SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31,
2011
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______
to ________
Commission File Number 001-15831
MERRIMAN HOLDINGS, INC.
(Exact Name of Registrant as Specified
in its Charter)
Delaware
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11-2936371
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(State or Other Jurisdiction of
Incorporation or Organization)
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(IRS Employer
Identification No.)
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600 California Street, 9th Floor
San Francisco, CA 94108
(Address of principal executive offices)(Zip
Code)
(415) 248-5600
(Registrant’s telephone number, including
area code)
Securities registered pursuant to Section
12(g) of the Act:
None
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
¨
No
x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
¨
No
x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
¨
No
x
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or a “smaller reporting company.” See
definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer (Do not check if a smaller reporting company)
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Smaller Reporting Company
x
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Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes
¨
No
x
The aggregate market value of the 1,969,593
shares of common stock of the Registrant issued and outstanding as of June 30, 2011, the last business day of the registrant’s
most recently completed second fiscal quarter, excluding 589,934 shares of common stock held by affiliates of the Registrant was
$5,120,942. This amount is based on the closing price of the common stock on NASDAQ of $2.60 per share on June 30, 2011.
The number of shares of Registrant’s
common stock outstanding as of March 26, 2012 was 6,471,839.
TABLE OF CONTENTS
PART I
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Item 1.
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Business
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1
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Item 1A.
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Risk Factors
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8
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Item 1B.
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Unresolved Staff Comments
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21
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Item 2.
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Properties
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21
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Item 3.
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Legal Proceedings
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22
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PART II
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Item 5.
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Market for Registrant’s Common Stock and Related Stockholder Matters
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24
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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27
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk
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46
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Item 8.
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Financial Statements and Supplementary Data
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47
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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95
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Item 9A.
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Controls and Procedures
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95
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Item 9B.
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Other Information
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95
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PART III
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Item 10.
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Directors and Executive Officers of the Registrant
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96
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Item 11.
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Executive Compensation
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99
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management
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101
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Item 13.
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Certain Relationships and Related Transactions
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102
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Item 14.
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Principal Accounting Fees and Services
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106
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PART IV
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Item 15.
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Exhibits and Financial Statement Schedules
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107
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This Annual Report on Form 10-K and
the information incorporated by reference in this Form 10-K include forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Some of the forward-looking
statements can be identified by the use of forward-looking words such as “believes,” “expects,” “may,”
“should,” “seeks,” “approximately,” “intends,” “plans,” “estimates”
or “anticipates,” or the negative of those words or other comparable terminology. Forward-looking statements involve
risks and uncertainties. You should be aware that a number of important factors could cause our actual results to differ materially
from those in the forward-looking statements. We will not necessarily update the information presented or incorporated by reference
in this Annual Report on Form 10-K if any of these forward-looking statements turn out to be inaccurate. Risks affecting our business
are described throughout this Form 10-K and especially in the section “Risk Factors.” This entire Annual Report on
Form 10-K, including the consolidated financial statements and the notes and any other documents incorporated by reference into
this Form 10-K, should be read for a complete understanding of our business and the risks associated with that business.
This Amendment No. 2 on Form 10-K/A (this
“Amendment”) amends the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, originally
filed on March 30, 2012 (the “Original Filing”) and Amendment No. 1 on Form 10-K/A, filed on April 27, 2012 (“Amendment
No. 1”). The Company is filing this Amendment because the Company filed Amendment No. 1 without having received the consent
of its Independent Registered Public Accounting Firm. Further, the April 27, 2012 filing of Amendment No. 1 inappropriately included
a draft consent with a future date of April 30, 2012. In addition, in connection with the filing of this Amendment and pursuant
to the rules of the Securities and Exchange Commission, the Company is including with this Amendment certain currently dated certifications.
Except as described above, no other changes
have been made to Amendment No. 1 to the Original Filing. This Amendment continues to speak as of the date of the Original Filing
or as of December 31, 2011 as required by the context, and the registrant has not updated the disclosures contained in the Original
Filing to reflect any events which occurred at a date subsequent to the filing of the Original Filing.
PART I
Item 1. Business
Overview
We are a financial services holding company
that primarily provides investment banking, sales and trading execution services, and capital markets advisory services through
our primary operating subsidiary, Merriman Capital, Inc. (MC).
MC is an investment bank and securities
broker-dealer focused on fast-growing companies and institutional investors. 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 December 31, 2011, we had 35 employees. MC is registered with
the Securities and Exchange Commission (SEC) as a broker-dealer and is a member of Financial Industry Regulatory Authority (FINRA)
and the Securities Investors Protection Corporation (SIPC).
Liquidity
Merriman Holdings, Inc. (the Company) incurred
substantial losses in 2011 and 2010. The Company had net losses of $7,894,000 and $5,338,000 in 2011 and 2010, respectively, and
negative operating cash flows of $4,467,000 and $1,525,000 in 2011 and 2010. As of December 31, 2011, the Company had an accumulated
deficit of $138,048,000. While the Company believes its current funds will be sufficient to enable it to meet its planned expenditures
through at least January 1, 2013, if anticipated operating results are not achieved, management has the intent and believes it
has the ability to delay or reduce expenditures. Failure to generate sufficient cash flows from operations, raise additional capital,
or reduce certain discretionary spending could have a material adverse effect on the Company’s ability to achieve its intended
business objectives.
In the fourth quarter, the Company decided
to shift its strategic focus away from the traditional broker dealer model of research and institutional sales toward a capital
markets advisory and platform revenue model. This represents a more scalable, predictable and profitable model in today’s
environment. Management believes this business model will result in reduced fixed operating costs and higher operating profit
margin. Given the Company’s track record and brand in investment banking and institutional sales, we will continue to assist
firms raise the capital needed to fuel innovation.
Principal Services
Our investment banking /broker-dealer subsidiary
provides four distinctive lines of business: investment banking, institutional brokerage, capital markets advisory and financial
entrepreneur services. We also provide limited research-based financial services to companies with market capitalizations
up to $1 billion, which we believe is an underserved sector in the financial services industry.
Investment Banking
Our investment bankers provide a full range
of corporate finance and strategic advisory services. Our corporate finance practice is comprised of industry coverage investment
bankers who focus on raising capital for fast-growing companies in selected industry sectors. Our strategic advisory practice
tailors solutions to meet the specific needs of our clients at various phases in their growth cycle.
Corporate Finance –
Our corporate
finance practice advises on and structures capital raising solutions for our corporate clients through public and private offerings
of primarily equity and convertible debt securities. Our focus is to provide fast-growing companies with necessary capital to
bring them to the next level of growth. We offer a wide range of financial services designed to meet the needs of fast-growing
companies, including initial public offerings, secondary offerings and private placements. Our equity capital markets team executes
securities underwriting offerings, assists clients with investor relations advice and introduces companies seeking to raise capital
to investors who we believe will be supportive, long-term investors. Additionally, we draw upon our deep connections throughout
the financial and corporate world, expanding the available options to our corporate clients.
Strategic Advisory –
Our strategic
advisory services include transaction-specific advice regarding mergers and acquisitions, divestitures, spin-offs and privatizations,
as well as general strategic advice. Our commitment to long-term relationships and our ability to meet the needs of a diverse
range of clients has made us a reliable source of advisory services for fast-growing public and private companies. Our strategic
advisory services are also supported by our capital markets professionals, who provide assistance in acquisition financing in
connection with mergers and acquisition transactions.
Institutional Brokerage
We provide institutional sales, trading
and equity execution and options execution services to institutional clients around the world. We execute securities transactions
for money managers, mutual funds, hedge funds, insurance companies, and pension and profit-sharing plans. Institutional investors
normally purchase and sell securities in large quantities requiring the distribution and trading expertise we provide.
We provide integrated research and trading
solutions centered on assisting our institutional clients in investing profitably, to grow their portfolios and ultimately their
businesses. We understand the importance of building long-term relationships with our clients who look to us for the professional
resources and relevant expertise to provide solutions for their specific situations. We believe it is important for us to assist
public companies early in their corporate life cycles. We strive to provide unique investment opportunities in fast-growing, relatively
undiscovered companies and to help our institutional clients to execute trades rapidly, efficiently and accurately.
Institutional Sales –
Our
sales professionals focus on communicating investment ideas to our clients and executing trades in securities of companies in
our target growth sectors. By actively trading in these securities, we endeavor to couple the capital market information flow
with the fundamental information flow provided by our analysts. We believe that this combined information flow is the basis of
delivering favorable execution of investment strategies for our clients. Our sales professionals work with our analysts and bankers
to provide up-to-date information to our institutional clients. We interface actively with our clients and plan to be involved
with them over the long term.
Trading –
Our trading professionals
facilitate liquidity discovery in equity securities. We make markets in securities traded on the NASDAQ Stock Market, other
stock exchanges and electronic communication networks, and service the trading desks of institutions in the United States. Our
trading professionals have direct access to the major stock exchanges, including the NASDAQ Stock Market, the New York Stock Exchange
and the American Stock Exchange.
The client base of our institutional brokerage
business includes mutual funds, hedge funds and private investment firms. We believe this group of potential clients to number
over 4,000. We grow our business by adding new clients and increasing the penetration of existing institutional clients that use
our equity research and trading services in their investment process.
Corporate & Executive Services –
We offer brokerage services to corporations such as stock repurchase program. We also serve the needs of company executives
with restricted stock transactions, cashless exercise of options, and liquidity strategies.
Capital Markets Advisory Group/OTCQX
Advisory –
MC began offering services to sponsor companies on the International and Domestic OTCQX markets in 2007.
In 2008, we solidified our position as the leading investment bank sponsor in this market. We enable non-U.S. and domestic companies
to obtain greater exposure to U.S. institutional investors without the expense and regulatory burdens of listing on traditional
U.S. exchanges. The International and Domestic OTCQX market tiers do not require full SEC registration and are not subject to
the Sarbanes Oxley Act of 2002. Listing on the market requires the sponsorship of a qualified investment bank called a Principal
American Liaison (PAL) for non-U.S. companies or a Designated Advisor for Disclosure (DAD) for domestic companies. MC was the
first investment bank to achieve DAD and PAL designations. We believe that we are the leading investment bank in the
number of listings of issuers on the OTCQX.
MC also offers Capital Markets Advisory
Services to U.S. based companies desiring to increase the liquidity and visibility of their securities. MC believes that the market
for these services is significant as it comprises the thousands of NYSE, NASDAQ, OTC and Pink Sheet companies that fall into MC’s
areas of research expertise and market capitalization.
Segment Reporting
In January 2011, the Company’s wholly
owned broker dealer subsidiary, Merriman Capital, Inc. (MC), formed a new investment banking division, Riverbank Partners (Riverbank),
to assist corporate issuers in raising capital through a network of independent investment bankers. Also, in January 2011, the
Company repositioned its OTCQX Advisory Services (OTCQX) offering and fee structure.
The
Company recognizes revenues earned by Riverbank on a gross basis in accordance with ASC 605-45,
Revenue Recognition: Principal
Agent Considerations
, as the Company is the primary obligor in the arrangements entered into by Riverbank.
Effective January 1, 2011, the Company
reorganized its business around three operating segments: MC, Riverbank and OTCQX. The Company's reportable segments are strategic
business units that offer products and services which are compatible with our core business strategy.
Competition
MC is engaged in the highly competitive
financial services and investment industries. We compete with other securities firms – from large U.S.-based firms, securities
subsidiaries of major commercial bank holding companies and U.S. subsidiaries of large foreign institutions to major regional
firms, smaller niche players, and those offering competitive services via the internet. Long term developments in the brokerage
industry, including decimalization and the growth of electronic communications networks, or ECNs, 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 more experienced sales and trading professionals. The trend by competitors to reduce services to address
these challenges has created an opportunity for us as many highly qualified individuals have been dislocated, expanding the pool
of experienced employees whom we might hire. Given the fact that many smaller firms have ceased their operations in the last four
months, with our reduced overhead and the core compliance competency we have developed over the years, we believe the opportunity
exists to expand our market presence in a cost effective way for our shareholders.
For a further discussion of the competitive
factors affecting our business, see “We face strong competition from larger firms,” under “Item 1A - Risk Factors.”
Corporate Support
Accounting, Administration and Operations
Our accounting, administration and operations
personnel are responsible for financial controls, internal and external financial reporting, human resources and personnel services,
office operations, information technology and telecommunication systems, the processing of securities transactions, and corporate
communications. With the exception of payroll processing which is performed by an outside service bureau, and client transaction
processing which is performed by our clearing firm, most data processing functions are performed internally.
Compliance, Legal, Risk Management and Internal Audit
Our compliance, legal and risk management
personnel (together with other appropriate personnel) are responsible for our compliance with legal and regulatory requirements
of our investment banking business and our exposure to market, credit, operations, liquidity, compliance, legal and reputation
risk. In addition, our compliance personnel test and audit for compliance with our internal policies and procedures. Our general
counsel provides legal service throughout our Company, including advice on managing legal risk. The supervisory personnel in these
areas have direct access to senior management and to the Audit Committee of our Board of Directors to ensure their independence
in performing these functions. In addition to our internal compliance, legal, and risk management personnel, we retain outside
auditors, tax advisors, consultants and legal counsel for their particular functional expertise.
Risk Management
In conducting our business, we are exposed
to a range of risks including:
Market risk
is the risk to our earnings
or capital resulting from adverse changes in the values of assets resulting from movement in equity prices or market interest
rates.
Credit risk
is the risk of loss
due to an individual client’s or institutional counterparty’s unwillingness or inability to fulfill its obligations.
Operations risk
is the risk of loss
resulting from systems failure, inadequate controls, human error, fraud or unforeseen catastrophes.
