expense increased $68,000 or 57%, as compared to the same period in 2013 primarily due to a $81,000 market data service rebate received in March 2013.

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 months ended March 31, 2014, depreciation expenses increased $35,000 or 826% as compared to the same period in 2013 due to certain capital leases were entered into during the third quarter of 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. For the three months ended March 31, 2014, travel and entertainment expenses decreased approximately $18,000 or 29% as compared to the same period in 2013 as a result of continued cost reduction measures.

Legal services relate to our various corporate legal consult. For the three months ended March 31, 2014, legal services increased $23,000 or 140% as compared to the same period in 2013 primarily due to increased number of FINRA inquiries.

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 March 31, 2014, no costs of underwriting capital were incurred due to the fact that the banking deals closed did not require underwriting capital.

The following expenses are included in other operating expenses for the three months ended March 31, 2014 and 2013:

                                                              Three Months Ended March 31,
                                                                2014                 2013

Insurance                                                  $       72,504       $      126,745
Regulatory & filing fees                                           52,544               39,125
Provision for uncollectible accounts receivable                         -              122,033
Other                                                              55,454               37,039

                  Total other operating expenses           $      180,502       $      324,942

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

For the three months ended March 31, 2014, other operating expenses decreased $144,000 or 44% as compared to the same period in 2013 due to (a) a ($122,000) decrease in provision for uncollectible accounts receivable, (b) a ($54,000) decrease in insurance, partially offset by (c) a $14,000 increase regulatory & filing fees and (d) an $18,000 increase in miscellaneous other expenses.

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, 2014 and 2013, amortizations of debt discounts for the remaining debt and related warrants were $19,000 and $40,000, respectively.

Off-Balance Sheet Arrangements

We were not a party to any off-balance sheet arrangements during the three months ended March 31, 2014 and 2013. 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, 2014, 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.

                                                                       Operating
                               Notes Payable       Office Leases        Leases         Capital Leases         Total

           2014               $     2,561,031     $       969,600     $   456,500     $         97,415     $  4,084,546
           2015                       710,121           1,343,760          60,800              129,885        2,244,566
           2016                        85,140           1,353,354          36,000              100,499        1,574,993
           2017                             -           1,421,854               -               49,563        1,471,417
           2018                             -           1,437,268               -                    -        1,437,268
        Thereafter                          -           2,189,662               -                    -        2,189,662
Total Commitments                   3,356,292           8,715,498         553,300              377,362       13,002,452
Interest                             (259,692 )                 -               -              (40,393 )       (300,085 )
Net Commitments               $     3,096,600     $     8,715,498     $   553,300     $        336,969     $ 12,702,367

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

. . .

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