Liquidity risk
is the potential that
we would be unable to meet our obligations as they come due because of an inability to liquidate assets or obtain funding. Liquidity
risk also includes the risk of having to sell assets at a loss to generate liquid funds, which is a function of the relative liquidity
(market depth) of the asset(s) and general market conditions.
Compliance risk
is the risk of loss,
including fines, penalties and suspension or revocation of licenses by self-regulatory organizations, or from failing to comply
with federal, state or local laws pertaining to financial services activities.
Legal risk
is the risk that arises
from potential contract disputes, lawsuits, adverse judgments, or adverse governmental or regulatory proceedings that can disrupt
or otherwise negatively affect our operations or financial condition.
Reputation risk
is the potential
that negative publicity regarding our practices, whether factually correct or not, will cause a decline in our client base, costly
litigation, or revenue decline.
We have a risk management program which
sets forth various risk management policies, provides for a risk management committee and assigns risk management responsibilities.
The program is designed to focus on the following:
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Identifying,
assessing and reporting
on corporate risk
exposures and trends;
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Establishing
and revising policies,
procedures and risk
limits, as necessary;
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Monitoring
and reporting on adherence
with risk policies
and limits;
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Developing
and applying new measurement
methods to the risk
process as appropriate;
and
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Approving
new product developments
or business initiatives.
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We cannot provide assurance that our risk
management program or our internal controls will prevent or mitigate losses attributable to the risks to which we are exposed.
For a further discussion of the risks affecting
our business, see “Item 1A Risk Factors.”
Regulation
As a result of federal and state registration
and self-regulatory organization (“SRO”) memberships, we are subject to overlapping layers of regulation that cover
all aspects of our securities business. Such regulations cover matters such as capital requirements, uses and safe-keeping of
clients’ funds, conduct of directors, officers and employees, record-keeping and reporting requirements, supervisory and
organizational procedures intended to ensure compliance with securities laws and to prevent improper trading on material nonpublic
information, employee-related matters, including qualification and licensing of supervisory and sales personnel, limitations on
extensions of credit in securities transactions, requirements for the registration, underwriting, sale and distribution of securities,
and rules of the SROs designed to promote high standards of commercial honor and just and equitable principles of trade. A particular
focus of the applicable regulations concerns the relationship between broker-dealers and their clients. As a result, many aspects
of the broker-dealer client relationship are subject to regulation including, in some instances, “suitability” determinations
as to certain client transactions, limitations on the amounts that may be charged to clients, timing of proprietary trading in
relation to clients’ trades, and disclosures to clients.
As a broker-dealer registered with the
SEC and as a member firm of FINRA, we are subject to the net capital requirements of the SEC (Rule 15c3-1 of the Securities Exchange
Act of 1934) as regulated and enforced by FINRA. These capital requirements specify minimum levels of capital, computed in accordance
with regulatory requirements that most firms are required to maintain and also limit the amount of leverage that each firm is
able to obtain in its respective business.
“Net capital” is essentially
defined as net worth (assets minus liabilities, as determined under accounting principles generally accepted in the United States
(“U.S. GAAP”), plus qualifying subordinated borrowings, less the value of all of a broker-dealer’s assets that
are not readily convertible into cash (such as furniture, prepaid expenses, and unsecured receivables), and further reduced by
certain percentages (commonly called “haircuts”) of the market value of a broker-dealer’s positions in securities
and other financial instruments. The amount of net capital in excess of the regulatory minimum is referred to as “excess
net capital.”
The SEC’s capital rules also (i)
require that the broker-dealers notify it, in writing, two business days prior to making withdrawals or other distributions of
equity capital or lending money to certain related persons if those withdrawals would exceed, in any 30-day period, 30% of the
broker-dealers’ excess net capital, and that they provide such notice within two business days after any such withdrawal
or loan that would exceed, in any 30-day period, 20% of the broker-dealers’ excess net capital; (ii) prohibit a broker-dealer
from withdrawing or otherwise distributing equity capital or making related party loans if, after such distribution or loan, the
broker-dealer would have net capital of less than $300,000 or if the aggregate indebtedness of the broker-dealer’s consolidated
entities would exceed 1,000% of the broker-dealer’s net capital in certain other circumstances; and (iii) provide that the
SEC may, by order, prohibit withdrawals of capital from a broker-dealer for a period of up to 20 business days, if the withdrawals
would exceed, in any 30-day period, 30% of the broker-dealer’s excess net capital and if the SEC believes such withdrawals
would be detrimental to the financial integrity of the broker-dealer or would unduly jeopardize the broker-dealer’s ability
to pay its client claims or other liabilities.
Compliance with regulatory net capital
requirements could limit those operations that require the intensive use of capital, such as underwriting and trading activities,
and could also restrict our ability to withdraw capital from our broker-dealer, which in turn could limit our ability to pay interest,
repay debt, and redeem or repurchase shares of our outstanding capital stock.
We believe that at all times we have been
in compliance with the applicable minimum net capital rules of the SEC and FINRA.
The failure of a U.S. broker-dealer to
maintain its minimum required net capital would require it to cease executing client transactions until it came back into compliance,
and could cause it to lose its FINRA membership, its registration with the SEC or require its liquidation. Further, the decline
in a broker-dealer’s net capital below certain “early warning levels,” even though above minimum net capital
requirements, could cause material adverse consequences to the broker-dealer.
We are also subject to “Risk Assessment
Rules” imposed by the SEC, which require, among other things, that certain broker-dealers maintain and preserve certain
information, describe risk management policies and procedures, and report on the financial condition of certain affiliates whose
financial and securities activities are reasonably likely to have a material impact on the financial and operational condition
of the broker-dealer. Certain “Material Associated Persons” (as defined in the Risk Assessment Rules) of the broker-dealer
and the activities conducted by such Material Associated Persons may also be subject to regulation by the SEC.
In the event of non-compliance by us or
our subsidiary with an applicable regulation, governmental regulators and one or more of the SROs may institute administrative
or judicial proceedings that may result in censure, fine, civil penalties (including treble damages in the case of insider trading
violations), the issuance of cease-and-desist orders, the deregistration or suspension of the non-compliant broker-dealer, the
suspension or disqualification of officers or employees, or other adverse consequences. The imposition of any such penalties or
orders on us or our personnel could have a material adverse effect on our operating results and financial condition.
Additional legislation and regulations,
including those relating to the activities of our broker-dealer, changes in rules promulgated by the SEC, FINRA, or other states,
or foreign governmental regulatory authorities and SROs, or changes in the interpretation or enforcement of existing laws and
rules may adversely affect our operation and profitability. Our businesses may be materially affected not only by regulations
applicable to us as a financial market intermediary but also by regulations of general application.
Geographic Area
Merriman Holdings, Inc. is domiciled in
the United States and most of our revenue is attributed to United States and Canadian clients. In 2007, through our broker-dealer
subsidiary, we began advising both international and domestic companies on listing on OTCQX.
All of our long-lived assets are located
in the United States.
Available Information
Our website address is www.merrimanco.com.
You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and all amendments to those reports on the “Investor Relations” portion of our website under the heading “SEC
Filings.” These reports are available on our website as soon as reasonably practicable after we electronically file them
with the SEC. We are providing the address to our internet site solely for the information of investors. We do not intend the
address to be an active link or to otherwise incorporate the contents of the website into this report.
Item 1a. Risk Factors
We face a variety of risks in our business,
many of which are substantial and inherent in our business and operations. The following are risk factors that could affect our
business which we consider material to our industry and to holders of our common stock. Other sections of this Annual Report on
Form 10-K, including reports which are incorporated by reference, may include additional factors which could adversely impact
our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk
factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the
impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
Risks Related to Our Business
We may not be able to achieve a positive cash flow and profitability.
Our ability to achieve a positive cash
flow and profitability depends on our ability to generate and maintain greater revenue while incurring reasonable expenses. This,
in turn, depends, among other things, on the successful shift from a transaction oriented business to service oriented business.
It also depends on the continued development of our investment banking, securities brokerage business, continued growth in our
Capital Markets Advisory Group (OTCQX) and the successful launch of our Financial Entrepreneur Services platform, and we may be
unable to achieve profitability if we fail to do any of the following:
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establish,
maintain, and increase
our client base;
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manage
the quality of our
services;
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compete
effectively with existing
and potential competitors;
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further
develop our business
activities;
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attract
and retain qualified
personnel;
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settle
pending litigation,
and
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maintain
adequate working capital
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We cannot be certain that we will be able
to achieve a positive cash flow and profitability on a quarterly or annual basis in the future. Our inability to achieve profitability
or positive cash flow could result in disappointing financial results, impede implementation of our growth strategy, or cause
the market price of our common stock to decrease. Accordingly, we cannot assure you that we will be able to generate the cash
flow and profits necessary to sustain our business.
We have had a number of structural changes
to our operations as we divested certain non-core business lines to focus on our core service and product offerings. Additionally,
there have been a number of significant challenges faced by the securities and financial industries in the past three years. As
a result of our structural changes and the uncertainty of the current economic environment, the factors upon which we are able
to base our estimates as to the gross revenue and the number of participating clients that will be required for us to maintain
a positive cash flow are unpredictable. For these and other reasons, we cannot assure you that we will not require higher gross
revenue and an increased number of clients, securities brokerage, and investment banking transactions, and/or more time in order
for us to complete the development of our business that we believe we need to be able to cover our operating expenses. It is more
likely than not that our estimates will prove to be inaccurate because actual events more often than not differ from anticipated
events. Furthermore, in the event that financing is needed in addition to the amount that is required for this development, we
cannot assure you that such financing will be available on acceptable terms, if at all.
There are substantial legal proceedings against us involving
claims for significant damages.
There are a number of legal actions against
us as described in the Legal Proceedings section below. If we are found to be liable for the claims asserted in any or all of
these legal actions, our cash position may suffer such that we are unable to continue our operations. Even if we ultimately prevail
in all of these lawsuits, we may incur significant legal fees and diversion of management’s time and attention from our
core businesses, and our business and financial condition may be adversely affected. We are attempting to negotiate a settlement
with some of the litigants, but there is no assurance of any favorable outcome.
Our exposure to legal liability may be significant, and
damages that we may be required to pay and the reputation harm that could result from legal action against us could materially
adversely affect our businesses.
We face significant legal risks in our
businesses and, in recent years, the volume of claims and amount of damages sought in litigation and regulatory proceedings against
financial institutions have been increasing. These risks include potential liability under securities or other laws for materially
false or misleading statements made in connection with securities offerings and other transactions, potential liability for “fairness
opinions” and other advice we provide to participants in strategic transactions and disputes over the terms and conditions
of trading arrangements. We are also subject to claims arising from disputes with employees for alleged discrimination or harassment,
among other things. These risks often may be difficult to assess or quantify and their existence and magnitude often remain unknown
for substantial periods of time.
Our role as advisor to our clients on important
underwriting or mergers and acquisitions transactions involves complex analysis and the exercise of professional judgment, including
rendering “fairness opinions” in connection with mergers and other transactions. Therefore, our activities may subject
us to the risk of significant legal liabilities to our clients and third parties, including shareholders of our clients who could
bring securities class actions against us. Our investment banking engagements typically include broad indemnities from our clients
and provisions to limit our exposure to legal claims relating to our services, but these provisions may not protect us or may
not be enforceable in all cases.
For example, an indemnity from a client
that subsequently is placed into bankruptcy is likely to be of little value to us in limiting our exposure to claims relating
to that client. As a result, we may incur significant legal and other expenses in defending against litigation and may be required
to pay substantial damages for settlements and adverse judgments. Substantial legal liability or significant regulatory action
against us could have a material adverse effect on our results of operations or cause significant reputation harm to us, which
could seriously harm our business and prospects.
In the past, following periods of volatility
in the market price of a company’s securities, securities class action litigation often has been instituted against many
broker-dealers. Such litigation is expensive and diverts management’s attention and resources. We cannot assure you that
we will not be subject to such litigation. If we are subject to such litigation, even if we ultimately prevail, our business and
financial condition may be adversely affected.
We may not be able to continue operating our business
The Company incurred significant losses
in 2011 and 2010. Even if we are successful in executing our plans, we will not be capable of sustaining losses such as those
incurred in 2011. The Company’s ability to meet its financial obligations is highly dependent on market and economic conditions.
We also recorded net losses in certain quarters within other past fiscal years. If operating conditions worsen in 2012 or if the
Company receives material adverse judgments in its pending litigations, we may not have the resources to meet our financial obligations.
If the Company is not able to continue in business, the entire investment of our common shareholders may be at risk, and there
can be no assurance that any proceeds shareholders would receive in liquidation would be equal to their investment in the Company,
or even that shareholders would receive any proceeds in consideration of their common stock.
Limitations on our access to capital and our ability to
comply with net capital requirements could impair our ability to conduct our business
Liquidity, or ready access to funds, is
essential to financial services firms. Failures of financial institutions have often been attributable in large part to insufficient
liquidity. Liquidity is of importance to our trading business and perceived liquidity issues may affect our clients and counterparties’
willingness to engage in brokerage transactions with us. Our liquidity could be impaired due to circumstances that we may be unable
to control, such as a general market disruption or an operational problem that affects our trading clients, third parties or us.
Further, our ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same
time.
The Company has historically accessed capital
markets to raise money through the sale of equity. Holders of our Series D and E Preferred Stock have certain rights
and restrictive provisions which may affect our ability to continue to raise capital through the issuance of additional common
stock.
MC, our broker-dealer subsidiary, is subject
to the net capital requirements of the SEC and various self-regulatory organizations of which it is a member. These requirements
typically specify the minimum level of net capital a broker-dealer must maintain and also mandate that a significant part of its
assets be kept in relatively liquid form. Any failure to comply with these net capital requirements could impair our ability to
conduct our core business as a brokerage firm. Furthermore, MC is subject to laws that authorize regulatory bodies to prevent
or reduce the flow of funds from it to Merriman Holdings, Inc. As a holding company, Merriman Holdings, Inc. depends on distributions
and other payments from its subsidiary to fund all payments on its obligations. As a result, regulatory actions could impede access
to funds that Merriman Holdings, Inc. needs to make payments on obligations, including debt obligations.
Our financial results may fluctuate substantially from period
to period, which may impair our stock price.
We have experienced, and expect to experience
in the future, significant periodic variations in our revenue and results of operations. These variations may be attributed in
part to the fact that our investment banking revenue is typically earned upon the successful completion of a transaction, the
timing of which is uncertain and beyond our control. In most cases we receive little or no payment for investment banking engagements
that do not result in the successful completion of a transaction. As a result, our business is highly dependent on market conditions
as well as the decisions and actions of our clients and interested third parties. For example, a client’s acquisition transaction
may be delayed or terminated because of a failure to agree upon final terms with the counterparty, failure to obtain necessary
regulatory consents or board or shareholder approvals, failure to secure necessary financing, adverse market conditions, or unexpected
financial or other problems in the client’s or counterparty’s business. If the parties fail to complete a transaction
on which we are advising or an offering in which we are participating, we will earn little or no revenue from the transaction.
Due to many factors, including the increased
regulatory burden on corporate issuers, there have been fewer initial public offerings of securities of U.S. based companies.
Consequently, many fast-growing companies have found a more cost effective method to attract capital through listing on the OTCQX. More
companies initiating the process of an initial public offering are also simultaneously exploring merger and acquisition opportunities.
If we are not engaged as a strategic advisor in any such dual-tracked process, our investment banking revenue would be adversely
affected in the event that an initial public offering is not consummated.
As a result, we are unlikely to achieve
steady and predictable earnings on a quarterly basis, which could in turn adversely affect our stock price.
Our ability to retain our professionals and recruit additional
professionals is critical to the success of our business, and our failure to do so may materially adversely affect our reputation,
business, and results of operations.
Our ability to obtain and successfully
execute our business depends upon the personal reputation, judgment, business generation capabilities and project execution skills
of our senior professionals, particularly D. Jonathan Merriman, our Co-Founder and Chief Executive Officer of Merriman Holdings,
Inc., and the other members of our Executive Committee. Our senior professionals’ personal reputations and relationships
with our clients are a critical element in obtaining and executing client engagements. We face intense competition for qualified
employees from other companies in the investment banking industry as well as from businesses outside the investment banking industry,
such as investment advisory firms, hedge funds, private equity funds, and venture capital funds. From time to time, we have experienced
losses of investment banking, brokerage, research, and other professionals and losses of our key personnel may occur in the future.
The departure or other loss of Mr. Merriman, other members of our Executive Committee or any other senior professional who manages
substantial client relationships and possesses substantial experience and expertise, could impair our ability to secure or successfully
complete engagements, or protect our market share, each of which, in turn, could materially adversely affect our business and
results of operations. Please see Risk Factor below entitled “If our CEO leaves the Company, additional warrants will be
issued, which may further dilute the ownership percentages of the holders of the Company’s Common Stock” for additional
information regarding the consequences of the loss of the services of Mr. Merriman.
If any of our professionals were to join
an existing competitor or form a competing company, some of our clients could choose to leave. The compensation plans and other
incentive plans we have entered into with certain of our professionals may not prove effective in preventing them from resigning
to join our competitors. If we are unable to retain our professionals or recruit additional professionals, our reputation, business,
results of operations, and financial condition may be materially adversely affected.
Our compensation structure may negatively impact our financial
condition if we are not able to effectively manage our expenses and cash flows.
Historically, the industry has been able
to attract and retain investment banking, research, and sales and trading professionals in part because the business models have
provided for lucrative compensation packages. Compensation and benefits are our largest expenditure and the variable compensation
component, or bonus, has represented a significant proportion of this expense. The Company’s bonus compensation is discretionary.
For 2011, the potential pool was determined by a number of components including revenue production, key operating milestones,
and profitability. There is a potential, in order to ensure retention of key employees, that we could pay individuals for revenue
production despite the business having negative cash flows and/or net losses.
Pricing and other competitive pressures may impair the revenue
and profitability of our brokerage business.
We derive a significant portion of our
revenue from our brokerage business. Along with other brokerage firms, we have experienced intense price competition in this business
in recent years. Recent developments in the brokerage industry, including decimalization and the growth of electronic communications
networks, or ECNs, have reduced commission rates and profitability in the brokerage industry. We expect this trend toward alternative
trading systems to continue. We believe we may experience competitive pressures in these and other areas as some of our competitors
seek to obtain market share by competing on the basis of price.
In addition, we face pressure from larger
competitors, which may be better able to offer a broader range of complementary products and services to brokerage customers in
order to win their trading business.
Finally, certain large U.S.-based broker-dealer
firms operate under capital requirements which are less restrictive than the regulatory capital requirements we face, which puts
smaller investment banks such as our Company at a competitive disadvantage in the market place.
We may experience significant losses if the value of our
marketable security positions deteriorates.
We conduct active and aggressive securities
trading, market making, and investment activities for our own account, which subjects our capital to significant risks. These
risks include market, credit, counterparty, and liquidity risks, which could result in losses. These activities often involve
the purchase, sale, or short sale of securities as principal in markets that may be characterized as relatively illiquid or that
may be particularly susceptible to rapid fluctuations in liquidity and price. Trading losses resulting from such activities could
have a material adverse effect on our business and results of operations.
Difficult market conditions could adversely affect our business
in many ways.
Difficult market and economic conditions
and geopolitical uncertainties have in the past adversely affected and may in the future adversely affect our business and profitability
in many ways. Weakness in equity markets and diminished trading volume of securities could adversely impact our brokerage business,
from which we have historically generated more than half of our revenue. Industry-wide declines in the size and number of underwritings
and mergers and acquisitions also would likely have an adverse effect on our revenue. In addition, reductions in the trading prices
for equity securities also tend to reduce the deal value of investment banking transactions, such as underwriting and mergers
and acquisitions transactions, which in turn may reduce the fees we earn from these transactions. As we may be unable to reduce
expenses correspondingly, our profits and profit margins may decline.
We may suffer losses through our investments in securities
purchased in secondary market transactions or private placements.
Occasionally, our Company, its officers
and/or employees may make principal investments in securities through secondary market transactions or through direct investment
in companies through private placements. In many cases, employees and officers with investment discretion on behalf of our Company
decide whether to invest in our account or their personal account. It is possible that gains from investing will accrue to these
individuals because investments were made in their personal accounts, and our Company will not realize gains because it did not
make an investment. It is possible that gains from investing will accrue to these individuals and /or to the Company, while the
Company’s brokerage customers do not accrue gains in the same securities due to differences in timing of investment decisions.
Conversely, it is possible that losses from investing will accrue to our Company, while these individuals do not experience losses
in their personal accounts because the individuals did not make investments in their personal accounts.
We face strong competition from larger firms.
The brokerage and investment banking industries
are intensely competitive. We compete on the basis of a number of factors, including client relationships, reputation, the abilities
and past performance of our professionals, market focus and the relative quality and price of our services and products. We have
experienced intense price competition with respect to our brokerage business, including large block trades, spreads, and trading
commissions. Pricing and other competitive pressures in investment banking, including the trends toward multiple book runners,
co-managers, and multiple financial advisors handling transactions, have continued and could adversely affect our revenue, even
during periods where the volume and number of investment banking transactions are increasing. We believe we may experience competitive
pressures in these and other areas in the future as some of our competitors seek to obtain market share by competing on the basis
of price.
We are a relatively small investment bank
with 35 employees as of December 31, 2011 and revenues of approximately $22 million in 2011. Many of our competitors in the investment
banking and brokerage industries have a broader range of products and services, greater financial and marketing resources, larger
customer bases, greater name recognition, more senior professionals to serve their clients’ needs, greater global reach,
have more established relationships with clients than we have, and some operate under less restrictive capital requirements. These
larger and better capitalized competitors may be better able to respond to changes in the brokerage and investment banking industries,
to compete for skilled professionals, to finance acquisitions, to fund internal growth, and to compete for market share generally.
The scale of our competitors has increased
in recent years as a result of substantial consolidation among companies in the investment banking and brokerage industries. In
addition, a number of large commercial banks, insurance companies, and other broad-based financial services firms have established
or acquired underwriting or financial advisory practices and broker-dealers or have merged with other financial institutions.
These firms operate under less restrictive capital requirements than we do and these firms have the ability to offer a wider range
of products than we do, which enhances their competitive position. They also have the ability to support investment banking with
commercial banking, insurance, and other financial services in an effort to gain market share, which has resulted, and could further
result, in pricing pressure in our businesses. In particular, the ability to provide financing has become an important advantage
for some of our larger competitors and, because we do not provide such financing, we may be unable to compete as effectively for
clients in a significant part of the brokerage and investment banking market.
If we are unable to compete effectively
with our competitors, our business, financial condition, and results of operations will be adversely affected.
We have incurred losses for the period covered by this report
in the recent past and may incur losses in the future.
The Company recorded net losses of $7,894,000
and $5,338,000 for the years ended December 31, 2011 and 2010. We also recorded net losses in certain quarters within other past
fiscal years. We may incur losses in future periods. If we are unable to finance future losses, those losses may have a significant
effect on our liquidity as well as our ability to operate.
In addition, the Company may incur significant
expenses in connection with initiating new business activities or in connection with any expansion of our underwriting, brokerage,
or other businesses. We may also engage in strategic acquisitions and investments for which we may incur significant expenses.
Accordingly, we may need to increase our revenue at a rate greater than our expenses to achieve and maintain profitability. If
our revenue does not increase sufficiently, or even if our revenue does increase but we are unable to manage our expenses, we
will not achieve and maintain profitability in future periods.
Capital markets and strategic advisory engagements are singular
in nature and do not generally provide for subsequent engagements.
The ability to complete capital raising
transactions for our clients is significantly affected by the state of the capital markets in general. Additionally,
our investment banking clients generally retain us on a short-term, engagement-by-engagement basis in connection with specific
capital markets or mergers and acquisitions transactions, rather than on a recurring basis under long-term contracts. As these
transactions are typically singular in nature and our engagements with these clients may not recur, we must seek out new engagements
when our current engagements are successfully completed or are terminated. As a result, high activity levels in any period are
not necessarily indicative of continued high levels of activity in any subsequent period. If we are unable to generate a substantial
number of new engagements and generate fees from those successful completion of transactions, our business and results of operations
would likely be adversely affected.
Our risk management policies and procedures could expose
us to unidentified or unanticipated risk.
Our risk management strategies and techniques
may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk.
We are exposed to the risk that third parties
who owe us money, securities, or other assets will not fulfill their obligations. These parties may default on their obligations
due to bankruptcy, lack of liquidity, operational failure, breach of contract, or other reasons. We are also subject to the risk
that our rights against third parties may not be enforceable in all circumstances. Although we regularly review credit
exposures to specific clients and counterparties and to specific industries and regions that we believe may present credit concerns,
default risk may arise from events or circumstances that are difficult to detect or foresee. In addition, concerns about, or a
default by, one institution could lead to significant liquidity problems, losses, or defaults by other institutions, which in
turn could adversely affect us. Also, risk management policies and procedures that we utilize with respect to investing our own
funds or committing our capital with respect to investment banking or trading activities may not protect us or mitigate our risks
from those activities. If any of the variety of instruments, processes, and strategies we utilize to manage our exposure to various
types of risk are not effective, we may incur losses.
Our operations and infrastructure may malfunction or fail.
Our business is highly dependent on our
ability to process, on a daily basis, a large number of increasingly complex transactions across diverse markets. Our financial,
accounting, or other data processing systems may fail to operate properly or become disabled as a result of events that are wholly
or partially beyond our control, including a disruption of electrical or communication services or our inability to occupy one
or more of our buildings. The inability of our systems to accommodate an increasing volume of transactions could also constrain
our ability to expand our businesses. If any of these systems do not operate properly or are disabled or if there are other shortcomings
or failures in our internal processes, people, or systems, we could suffer impairment to our liquidity, financial loss, disruption
of our businesses, liabilities to clients, regulatory intervention, or reputation damage.
We also face the risk of operational failure
of any of our clearing agents, the exchanges, clearing houses, or other financial intermediaries we use to facilitate our securities
transactions. Any such failure or termination could adversely affect our ability to execute transactions and to manage our exposure
to risk.
In addition, our ability to conduct business
may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which located.
This may include a disruption involving electrical, communication, transportation, or other services used by us or third parties
with whom we conduct business, whether due to fire, other natural disaster, power or communication failure, act of terrorism or
war or otherwise. Nearly all of our employees in our primary locations, including San Francisco and New York, work in proximity
to each other. If a disruption occurs in one location and our employees in that location are unable to communicate with or travel
to other locations, our ability to service and interact with our clients may suffer and we may not be able to implement successfully
contingency plans that depend on communication or travel. Insurance policies to mitigate these risks may not be available or may
be more expensive than the perceived benefit. Further, any insurance that we may purchase to mitigate certain of these risks may
not cover our loss.
Our operations also rely on the secure
processing, storage, and transmission of confidential and other information in our computer systems and networks. Our computer
systems, software, and networks may be vulnerable to unauthorized access, computer viruses, or other malicious code and other
events that could have a security impact. If one or more of such events occur, this potentially could jeopardize our or our clients’
or counterparties’ confidential and other information processed by, stored in, and transmitted through our computer systems
and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’, or third
parties’ operations. We may be required to expend significant additional resources to modify our protective measures or
to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that
are either not insured against or not fully covered through any insurance maintained by us.
Internal Control Over Financial Reporting
– Our management is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in the Securities Exchange Act of 1934 Rules 13a-15(f), to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the United
States Generally Accepted Accounting Principles (U.S. GAAP). The internal control includes policies and procedures to provide
reasonable assurance that transactions are properly accounted for in accordance with U.S. GAAP.
Management assessed the effectiveness of
our internal control over financial reporting as of December 31, 2011 and based on that evaluation, they concluded that such internal
controls and procedures relating to the
accounting research and reporting functions and the closing
and reporting process were not effective.
Management is committed to improving the Company’s internal control over
financial reporting processes and has taken remedial actions to correct the situation.
Evaluation of our prospects may be more difficult in light
of our operating history.
As a result of the volatile economic conditions
faced by the securities and financial industries, and the restructuring of our business lines, there have been a number of changes
to our operations. Given these changes, we can no longer rely upon prior operating history to evaluate our business and prospects.
Additionally, we are subject to the risks and uncertainties that face a company in the process of restructuring its business in
the midst of uncertain economic environment. Some of these risks and uncertainties relate to our ability to attract and retain
employees and clients on a cost-effective basis, expand and enhance our service offerings, raise additional capital, and respond
to competitive market conditions. We may not be able to address these risks adequately, and our failure to do so may adversely
affect our business and the value of an investment in our Common Stock.
Risks Related to Our Industry
Risks associated with volatility and losses in the financial
markets.
In the last 4 years, the U.S. financial
markets have experienced tremendous volatility and uncertainty. Several mortgage-related financial institutions and large, reputable
investment banks were not able to continue operating their businesses. In the event that the securities and financial industries
face similar or greater volatility, there can be no assurance that we will be able to continue our operations.
Employee misconduct could harm us and is difficult to detect
and deter.
There have been a number of highly publicized
cases involving fraud or other misconduct by employees in the financial services industry in recent years. Our experience with
a former employee disrupted our business significantly, and we run the risk that employee misconduct could occur at our Company.
For example, misconduct by employees could involve the improper use or disclosure of confidential information, which could result
in regulatory sanctions and serious reputation or financial harm to us. It is not always possible to deter employee misconduct.
The precautions we take to detect and prevent this activity may not be effective in all cases and we may suffer significant reputation
harm for any misconduct by our employees.
Risks associated with regulatory impact on capital markets.
Highly publicized financial scandals in
recent years have led to investor concerns over the integrity of the U.S. financial markets and have prompted Congress, the SEC,
the NYSE, and FINRA to significantly expand corporate governance and public disclosure requirements. To the extent that private
companies, in order to avoid becoming subject to these new requirements, decide to forgo initial public offerings, our equity
underwriting business may be adversely affected. In addition, provisions of the Sarbanes-Oxley Act of 2002 and the corporate governance
rules imposed by self-regulatory organizations have diverted many companies’ attention away from capital market transactions,
including securities offerings and acquisition and disposition transactions. In particular, companies that are or are planning
to register their securities with the SEC or to become subject to the reporting requirements of the Securities Exchange Act of
1934 are incurring significant expenses in complying with the SEC and accounting standards relating to internal control over financial
reporting, and companies that disclose material weaknesses in such controls under the new standards may have greater difficulty
accessing the capital markets. These factors, in addition to adopted or proposed accounting and disclosure changes, may have an
adverse effect on the business.
Financial services firms have been subject to increased
scrutiny over the last several years, increasing the risk of financial liability and reputation harm resulting from adverse regulatory
actions.
Firms in the financial services industry
have been operating in a differentiated and difficult regulatory environment. The industry has experienced increased scrutiny
from a variety of regulators, including the SEC, the NYSE, FINRA and state attorneys general. Penalties and fines sought by regulatory
authorities have increased substantially over the last several years. This regulatory and enforcement environment has created
uncertainty with respect to a number of transactions that had historically been entered into by financial services firms and that
were generally believed to be permissible and appropriate. We may be adversely affected by changes in the interpretation or enforcement
of existing laws and rules by these governmental authorities and self-regulatory organizations. We also may be adversely affected
as a result of new or revised legislation or regulations imposed by the SEC and other United States or foreign governmental regulatory
authorities or self-regulatory organizations that supervise the financial markets. Among other things, we could be fined, prohibited
from engaging in some of our business activities or subjected to limitations or conditions on our business activities. Substantial
legal liability or significant regulatory action against us could have material adverse financial effects or cause significant
reputation harm to us, which could seriously harm our business prospects.
In addition, financial services firms are
subject to numerous conflicts of interests or perceived conflicts. The SEC and other federal and state regulators have increased
their scrutiny of potential conflicts of interest. We have adopted various policies, controls and procedures to address or limit
actual or perceived conflicts and regularly seek to review and update our policies, controls and procedures. However, appropriate
dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail,
to deal appropriately with conflicts of interest. Our policies and procedures to address or limit actual or perceived conflicts
may also result in increased costs, additional operational personnel and increased regulatory risk. Failure to adhere to these
policies and procedures may result in regulatory sanctions or client litigation. For example, the research areas of investment
banks have been and remain the subject of heightened regulatory scrutiny which has led to increased restrictions on the interaction
between equity research analysts and investment banking personnel at securities firms. Several securities firms in the United
States reached a global settlement in 2003 and 2004 with certain federal and state securities regulators and self-regulatory organizations
to resolve investigations into equity research analysts’ alleged conflicts of interest. Under this settlement, the firms
have been subject to certain restrictions and undertakings, which have imposed additional costs and limitations on the conduct
of our businesses.
Financial service companies have experienced
a number of highly publicized regulatory inquiries concerning market timing, late trading and other activities that focus on the
mutual fund industry. These inquiries have resulted in increased scrutiny within the industry and new rules and regulations for
mutual funds, investment advisers, and broker-dealers.
Our exposure to legal liability is significant, and damages
that we may be required to pay and the reputational harm that could result from legal action against us could materially adversely
affect our businesses.
We face significant legal risks in our
businesses and, in recent years, the volume of claims and amount of damages sought in litigation and regulatory proceedings against
financial institutions have been increasing. These risks include potential liability under securities or other laws for materially
false or misleading statements made in connection with securities offerings and other transactions, potential liability for “fairness
opinions,” and other advice we provide to participants in strategic transactions, and disputes over the terms and conditions
of complex trading arrangements. We are also subject to claims arising from disputes with employees for alleged discrimination
or harassment, among other things. These risks often may be difficult to assess or quantify and their existence and magnitude
often remain unknown for substantial periods of time.
Our role as advisor to our clients on important
underwriting or mergers and acquisitions transactions involves complex analysis and the exercise of professional judgment, including
rendering “fairness opinions” in connection with mergers, and other transactions. Therefore, our activities may subject
us to the risk of significant legal liabilities to our clients and aggrieved third parties, including stockholders of our clients
who could bring securities class actions against us. Our investment banking engagements typically include broad indemnities from
our clients and provisions to limit our exposure to legal claims relating to our services, but these provisions may not protect
us or may not be enforceable in all cases.
For example, an indemnity from a client
that subsequently is placed into bankruptcy is likely to be of little value to us in limiting our exposure to claims relating
to that client. As a result, we may incur significant legal and other expenses in defending against litigation and may be required
to pay substantial damages for settlements and adverse judgments. Substantial legal liability or significant regulatory action
against us could have a material adverse effect on our results of operations or cause significant reputational harm to us, which
could seriously harm our business and prospects.
In the past, following periods of volatility
in the market price of a company’s securities, securities class action litigation often has been instituted against broker-dealer
companies. Such litigation is expensive and diverts management’s attention and resources. We cannot assure you that we will
not be subject to such litigation. If we are subject to such litigation, even if we ultimately prevail, our business and financial
condition may be adversely affected.
Risks Related to Ownership of Our Common
Stock
We have issued Series D and E Convertible Preferred Stock
with rights preferences and privileges that are senior to those of our Common Stock. The exercise of some or all of these Series
D and E Convertible Preferred Stock rights may have a detrimental effect on the rights of the holders of the Common Stock.
On September 8, 2009, we closed a private
placement Preferred Stock financing transaction. We sold 23,720,916 shares of our Series D Convertible Preferred Stock at $0.43
per share (equivalent to 3,388,677 shares of common at a conversion price of $3.01 per share after adjusting for our reverse
stock split in August 2010) and warrants to purchase 3,388,677 share of Common Stock at $4.55 per share to an investor group
that includes certain of our officers and directors, in addition to outside investors. In connection with this transaction, the
Company converted the principal and accrued interest of certain notes issued by the Company between May 2009 and July 2009 into
Series D Convertible Stock. The aggregate principal amount from these cancelled notes was $1,425,000.
As the warrants originally contained a
full ratchet anti-dilution provision, we recorded a non-cash warrant liability of approximately $26 million as of September 30,
2009 in accordance with U. S. GAAP, which resulted in a shareholders’ deficit (negative shareholders’ equity). This,
in turn, caused us to fall outside of the NASDAQ Listing Rules which require a minimum of $2,000,000 of shareholders’ equity.
We have since remedied the noncompliance
with the NASDAQ Listing Rules by amending the warrants to remove the full ratchet anti-dilution provision and thus removed the
resulting shareholders’ deficit. In consideration for such amendment, the Company has agreed to pay the holders of the warrants
$0.035 per warrant share in cash which was paid in February 2011.
The Series D Convertible Preferred Stock
has a number of rights, preferences, and privileges that are superior to those of the Common Stock. Holders of the Series D Convertible
Preferred Stock are entitled to a 6% annual dividend payable monthly in arrears. For the year ended December 31, 2011, the Company
recorded cash dividends of $491,334. The Company is prohibited from paying any dividends on the Common Stock until all accrued
dividends on the Series D Convertible Preferred Stock are first paid.
The holders of Series D Convertible Preferred
Stock are entitled to a “liquidation preference payment” of $0.43 per share of Series D Convertible Preferred Stock
plus all accrued but unpaid dividends on such shares prior and in preference to any payment to holders of the Common Stock upon
a merger, acquisition, sale of substantially all the assets, or certain other liquidation events of the Company. Any proceeds
after payment of the “liquidation preference payment” shall be paid pro rata to the holders of the Series D Convertible
Preferred Stock and Common Stock on an as converted to Common Stock basis. As such, holders of Common Stock might receive nothing
in liquidation, or receive much less than they would if there were no Series D Convertible Preferred Stock outstanding.
The holders of the Series D Convertible
Preferred Stock also have substantial voting power over the Company. Such holders are entitled to elect four of the nine authorized
members of our Board of Directors. Additionally, they have certain “protective provisions,” as set forth in the Certificate
of Designation, requiring us to obtain their approval before we can carry out certain actions. The holders of Series D Convertible
Preferred Stock may gain additional voting power if they exercise the warrants or they acquire shares of our Common Stock in the
market.
The interests of the holders of the Series
D Convertible Preferred Stock might not be aligned with those of the holders of Common Stock, which could result in the Company
being sold or liquidated in a transaction in which the holders of Common Stock receive little or nothing.
In connection with the private placement
transaction, we entered into an Investors’ Rights Agreement with the investors. Under the terms of the Investors’
Rights Agreement, if a registration statement relating to the Common Shares underlying the Series D Convertible Preferred Stock
and warrants is not declared effective or is not available within time lines provided in the Investors’ Rights Agreement
(with certain limited exceptions), then we are required to pay the investors, pro rata, in proportion to the number of shares
of Series D Convertible Preferred Stock purchased by such investor in the transaction, five year warrants to purchase 21,428 shares
of the Company’s Common Stock at $4.55 per share, on terms identical to those issued to the investors under the financing
transaction (the “Registration Warrants”), as liquidated damages and not as penalty, subject to an overall limit of
liquidated damages in the aggregated of 128,571Registration Warrants. The liquidated damages pursuant to the terms hereof shall
apply on a daily pro rata basis for any portion of a month prior to securing an effective registration statement. The foregoing
shall in no way limit any equitable remedies available to investors for failure to secure an effective registration statement
by the time specified in the Investors’ Rights Agreement. Investors shall also be able to pursue monetary damages for failure
to secure an effective registration statement by the time specified in the Investors’ Rights Agreement. Investors shall
also be able to pursue monetary damages for failure to secure an effective registration statement by the agreed upon time but
only if such failure is due to the willful or deliberate action or inaction of the Company in breach of the covenants.
During November 2011, more than 50% of
the holders of the outstanding Series D Convertible Preferred Stock approved (1) an amendment to provide for dividends to be paid
only when, if and as declared by the Board of Directors and such dividends will accumulate and compound until paid; (2) an amendment
to decrease the “full ratchet” anti-dilution provision of the Series D Certificate of Designation to an amount equal
to two times the AP, as applicable to the conversion of the Secured Promissory Notes and Unsecured Promissory Notes.
This amendment effectively reduces the
Company’s Series D Convertible Preferred Stock annual dividend requirement by approximately $500,000 unless such dividends
are declared by the Board of Directors.
On December 30, 2011, the Company issued
2,531,744 shares of Series E Convertible Preferred Stock at $0.63 per share plus warrants to purchase 1,265,874 shares of the
Company’s common stock with an exercise price of $0.63 per share. The warrants expire five years from the effective date.
All Series E Convertible Preferred shareholders are directors of the Company.
The Series E Convertible Preferred Stock
carries a dividend rate of 9% per annum, such dividends will be paid only when, if and as declared by the Board of Directors and
will accumulate until paid. The Company is prohibited from paying any dividends on the Common Stock until all accrued dividends
on the Series D and Series E Convertible Preferred Stock are first paid.
The holders of Series E Convertible Preferred
Stock are entitled to a “liquidation preference payment” of $0.63 per share of Series E Convertible Preferred Stock
plus all accrued but unpaid dividends on such shares prior and in preference to any payment to holders of the Common Stock upon
a merger, acquisition, sale of substantially all the assets, or certain other liquidation events of the Company. Any proceeds
after payment of the “liquidation preference payment” shall be paid pro rata to the holders of the Series D and E
Convertible Preferred Stock and Common Stock on an as converted to Common Stock basis.
Your ownership percentage may be diluted by warrants issued
in connection with our convertible notes financing.
The investors of the convertible notes
issued on May 29, 2009 and June 1, 2009 received warrants to purchase an aggregate of 133,928 shares of the Common Stock of the
Company at $3.50 per share on a post-reverse split basis. The investor and guarantors of the Note issued on July 31, 2009 received
warrants to purchase an aggregate of 332,225 shares of the Common Stock of the Company at $4.55 per share on a post-reverse split
basis. While the convertible notes and the note are no longer outstanding, the warrants issued in conjunction with them are, and
exercise of these warrants would dilute the ownership percentage of existing shareholders in the Company.
Investor interest in our firm may be diluted due to issuance
of additional shares of common stock.
Our Board of Directors has the authority
to issue up to 300,000,000 shares of common stock and to issue options and warrants to purchase shares of our common stock without
shareholder approval in certain circumstances. Future issuance of additional shares of our common stock could be at values substantially
below the price at which you may purchase our stock and, therefore, could represent substantial dilution. In addition, our Board
of Directors could issue large blocks of our common stock to fend off unwanted tender offers or hostile takeovers without further
shareholder approval.
The table below represents a list of potentially
dilutive securities outstanding as of March 26, 2012:
|
|
Potentially
|
|
|
Weighted-Average
|
|
|
|
Dilutive
|
|
|
Exercise Price
|
|
|
|
Securities
|
|
|
or
|
|
|
|
Outstanding
|
|
|
Conversion Price
|
|
|
|
|
|
|
|
|
Series D convertible preferred stock warrants
|
|
|
3,388,677
|
|
|
$
|
4.55
|
|
Series E convertible preferred stock warrants
|
|
|
1,345,239
|
|
|
|
0.63
|
|
Conversion of Series D preferred stock
|
|
|
6,358,872
|
|
|
|
-
|
|
Conversion of Series E preferred stock
|
|
|
2,690,474
|
|
|
|
-
|
|
Stock options
|
|
|
929,646
|
|
|
|
6.18
|
|
Other outstanding warrants
|
|
|
1,030,909
|
|
|
|
3.57
|
|
Potentially dilutive securities
|
|
|
15,743,817
|
|
|
|
1.63
|
|
In addition to the potentially dilutive
securities listed above, the total number of common shares outstanding as of March 26, 2012 was 6,471,839.
The exercise of the outstanding options
and warrants would dilute the then-existing shareholders’ percentage ownership of our common stock. Any sales resulting
from the exercise of options and warrants in the public market could adversely affect prevailing market prices for our common
stock. Moreover, our ability to obtain additional equity capital could be adversely affected since the holders of outstanding
options and warrants may exercise them at a time when we would also wish to enter the market to obtain capital on terms more favorable
than those provided by such options and warrants. We lack control over the timing of any exercise or the number of shares issued
or sold if exercises occur.
A significant percentage of our outstanding common stock
is owned or controlled by senior members of our firm and other employees and their interests may differ from those of other shareholders.
Our executive officers and directors, and
entities affiliated with them, currently control approximately 44% of our outstanding common stock including exercise of their
options and Series D and E Preferred Stock and associated warrants. These shareholders, if they act together, will be able to
exercise substantial influence over all matters requiring approval by our shareholders, including the election of directors and
approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing
a change in control of us and might affect the market price of our common stock.
Provisions of the organizational documents may discourage
an acquisition of us.
Our Articles of Incorporation authorize
our Board of Directors to issue additional shares of preferred stock, without approval from our shareholders. This preferred stock,
often called “blank check” preferred stock, could have conversion terms that would allow one share of preferred stock
to convert into multiple shares of common stock. It could also have voting rights and other rights advantageous to holders of
that preferred stock, but disadvantageous to holders of the Company’s common stock.
If you hold our common stock, this means
that our Board of Directors has the right, without your approval as a common shareholder, to fix the relative rights and preferences
of the preferred stock. This would affect your rights as a common shareholder regarding, among other things, dividends and liquidation.
We could also use the preferred stock to deter or delay a change in control of our Company that may be opposed by our management
even if the transaction might be favorable to you as a common shareholder.
In addition, the Delaware General Corporation
Law contains provisions that may enable our management to retain control and resist a takeover of the Company. These provisions
generally prevent us from engaging in a broad range of business combinations with an owner of 15% or more of our outstanding voting
stock for a period of three years from the date that such person acquires his or her stock. Accordingly, these provisions could
discourage or make more difficult a change in control or a merger or other type of corporate reorganization even if it could be
favorable to the interests of our shareholders.
The market price of our common stock may decline.
The market price of our common stock has
in the past been, and may in the future continue to be, volatile. A variety of events may cause the market price of our common
stock to fluctuate significantly, including:
|
·
|
variations
in quarterly operating
results;
|
|
·
|
announcements
of significant contracts,
milestones, and acquisitions;
|
|
·
|
relationships
with other companies;
|
|
·
|
ability
to obtain needed capital
commitments;
|
|
·
|
additions
or departures of key
personnel;
|
|
·
|
sales
of common and preferred
stock, conversion
of securities convertible
into common stock,
exercise of options
and warrants to purchase
common stock, or termination
of stock transfer
restrictions;
|
|
·
|
general
economic conditions,
including conditions
in the securities
brokerage and investment
banking markets;
|
|
·
|
changes
in financial estimates
by securities analysts;
and
|
|
·
|
fluctuations
in stock market price
and trading volume.
|
Many of these factors are beyond our control.
Any one of the factors noted herein could have an adverse effect on the value of our common stock. Declines in the price of our
stock may adversely affect our ability to recruit and retain key employees, including our senior professionals.
In addition, the stock market in recent
years has experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities
of many companies and that often have been unrelated to the operating performance of such companies. These market fluctuations
have adversely impacted the price of our common stock in the past and may do so in the future.
Your ability to sell your shares may be restricted because
there is a limited trading market for our common stock
.
An active trading market in our stock has
been limited. Accordingly, you may not be able to sell your shares when you want or at the price you want.
We do not expect to pay any cash dividends on our common
stock in the foreseeable future.
We do not anticipate paying cash dividends
on our common stock in the foreseeable future. Accordingly, our common stock shareholders must rely on sales of their shares of
common stock after price appreciation, which may never occur, as the primary means to realize any future gains on an investment
in our common stock. Investors seeking cash dividends should not purchase our common stock.
If our CEO leaves the Company, additional warrants will
be issued, which may further dilute the ownership percentage of the holders of the Company's Common Stock
If D. Jonathan Merriman ceases to serve
as Chief Executive Officer of the Company prior to August 27, 2012, the Company agreed in connection with the issuance of the
Series D Convertible Preferred Stock to issue additional warrants (the “Merriman Warrants”) to the holders of the
Series D Preferred Stock to purchase shares of the Company’s Common Stock. The Merriman Warrants would be exercisable
for a total of 3,388,677 shares of common stock, with an exercise price of $4.55 per share and a term of five years. Exercise
of the Merriman Warrants would dilute the ownership percentage of existing holders of Common Stock. If Mr. Merriman is deceased,
is terminated without “Cause” or resigns with “Good Reason,” these warrants will not be issuable. “Cause”
and “Good Reason” are defined in the Investors Rights Agreement entered into in connection with the issuance of the
Series D Preferred Stock, which was filed as Exhibit 10.48 to the Company’s Amended Current Report on Form 8-K/A on September
2, 2009.
Item 1b. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2011, all of our real
estate properties are leased. Our principal executive offices are located in San Francisco, CA and New York City, NY. We
believe the facilities we are now using are adequate and suitable for business requirements.
Item 3. Legal Proceedings
Del Biaggio/Cacchione Matters
A
number of lawsuits have been filed against the Company and its
broker dealer subsidiary, MC
(collectively, “Merriman Parties”), in connection with the actions of William Del Biaggio III (Del Biaggio), a former
customer of the Company and David Scott Cacchione (Cacchione), a former retail broker of the Company.
Del Biaggio and Cacchione
pled guilty to securities fraud and were subsequently imprisoned.
Lawsuits against the Company in connection
with Cacchione’s activities are as follows:
Trustee for the Bankruptcy estates
of William James “Boots” Del Biaggio and BDB Management, LLC v. Merriman Capital, Inc. and D. Jonathan Merriman.
On September 2, 2011,
a complaint was filed in FINRA arbitration against MC and D. Jonathan Merriman by the bankruptcy estates of William James “Boots”
Del Biaggio III and BDB Management, LLC. The complaint alleges various causes of action arising from alleged unauthorized trading
and cross collateralization in plaintiff’s accounts at MC and seeks damages of $7.2 million. MC believes that it has valid
defenses and intends to contest these claims vigorously. On November 2, 2011, MC filed an answer to the complaint on behalf of
MC and D. Jonathan Merriman, denying the allegations and asserting, among other things, the right to set off damages caused to
the Merriman Parties by Del Biaggio, who is currently serving an eight year sentence in federal prison for fraud, in an amount
well in excess of plaintiff’s alleged damages. MC believes it has meritorious defenses and intends to contest these claims
vigorously. Since MC
believes that the likelihood of an unfavorable outcome in the case is remote,
management has not provided an accrual for this lawsuit.
Khachaturian, Peterson and Salvi v. Merriman Capital, Inc.
and Merriman Holdings, Inc.
Complaints were filed
in the San Francisco County Superior Court, California, by Henry Khachaturian in January 2011, by Chuck Peterson in February 2010
and by Dolores Salvi in October 2010. The complaints also named as defendants the Company’s officers and former officers
D. Jonathan Merriman, Gregory Curhan, and Robert Ford. Messrs Curhan and Ford were dropped from the case in January 2011.
The complaints were consolidated into one case in March 2011. The complaints allege that plaintiffs were convinced by the Company
to purchase shares of a small, risky stock in which the Company held a position. It further alleges that the Company’s broker
dealer subsidiary, Merriman Capital, Inc. did not permit plaintiffs to sell the shares when the stock’s price fell. The
complaints seek unspecified compensatory and punitive damages. The Company believes it has meritorious defenses and intends to
contest these claims vigorously. Since
the Company believes that the likelihood of an unfavorable outcome
in the case is remote, management has not provided an accrual for this lawsuit.
Don Arata and Gary Thronhill, et al. v. Merriman Capital,
Inc. et al.
In
July 2008, the Company and its
broker dealer subsidiary, MC
were served with complaints filed
in the San Francisco County, California Superior Court by several plaintiffs who invested money with Del Biaggio and related entities.
In March 2009, the Company and MC were served with an amended consolidated complaint on behalf of 39 plaintiffs which consolidated
several similar pending actions filed by the same law firm.
Plaintiffs allege, among other things,
fraud based on Cacchione’s alleged assistance to Del Biaggio in connection with the fraudulent investments and the Company’s
failure to discover and stop the continuing fraud. Plaintiffs in this lawsuit seek damages of over $9 million. The Merriman Parties
responded to the amended consolidated complaint in June 2009 denying all liability. Although we believed that the Merriman Parties
had meritorious defenses, the Company and MC signed separate comprehensive settlement agreements with the plaintiffs on May 9,
2011. MC was dismissed from the case with prejudice in May 2011. The Company was dismissed from the case with prejudice in January
2012.
Pacific Capital Bank v. Merriman Capital,
Inc.
In October 2008, MC
was served with a complaint filed in the San Francisco County Superior Court by Pacific Capital Bank. Plaintiff alleges, among
other things, fraud based on Cacchione having induced plaintiff into making loans to Del Biaggio. Plaintiff in this lawsuit alleges
damages of $1.84 million. MC settled all claims in this case on January 28, 2011.
Other Litigation
Other legal cases
not arising out of the Del Biaggio/Cacchione matters are as follows:
Spare Backup v. Merriman Capital, Inc. (Settled)
In April 2008, MC
entered into an engagement to provide investment banking services to Spare Backup, Inc. MC completed a bridge financing for Spare
Backup, Inc. in the amount of $1,300,000 in June 2008. As a result of closing the financing transaction, MC was entitled to reimbursement
of its expenses, a convertible note with principal valued at $161,100 and 370,370 shares of Spare Backup, Inc.’s common
stock. As of November 2008, these transaction fees had not been paid to MC. We hired counsel to seek payment of the fees and to
proceed to arbitration, as is specified in the engagement letter. In January 2009, MC filed a petition to compel arbitration in
the San Francisco County Superior Court. In response to the petition to compel arbitration, Spare Backup filed a complaint in
the Riverside County Superior Court, Indio Branch, for fraud and declaratory relief alleging that MC fraudulently induced it to
execute the investment banking engagement letter. The petition for arbitration was granted in May of 2009 and the Indio action
was stayed for all purposes pending the outcome of arbitration. The parties settled the case by mutual agreement on March 22,
2011.
Additionally, from time to time, the Company
is involved in ordinary routine litigation incidental to our business.
The expenses incurred by the Company for
the years ended December 31, 2011 and 2010 for legal services and litigation settlements amounted to $711,000 and $3,411,000,
respectively. Of the total legal settlement and professional fees incurred for the year ended December 31, 2010, $606,000
was settled in common stock, of which $461,675 were issued in 2011.
PART II
Item 5. Market for Registrant’s Common Stock and Related
Stockholder Matters
Our common stock had been quoted on the
NASDAQ Stock Market, Inc. under the symbol “MERR” since February 12, 2008. Prior to this time, it traded on the American
Stock Exchange under the symbol “MEM.” Since November 2011, our common stock was listed on the OTCQX, where it currently
trades under the symbol “MERR.” The following table sets forth the range of the high and low sales prices per share
of our common stock for the fiscal quarters indicated.
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
1.47
|
|
|
$
|
0.41
|
|
Third Quarter
|
|
|
2.60
|
|
|
|
1.40
|
|
Second Quarter
|
|
|
3.05
|
|
|
|
2.15
|
|
First Quarter
|
|
|
4.06
|
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
3.03
|
|
|
$
|
1.90
|
|
Third Quarter
|
|
|
4.13
|
|
|
|
2.35
|
|
Second Quarter
|
|
|
6.37
|
|
|
|
3.43
|
|
First Quarter
|
|
|
7.28
|
|
|
|
4.90
|
|
The closing sale price for the common stock
on March 26, 2012 was $0.59. The market price of our common stock has fluctuated significantly and may be subject to
significant fluctuations in the future. See Item 1A – “Risk Factors.”
According to the records of our transfer
agent, we had 625 stockholders of record as of December 31, 2011. Since many shares are held by brokers and other institutions
on behalf of shareholders, we are unable to estimate the total number of beneficial shareholders represented by these record holders.
Our policy is to reinvest earnings in order
to fund future growth. Therefore, we have not paid, and currently do not plan to declare, dividends on our common stock.
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table gives information about
the Company’s common stock that may be issued upon the exercise of options and warrants under all of our existing equity
compensation plans as of December 31, 2011.
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
|
|
Securities
|
|
|
|
Securities to
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
be Issued
|
|
|
Average
|
|
|
Available
|
|
|
|
Upon
|
|
|
Exercise
|
|
|
For Future
|
|
|
|
Exercise of
|
|
|
Price of
|
|
|
Issuance
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Under Equity
|
|
|
|
Options and
|
|
|
Options and
|
|
|
Compensation
|
|
Plan Category
|
|
Warrants
|
|
|
Warrants
|
|
|
Plans
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
1999 Stock Option Plan (expired 12/30/08)
|
|
|
8,162
|
|
|
$
|
31.63
|
|
|
|
-
|
|
2000 Stock Option and Incentive Plan (expired 2/28/10)
|
|
|
16,657
|
|
|
$
|
5.90
|
|
|
|
-
|
|
2001 Stock Option and Incentive Plan
|
|
|
19,342
|
|
|
$
|
11.01
|
|
|
|
-
|
|
2003 Stock Option and Incentive Plan
|
|
|
274,994
|
|
|
$
|
4.62
|
|
|
|
-
|
|
2009 Stock Incentive Plan
|
|
|
666,978
|
|
|
$
|
5.79
|
|
|
|
820,765
|
|
2006 Directors’ Stock Option and Incentive Plan
|
|
|
14,118
|
|
|
$
|
3.01
|
|
|
|
-
|
|
Equity compensation not approved by stockholders
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Equity compensation not approved by shareholders
includes shares in a Non-Qualified option plan approved by the Board of Directors of NetAmerica.com Corporation (now known as
Merriman Holdings, Inc.) in 1999 and a Non-Qualified option plan approved by the Board of Directors in 2004 that is consistent
with the exchange guidelines at the time of listing.
Recent Sale of Unregistered Securities
On September 29, 2010, the Company borrowed
$1,000,000 from nine individual lenders, all of whom were directors, officers or employees of the Company at the time of issuance,
pursuant to a series of unsecured promissory notes (Subordinated Notes). The Subordinated Notes are for a term of three
years and provide for interest comprising two components: (i) six percent (6.0%) per annum to be paid in cash monthly; and (ii)
eight percent (8.0%) per annum to be accrued and paid in cash upon maturity. Additional consideration was paid to the
lenders at closing comprising a number of shares of common stock of the Company equal to: (A) 30% of the principal amount
lent; divided by (B) $3.01 per share. A total of 99,663 shares of common stock were issued.
On November 1, 2010, the Company issued
$300,000 in Unsecured Promissory Notes to four of its Series D Convertible Preferred Stock investors with a maturity date of the
earlier of January 31, 2011 or the consummation of a qualified financing, as defined. The Unsecured Promissory Notes
provide for interest of twelve percent (12%) per annum to be paid in cash at maturity. Additional consideration was
paid to the lenders at closing comprising a number of shares of common stock of the Company equal to 55% of the principal amount
lent divided by $3.01 per share. A total of 54,817 shares of common stock were issued.
Secured Promissory Note
On November 17, 2010, the Company issued
$1,050,000 in Secured Promissory Note to Ronald L. Chez, its Co-Chairman of the Board of Directors. The Secured Promissory
Note is secured by certain accounts receivable which were purchased by the Company from its broker dealer subsidiary, MC, with
the proceeds of the transaction being used for such purchase. The Secured Promissory Note is due and payable in two tranches
as the accounts receivable become due, with $950,000 due on January 19, 2011 and $100,000 due on February 28, 2011. It
provides for interest of 29.2% per annum and additional consideration comprising two components (i) 50,000 shares of the
Company’s Series D Preferred Stock (which is convertible into 7,142 shares of our Common Stock); and (ii) a cash fee of
$15,000. The proceeds were used to supplement underwriting capacity of MC. The Company paid off $720,000
of the Secured Promissory Note on December 22, 2010. As of December 31, 2010, the Secured Promissory Note of $330,000 remains
outstanding and is included in notes payable to related parties – short term in the Company’s consolidated statement
of financial condition. For the year ended December 31, 2010, the Company incurred $48,000 as fees on the Secured Promissory
Notes (included in cost of underwriting capital in the Company’s consolidated statement of operations), which remain outstanding
as of December 31, 2010 and is included in accrued expenses and other in the consolidated statements of financial position. On
January 21, 2011, this Secured Promissory Note was amended to extend the maturity date to April 15, 2011 and change the 50,000
Series D Convertible Preferred Stock consideration to cash compensation of $21,000.
In April 2011, the Company raised $2,770,000
from 24 investors, of which 11 were directors, officers, consultants or employees of the Company at the time of issuance, pursuant
to a series of secured promissory notes (Secured Promissory Notes). The Secured Promissory Notes are for a term of three
years and provide for interest of ten percent (10.0%) per annum to be paid in cash quarterly. Additional consideration was
paid to the lenders at closing comprising warrants to purchase shares of the common stock of the Company at a price per share
equal to 85% of the Company’s stock price at the closing date (the Warrants). 86 Warrants were issued for each $1,000
invested. A total of 238,220 Warrants were issued. The Warrants issued to directors, officers, consultants and
employees (Insider Warrants) of the Company provide that the Insider Warrants will not be exercisable unless first approved by
the Company’s stockholders. These notes are secured by a security interest in and right of setoff against all of such
the Company’s right, title and interest in, to all of the capital stock of MC, together with all proceeds, rents, profits
and returns of and from any of the foregoing. Also, beginning on the date which is one year from the issuance date, if there is
an equity financing of the Company resulting in gross proceeds of at least $15,000,000 in new money, holders shall have the option
to put 50% of Secured Promissory Notes originally purchased back to the Company, for an amount equal to the principal plus accrued
but unpaid interest, on 30 days written notice. The Secured Promissory Notes were issued in two tranches, one closed on April
7, 2011 for $2,470,000 and the other closed on April 21, 2011 for $300,000.
On November
16, 2011, the Company entered into e
xchange agreements with certain Secured Promissory Note investors whereby the investors
agree to exchange the Secured Promissory Notes and Warrants for shares of common stock and new warrants to purchase shares of
common stock of the Company as follows.
|
(a)
|
For the Secured Promissory Notes,
a number of new shares of common stock equal to (i) the total
amount of principal plus accrued but unpaid interest of the Secured
Promissory Notes submitted for cancellation divided by (ii) an
amount equal to 80% of the average closing price per share of
common stock as quoted on the exchange on which it principally
trades for the 30 day period ending two days prior to the closing
date (the AP); plus
|
|
(b)
|
For the Warrants, 1.25 new warrants
for each Warrant converted, with each new warrant carrying an
exercise price equal to 110% of the AP.
|
Fifteen investors
agreed to exchange $1,750,000 principal balance of the
Secured Promissory Notes plus $22,000 accrued interest for 2,373,505
shares of common stock and 188,126 warrants.
The Company accounted for this transaction
in accordance with ASC 470,
Debt
, as an extinguishment of debt, whereby a gain or loss was calculated as the difference
between the reacquisition price and net carrying value of the debt. The reacquisition price was determined as the sum of the fair
value of the common stock and new warrants less the fair value of the original Warrants. The warrants were valued using the Black-Scholes
fair value model. A loss of $1,134,000 was recorded on the transaction based on a reacquisition price of $2,688,000 and net carrying
value, including interest, of $1,554,000.
Series E Convertible Preferred Stock
On December 30, 2011, the Company issued
2,531,744 shares of Series E Convertible Preferred Stock at $0.63 per share plus warrants to purchase 1,265,874 shares of the
Company’s common stock with an exercise price of $0.63 per share. The warrants expire five years from the effective date.
The total proceeds of $1,595,000 were allocated between the Series E Convertible Preferred Stock and the related warrants based
on the relative fair values of each instrument at the time of issuance. All Series E Convertible Preferred shareholders are directors
of the Company.
The Series E Convertible Preferred Stock
carries a dividend rate of 9% per annum, such dividends will be paid only when, if and as declared by the Board of Directors and
will accumulate until paid. The Company is prohibited from paying any dividends on the Common Stock until all accrued dividends
on the Series D and Series E Convertible Preferred Stock are first paid.
The holders of Series E Convertible Preferred
Stock are entitled to a “liquidation preference payment” of $0.63 per share of Series E Convertible Preferred Stock
plus all accrued but unpaid dividends on such shares prior and in preference to any payment to holders of the Common Stock upon
a merger, acquisition, sale of substantially all the assets, or certain other liquidation events of the Company. Any proceeds
after payment of the “liquidation preference payment” shall be paid pro rata to the holders of the Series D and E
Convertible Preferred Stock and Common Stock on an as converted to Common Stock basis.
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. (formerly Merriman
Curhan Ford Group, Inc.) is a financial services company that primarily provides investment banking, sales and trade execution,
and equity research through our primary operating subsidiary, Merriman Capital, Inc. (“MC”).
MC is an investment bank and securities
broker-dealer focused on fast-growing companies and institutional investors. 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 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 December 31, 2011, we had 35 employees. MC is registered
with the Securities and Exchange Commission (SEC) as a broker-dealer and is a member of Financial Industry Regulatory Authority
(FINRA) and the Securities Investors Protection Corporation (SIPC).
Executive Summary
Our total revenues decreased 28%
in 2011 to $21,949,000, primarily due to decreases in our investment banking and principal transaction revenues, resulting in
a 48% increase in our net loss. Our net cash used in operating activities increased by approximately $2,900,000 primarily due
to reduction in commission and bonus payables and accrued liabilities.
Commissions
– Commission revenue
from institutional brokerage business decreased by 10% to $13,411,000 in 2011 from $14,938,000 in 2010. The decrease was primarily
due to the fact that we had fewer producers in 2011. 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
transaction revenue amounted to a loss of $777,000 in 2011, a 144% decrease as compared to a gain of $1,785,000 in 2010 primarily
due to market volatility. 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 Riverbank’s, decreased 37% to $8,440,000 in 2011 from $13,413,000 in 2010 consisting of a decrease
of $8,143,000 or 61% in investment banking revenues, partially offset by an increase in Riverbank’s revenues of $3,199,000.
Decrease in investment banking revenues was primarily due to the decrease in number of deals closed. The number of large deals
(over $250,000 in fees), excluding Riverbank’s, closed in 2011 was 7 versus 15 in 2010.
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 65% to $876,000
in 2011 from $531,000 in 2010 primarily due to increase in the number of clients, 29 in 2011 versus 13 in 2010.
Employees –
During 2011, our
headcount was reduced in an effort to eliminate certain unprofitable revenue activities. At December 31, 2011 and 2010,
the Company had 35 and 77 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 2011.
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, 2011 and 2010:
|
|
2011
|
|
|
2010
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
13,411,312
|
|
|
$
|
14,937,938
|
|
Principal transactions
|
|
|
(777,495
|
)
|
|
|
1,784,868
|
|
Investment banking
|
|
|
8,439,569
|
|
|
|
13,412,832
|
|
Other revenues
|
|
|
875,894
|
|
|
|
530,673
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
21,949,280
|
|
|
|
30,666,311
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
17,164,221
|
|
|
|
19,078,084
|
|
Stock-based compensation
|
|
|
725,179
|
|
|
|
1,636,100
|
|
Brokerage and clearing fees
|
|
|
1,395,820
|
|
|
|
1,483,436
|
|
Professional services
|
|
|
1,359,004
|
|
|
|
1,404,195
|
|
Occupancy and equipment
|
|
|
1,912,617
|
|
|
|
1,910,553
|
|
Communications and technology
|
|
|
1,954,384
|
|
|
|
2,006,615
|
|
Depreciation and amortization
|
|
|
125,726
|
|
|
|
401,346
|
|
Travel and business development
|
|
|
894,959
|
|
|
|
1,226,378
|
|
Legal services and litigation settlement expense
|
|
|
710,841
|
|
|
|
3,410,914
|
|
Cost of underwriting capital
|
|
|
97,625
|
|
|
|
1,068,520
|
|
Other
|
|
|
1,898,884
|
|
|
|
2,351,864
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
28,239,260
|
|
|
|
35,978,005
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(6,289,980
|
)
|
|
|
(5,311,694
|
)
|
Other income
|
|
|
51,601
|
|
|
|
25,418
|
|
Interest income
|
|
|
6,249
|
|
|
|
13,576
|
|
Interest expense
|
|
|
(378,239
|
)
|
|
|
(84,793
|
)
|
Amortization of debt discount
|
|
|
(93,269
|
)
|
|
|
(81,035
|
)
|
Loss on early extinguishment of debt
|
|
|
(1,183,917
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(7,887,555
|
)
|
|
|
(5,438,528
|
)
|
Income tax benefit
|
|
|
(6,107
|
)
|
|
|
5,005
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(7,893,662
|
)
|
|
|
(5,433,523
|
)
|
Income from discontinued operations
|
|
|
-
|
|
|
|
95,104
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,893,662
|
)
|
|
$
|
(5,338,419
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(8,384,996
|
)
|
|
$
|
(5,929,544
|
)
|
Our total revenues in 2011 decreased by
$8,717,000 or 28%, from 2010. Of the total decrease in revenues,
$8,143,000 or 61% was due to investment banking, partially
offset by $3,199,000 Riverbank’s revenues for a net decrease of $4,973,000 or 37%. Other contributing factors were a decrease
in commission revenue of $1,527,000 or 10% and a decrease in principal revenue of $2,562,000 or 143%, partially offset by an increase
in OTCQX revenue of $345,000 or 65%.
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:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Capital raising
|
|
$
|
6,580,948
|
|
|
$
|
12,596,123
|
|
Financial advisory
|
|
|
1,858,621
|
|
|
|
816,709
|
|
|
|
|
|
|
|
|
|
|
Total investment banking revenue
|
|
$
|
8,439,569
|
|
|
$
|
13,412,832
|
|
|
|
|
|
|
|
|
|
|
Transaction Volumes:
|
|
|
|
|
|
|
|
|
Public offerings:
|
|
|
|
|
|
|
|
|
Capital underwritten participations
|
|
$
|
356,964,000
|
|
|
$
|
780,800,000
|
|
Number of transactions
|
|
|
9
|
|
|
|
11
|
|
Private placements:
|
|
|
|
|
|
|
|
|
Capital raised
|
|
$
|
652,300,000
|
|
|
$
|
312,396,000
|
|
Number of transactions
|
|
|
12
|
|
|
|
13
|
|
Financial advisory:
|
|
|
|
|
|
|
|
|
Transaction amounts
|
|
$
|
160,000,000
|
|
|
$
|
43,029,000
|
|
Number of transactions
|
|
|
3
|
|
|
|
4
|
|
Our investment banking revenues, including
Riverbank’s, decreased 37% to $8,440,000 in 2011 from $13,413,000 in 2010 consisting of a decrease of $8,143,000 or 61%
in investment banking revenues, partially offset by an increase in Riverbank ‘s revenues of $3,199,000. Decrease in investment
banking revenues was primarily due to the decrease in number of deals closed. The number of large deals (over $250,000 in fees),
excluding Riverbank’s, closed in 2011 was 7 versus 15 in 2010. As a percentage of total revenues, investment banking
revenues, including Riverbank’s, contributed 38% in 2011 comparing to 44% in 2010.
During the year ended December 31, 2010,
there was one investment banking client that accounted for more than 10% of our total revenues. During 2011, 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 several operating metrics which we utilize in measuring and evaluating performance and the results of our trading operations:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Commissions on institutional equities
|
|
$
|
13,411,312
|
|
|
$
|
14,937,938
|
|
|
|
|
|
|
|
|
|
|
Principal transactions:
|
|
|
|
|
|
|
|
|
Customer principal transactions, proprietary trading
and market making
|
|
$
|
188,559
|
|
|
$
|
760,000
|
|
Investment portfolio
|
|
|
(966,054
|
)
|
|
|
1,024,867
|
|
|
|
|
|
|
|
|
|
|
Total principal transactions revenue
|
|
$
|
(777,495
|
)
|
|
$
|
1,784,867
|
|
|
|
|
|
|
|
|
|
|
Transaction Volumes:
|
|
|
|
|
|
|
|
|
Number of shares traded
|
|
|
538,327,146
|
|
|
|
676,504,648
|
|
Commissions amounted to $13,411,000 or
61% of our revenue in 2011, representing a 10% decrease from that in 2010. The decrease was primarily due to the fact
that we had fewer producers in 2011.
Principal transaction revenue amounted
to a loss of $777,000 in 2011, a 144% decrease as compared to a gain of $1,785,000 in 2010 primarily due to market volatility.
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.
For the year ended
December 31, 2011, one customer accounted for more than 10% of total revenues. No one single customer accounted for more
than 10% of total revenues for the year ended December 31, 2010.
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. Historically, sales employees have not been eligible
for discretionary bonuses. Investment banking, research and support staff and executives are paid base salaries and may participate
in the discretionary bonus plans. The bonus pool is funded based on a number of criteria including revenue production, profitability
and other key metrics. However, the total bonus pool is evaluated by management and the Board of Directors and can be adjusted
at their discretion.
The following table sets forth the major
components of our compensation and benefits for the two years ended December 31, 2011 and 2010:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Incentive compensation and discretionary bonuses
|
|
$
|
9,871,572
|
|
|
$
|
9,973,704
|
|
Salaries and wages
|
|
|
5,888,225
|
|
|
|
7,204,046
|
|
Stock-based compensation
|
|
|
725,179
|
|
|
|
1,636,100
|
|
Payroll taxes, benefits and other
|
|
|
1,404,424
|
|
|
|
1,900,334
|
|
|
|
|
|
|
|
|
|
|
Total compensation and benefits
|
|
$
|
17,889,400
|
|
|
$
|
20,714,184
|
|
|
|
|
|
|
|
|
|
|
Total compensation and benefits as a percentage of revenue
|
|
|
82
|
%
|
|
|
68
|
%
|
Cash compensation and benefits as a percentage of revenue
|
|
|
78
|
%
|
|
|
62
|
%
|
Total compensation and benefits decreased
$2,825,000 or 14% from 2010 to 2011, consisting of $1,914,000 or 10% and $911,000 or 56% decrease in cash compensation and benefits
and stock-based compensation, respectively. The decrease in cash compensation and benefits was due to lower revenue and headcount
reduction partially offset by separation costs. Our headcount went from 82 at December 31, 2009 to 77 at December 31, 2010 and
further decreased to 35 at December 31, 2011. The decrease in stock-based compensation was primarily due to headcount reduction.
Total cash compensation and benefits as
a percentage of revenue increased to 78% in 2011 from 62% in 2010 primarily due to separation costs. We continue to focus on decreasing
the ratio of total cash compensation and benefits as a percentage of revenue and anticipate a lower metric in 2012.
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.
One sales professional accounted for more
than 10% of total revenue in 2011 and 2010.
Other Operating Expenses
Brokerage and clearing fees include trade
processing fees paid to our clearing broker and execution fees paid to floor brokers and electronic communication networks. MC
is a fully-disclosed broker-dealer and has contracted a third-party clearing firm to perform all of the trade clearance functions.
The third-party clearing firm processes, settles trade transactions and maintains detailed customer records for MC. Security trades
are executed by third-party broker-dealers and electronic trading systems. These fees directly correlate to commission revenue
and brokerage transaction volume. Brokerage and clearing fees decreased $88,000 or 6% from prior year as a result from lower commission
revenue.
Professional services include audit, tax
and various consulting fees which decreased $45,000 or 3% from prior year.
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 remained flat
form prior year due to contractual obligations.
Communications and technology includes
market data, voice and internet service fees. The expenses remained fairly flat form prior year with a slight decrease of
$52,000 or 3%.
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 decrease of $276,000 or 69% was due to the fact that many assets have become fully depreciated during
2011.
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 $331,000 or 27% directly related to the decrease in number of banking deals closed and headcount reduction in 2011.
Legal services and litigation settlement
expenses relate to our ongoing litigations. The decrease of $2,700,000 or 79% from prior year was due to the fact that a number
of litigations were settled in 2010.
Cost of underwriting capital directly relates
to borrowed capital to underwrite investment banking deals as required by FINRA regulations.
The following expenses are included in
other operating expenses for the two years ended December 31, 2011 and 2010:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
807,228
|
|
|
$
|
658,778
|
|
Regulatory printing & filing
|
|
|
320,571
|
|
|
|
265,742
|
|
Recruiting
|
|
|
215,455
|
|
|
|
15,517
|
|
Taxes - Other
|
|
|
196,603
|
|
|
|
94,177
|
|
Supplies
|
|
|
69,336
|
|
|
|
100,284
|
|
Public and investor relations
|
|
|
58,171
|
|
|
|
207,304
|
|
Provision for uncollectible accounts receivable
|
|
|
53,332
|
|
|
|
448,022
|
|
Dues and subscriptions
|
|
|
50,490
|
|
|
|
89,481
|
|
Company events
|
|
|
-
|
|
|
|
219,946
|
|
Other
|
|
|
127,698
|
|
|
|
252,613
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
$
|
1,898,884
|
|
|
$
|
2,351,864
|
|
Other operating expenses
decreased $440,000 or 19% as a result of: 1) a decrease of $150,000 in public and investor relations due to the fact that a marketing
and rebranding campaign was launched in 2010, 2) a decrease of $395,000 in provision for uncollectible accounts receivable due
to the write-off of certain investment banking receivables, 3) a decrease of $220,000 in company events due to our annual investor
conference being re-scheduled to 2012, and 4) a decrease of $125,000 in other due to the write-off of reimbursable expenses from
certain investment banking deals, partially offset by 5) an increase of $148,000 in insurance due to claim experience in prior
year, 6) an increase of $200,000 in recruiting due to the hiring of a sales team in the last quarter of 2011, and 7) an increase
of $102,000 in taxes due to an unanticipated prior commercial rent tax assessment.
Interest Income
Interest income represents interest earned
on our cash balances maintained at financial institutions.
Amortization of Debt Discounts
In 2011 and 2010, 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.
Income Tax Expense
We recorded an income tax expense and benefit
of $6,100 and $5,000 in 2011 and 2010, respectively, resulting in a zero effective tax rate for both years. 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.
Historically and currently, we have recorded
a 100% valuation allowance on our deferred tax assets, the significant component of which relates to net operating loss tax carry-forwards.
Management continually evaluates the realizability of its deferred tax assets based upon evidence available. Based on the evidence
available at this time, we conclude that it is not "more likely than not" that we will be able to realize the benefit
of our deferred tax assets in the near future.
As a result of the implementation
of Accounting Standards Codification (ASC) 740, the Company recognized no adjustment in the liability for unrecognized income
tax benefits and no corresponding change in retained earnings. The Company does not have any material accrued interest or penalties
associated with any unrecognized tax benefits. The Company does not believe it is reasonably possible that the unrecognized tax
benefits will significantly change within the next twelve months.
Discontinued Operations
Panel Intelligence, LLC
On April 17, 2007, Merriman Holdings, Inc.
acquired 100% of the outstanding common shares of MedPanel Corp. which was subsequently renamed Panel Intelligence, LLC (“Panel”)
and operated as a subsidiary of the Company. As a result of the acquisition, the Company began providing independent market data
and information to clients in the biotechnology, pharmaceutical, medical device, and financial industries by leveraging Panel’s
proprietary methodology and vast network of medical experts.
In December 2008, the Company determined
that the sale of Panel would reduce investments required to develop Panel’s business. Its sale would also generate
capital necessary for its core business. The Company determined that the plan of sale criteria in ASC 360,
Property,
Plant and Equipment,
had been met. As a result, the revenue and expenses of Panel have been reclassified and included in discontinued
operations in the consolidated statements of operations. Accordingly, the carrying value of the Panel assets was adjusted
to their fair value less costs to sell in 2008. In January 2009, the Company sold Panel to Panel Intelligence, LLC
(Newco) for $1,000,000 and shares of the Company’s common stock in the amount of $100,000.
For the year ended December 31, 2010, income
from discontinued operations related to Panel was $33,000.
Institutional Cash Distributors
On January 16, 2009, the Company entered
into an agreement to sell the assets of ICD, a division of MC, for $2,000,000 to a group of investors who were also its employees
in order to raise capital. The assets sold included MC’s rights in trademark, copyright, and other intellectual property
used in the business, customer lists, marketing materials, and books and records, which did not have any carrying values. In
accordance ASC 605, “
Revenue Recognition
”, the Company recognized $2,000,000 as other income in the consolidated
statement of operations during the year ended December 31, 2009. In the second quarter of 2010, ICD, LLC, formed by
the new group of investors, started supporting its operations fully and as such, did not require significant assistance from MC. The
Company terminated all employees supporting ICD business, and did not have significant involvement going forward. The Company
determined that the criteria for discontinued operations under the guidance of ASC 205, had been met as of June 30, 2010. As a
result, the revenue and expenses of ICD have been included in discontinued operations in the consolidated statements of operations.
For the year ended December 31, 2010, income
from discontinued operations related to ICD was $62,000.
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,
selling concessions and underwriting fees. 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 presented
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 subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
Level 1 — Unadjusted, quoted prices
are available in active markets for identical assets or liabilities at the measurement date. The types of assets and liabilities
carried at Level 1 fair value generally are G-7 government and agency securities, equities listed in active markets, investments
in publicly traded mutual funds with quoted market prices and listed derivatives.
Level 2 — Pricing inputs (other than
quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation
with market data at the measurement date and for the duration of the instrument’s anticipated life. Fair valued
assets which are generally included in this category are stock warrants for which market-based implied volatilities are available,
and unregistered common stock.
Level 3 — Pricing inputs are both
significant to the fair value measurement and unobservable. These inputs generally reflect management’s best
estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given
to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Fair valued assets which are
generally included in this category are stock warrants for which market-based implied volatilities are not available.
In certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes,
the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the
lowest level input that is significant to the fair value measurement in its entirety.
Stock-Based Compensation
We measure and recognize compensation expense
based on estimated fair values for all stock-based awards made to employees and directors, including stock options, restricted
stock, and warrants. We estimate fair value of stock-based awards on the date of grant using the Black-Scholes option-pricing
model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company’s
consolidated statements of operations over the requisite service periods. Since stock-based compensation expense is based on awards
that are ultimately expected to vest, stock-based compensation expense has been reduced to account for estimated forfeitures.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates.
To calculate stock-based compensation resulting
from the issuance of options, restricted common stock, and warrants, we use the Black-Scholes option pricing model, which is affected
by the Company’s stock price as well as assumptions regarding a number of subjective variables. These variables include,
but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected
employee stock option exercise behaviors. No tax benefits were attributed to the share-based compensation expense because a valuation
allowance was maintained for all net deferred tax assets.
Income Taxes
The Company uses the asset and liability
method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce
deferred tax assets to an amount whose realization is more likely than not. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment
date.
Liquidity and Capital Resources
MC is a broker-dealer
subject to Rule 15c3-1 of the Securities Exchange Act of 1934, which specifies uniform minimum net capital requirements, as defined,
for their registrants. As of December 31, 2011, MC had regulatory net capital, as defined, of $1,894,000, which exceeded the amount
required by $1,644,000.
The Company incurred
substantial losses in 2011 and 2010. The Company had net losses attributable to common shareholders of $8,385,000 and $5,930,000
in 2011 and 2010, respectively, and negative operating cash flows of $4,467,000 and $1,525,000 in 2011 and 2010, respectively.
As of December 31, 2011, the Company had an accumulated deficit of $138,048,000. While the Company believes its current funds
will be sufficient to enable it to meet its planned expenditures through at least January 1, 2013, if anticipated operating results
are not achieved, management has the intent and believes it has the ability to delay or reduce expenditures. Failure to generate
sufficient cash flows from operations, raise additional capital, or reduce certain discretionary spending could have a material
adverse effect on the Company’s ability to achieve its intended business objectives.
In the fourth quarter, the Company decided
to shift its strategic focus away from the traditional broker dealer model of research and institutional sales toward a capital
markets advisory and platform revenue model. This represents a more scalable, predictable and profitable model in today’s
environment. Management believes this business model will result in reduced fixed operating costs and higher operating profit
margin. Given the Company’s track record in investment banking and institutional sales, we will continue to assist firms
raise the capital needed to fuel innovation.
Commitments
The following is a table summarizing our
significant commitments as of December 31, 2011, consisting of non-cancellable payments under operating agreements and leases
and capital leases with initial or remaining terms in excess of one year.
|
|
Notes
|
|
|
Operating
|
|
|
Operating
|
|
|
|
|
|
|
Payable
|
|
|
Commitments
|
|
|
Leases
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
$
|
175,063
|
|
|
$
|
1,467,813
|
|
|
$
|
1,774,002
|
|
|
$
|
3,416,878
|
|
2013
|
|
|
1,381,580
|
|
|
|
360,520
|
|
|
|
1,327,563
|
|
|
|
3,069,663
|
|
2014
|
|
|
967,907
|
|
|
|
65,000
|
|
|
|
-
|
|
|
|
1,032,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
|
2,524,550
|
|
|
|
1,893,333
|
|
|
|
3,101,565
|
|
|
|
7,519,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(604,550
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(604,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net commitments
|
|
$
|
1,920,000
|
|
|
$
|
1,893,333
|
|
|
$
|
3,101,565
|
|
|
$
|
6,914,898
|
|
Off-Balance Sheet Arrangements
We were not a party to any off-balance
sheet arrangements during the two years ended December 31, 2011. In particular, we do not have any interest in so-called limited
purpose entities, which include special purpose entities and structured finance entities.
New Accounting Pronouncements
In June 2011, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “
Comprehensive
Income (Topic 220):Presentation of Comprehensive Income
,” that will require a company to present components of net income
and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There are no changes
to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted.
The Company does not expect the adoption of ASU 2011-05 to have a material effect on its consolidated financial statements.
In May 2011,
the FASB issued ASU No. 2011-04, “
Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRSs
.” The amendments in this ASU generally represent clarification of
Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information
about fair value measurements has changed. This update results in common principles and requirements for measuring fair value
and for disclosing information about fair value measurements in accordance with U. S. GAAP and International Financial Reporting
Standards (“IFRS”). The amendments are effective for interim and annual periods beginning after December 15, 2011
and are to be applied prospectively. Early application is not permitted. The Company does not expect the adoption of ASU 2011-04
to have a material impact on its consolidated financial statements.
Related Party Transactions
Sale of Convertible Notes Receivable
On December 30, 2010, the Company sold
its convertible note receivable from a corporate issuer, Digital Display Networks, Inc., with a face value of $50,000, including
any accrued interest, to Peter Coleman, the Company’s previous Chief Financial Officer and Ronald L. Chez, its Co-Chairman
of the Board of Directors, for a total selling price of $50,000. The convertible note receivable accrued interest at an annual
rate of 12%. As of December 31, 2010, the convertible note receivable was no longer included in the Company’s consolidated
statement of financial condition. In relation to the sale, the Company incurred an immaterial loss, which is included in
other income, net in the Company’s consolidated statement of operations.
Temporary Subordinated Borrowings
On
January 31, 2011, the Company borrowed $2,800,000 from Ronald L. Chez, its
Co-Chairman of the Board of Directors
.
The loan was in the form of a temporary subordinated loan in accordance with Rule 15c3-1 of the Securities Exchange Act of 1934.
The Company incurred $56,000 in loan fees, which amount was included in cost of underwriting capital in the Company’s consolidated
statement of operations. The loan and related fees were paid in full on February 7, 2011.
On September 28, 2010, the Company borrowed
$4,000,000 from DGB Investment, Inc. (DGB). DGB is controlled by Douglas G. Bergeron, who was a previous member of the Board
of Directors. The loan was in the form of a temporary subordinated loan in accordance with Rule 15c3-1 of the Securities
Exchange Act of 1934. Interest on the loan was $60,000 for each 10-day period. For the year ended December 31,
2010, the Company incurred of $60,000 in loan fees, which amount was included in cost of underwriting capital in the Company’s
consolidated statement of operations. The loan and related fees were paid in full in October 2010.
On April 23, 2010, the Company borrowed
$1,000,000 from DGB and $6,000,000 from Ronald L. Chez. The loan was in the form of a temporary subordinated loan in accordance
with Rule 15c3-1 of the Securities Exchange Act of 1934. The Company incurred $230,000 in loan fees, which amount was included
in cost of underwriting capital in the Company’s consolidated statement of operations. The loan and related fees were
paid in full in May 2010.
On January 20, 2010, the Company borrowed
$11,000,000 from DGB and the Bergeron Family Trust, both controlled by Douglas G. Bergeron. The loan was in the form of a temporary
subordinated loan in accordance with Rule 15c3-1 of the Securities Exchange Act of 1934. The Company incurred $731,000 in loan
fees, which amount was included in cost of underwriting capital in the Company’s consolidated statement of operations. The
loan and related fees were paid in full in February 2010.
Subordinated Notes Payable to Related Parties
On September 29, 2010, the Company borrowed
$1,000,000 from nine individual lenders, all of whom were directors, officers or employees of the Company at the time of issuance,
pursuant to a series of unsecured promissory notes (Subordinated Notes). The Subordinated Notes are for a term of three years
and provide for interest comprising two components: (i) six percent (6.0%) per annum to be paid in cash monthly; and (ii) eight
percent (8.0%) per annum to be accrued and paid in cash upon maturity. Additional consideration was paid to the lenders at
closing comprising a number of shares of common stock of the Company equal to: (A) 30% of the principal amount lent; divided
by (B) $3.01 per share. The total effective interest on the note is approximately 21.73%. Proceeds were used to supplement
underwriting capacity and working capital for MC.
The total proceeds of $1,000,000 raised
in the transaction above were accounted for as an issuance of debt with stock. The total proceeds of $1,000,000 have been allocated
to these individual instruments based on the relative fair values of each instrument. Based on such allocation method, the value
of the stocks issued in connection with the Subordinated Notes was $206,000, which was recorded as a discount on the debt and
applied against the Subordinated Notes. The Company paid off $720,000 of the Secured Promissory Note on December 22, 2010. As
of December 31, 2010, the Subordinated Notes of $809,000, net of $191,000 discount, remained outstanding and is included in notes
payable to related parties in the Company’s consolidated statements of financial condition.
As of December
31, 2011, $830,000 of the
Subordinated Notes, net of $120,000 discount
, remain outstanding and
is included in notes payable to related parties in the Company’s consolidated statements of financial condition. The remaining
Subordinated Notes held by parties no longer related to the Company of $44,000, net of $6,000 discount, are included in notes
payable in the Company’s consolidated statements of financial condition. The discount on the note is amortized over the
term of the loan using the effective interest method. For the year ended December 31, 2011, the Company incurred $140,000 in interest
on the
Subordinated Notes
. Total interest of $105,000 remains outstanding as of December 31,
2011 and is included in accrued expenses and other in the consolidated statements of financial condition.
2010 Chez Secured Promissory Note
On November 17, 2010, the Company borrowed
$1,050,000 from Ronald L. Chez, its Co-Chairman of the Board of Directors, pursuant to a secured promissory note (2010 Chez Secured
Promissory Note). The 2010 Chez Secured Promissory Note is secured by certain accounts receivable which were purchased by
the Company from MC with the proceeds of the transaction being used for such purchase. The 2010 Chez Secured
Promissory Note is due and payable in two tranches as the accounts receivable became due, with $950,000 due on January 19, 2011
and $100,000 due on February 28, 2011. It provides for interest of 29.2% per annum and additional consideration comprising two
components (i) 50,000 shares of the Company’s Series D Preferred Stock (which is convertible into 7,142 shares of our Common
Stock); and (ii) a cash fee of $15,000. The proceeds were used to supplement underwriting capacity for MC.
As
of December 31, 2010, the 2010 Chez Secured Promissory Note
of $330,000 remained outstanding
and is included in notes payable to related parties in the Company’s consolidated statements of financial condition.
On January 21, 2011, the 2010 Chez
Secured Promissory Note was amended to extend the maturity date to April 15, 2011 and change the 50,000 Series D Convertible Preferred
Stock consideration to cash compensation of $21,000. For the year ended
December 31
, 2011, the
Company incurred $42,000 in fees, composed of $15,000 and $21,000 in cash fees, and $6,000 of interest at 29.2% per annum. On
March 24, 2011, all principal and related fees were paid and no balance remains outstanding.
2011 Chez Secured Promissory Note
On April 7, 2011, Ronald L. Chez, the
Company’s Co-Chairman of the Board of Directors, invested $330,000 in a three year secured promissory note (2011 Chez Secured
Promissory Note) at an interest rate of six percent (6%) per annum payable quarterly. This note is secured by a security
interest in and right of setoff against all of such the Company’s right, title and interest in, to all of the capital
stock of Merriman Capital Inc., together with all proceeds, rents, profits and returns of and from any of the foregoing. Also,
beginning on the date which is one year from the issuance date, if there is an equity financing of the Company resulting in gross
proceeds of at least $15,000,000 in new money, holders shall have the option to put 50% of Secured Promissory Notes originally
purchased back to the Company, for an amount equal to the principal plus accrued but unpaid interest, on 30 days written notice.
On November
16, 2011,
the 2011 Chez Secured Promissory Note plus accrued interest of $3,000 was exchanged for 445,299 shares of common
stock of the Company calculated as (i) the total amount of principal plus accrued but unpaid interest divided by (ii) an amount
equal to 80% of the average closing price per share of common stock as quoted on the exchange on which it principally trades for
the 30 day period ending two days prior to the closing date.
The Company accounted for this transaction
in accordance with ASC 470,
Debt
, as an extinguishment of debt, whereby a gain or loss was calculated as the difference
between the reacquisition price and net carrying value of the debt. The reacquisition price was determined as the sum of the fair
value of the common stock and new warrants. The warrants were valued using the Black-Scholes fair value model. A loss of $157,000
was recorded on the transaction based on a reacquisition price of $490,000 and net carrying value, including interest, of $333,000.
For the year ended December 31, 2011, the
Company incurred $12,000 in interest in relation to this note.
Secured Promissory Notes
In April 2011, the Company raised $2,770,000
from 24 investors, of which 11 were directors, officers, consultants or employees of the Company at the time of issuance, pursuant
to a series of secured promissory notes (Secured Promissory Notes). The Secured Promissory Notes are for a term of three
years and provide for interest of ten percent (10.0%) per annum to be paid in cash quarterly. Additional consideration was
paid to the lenders at closing comprising warrants to purchase shares of the common stock of the Company at a price per share
equal to 85% of the Company’s stock price at the closing date (the Warrants). 86 Warrants were issued for each $1,000
invested. A total of 238,220 Warrants were issued. The Warrants issued to directors, officers, consultants and
employees (Insider Warrants) of the Company provide that the Insider Warrants will not be exercisable unless first approved by
the Company’s stockholders. These notes are secured by a security interest in and right of setoff against all of such
the Company’s right, title and interest in, to all of the capital stock of MC, together with all proceeds, rents, profits
and returns of and from any of the foregoing. Also, beginning on the date which is one year from the issuance date, if there is
an equity financing of the Company resulting in gross proceeds of at least $15,000,000 in new money, holders shall have the option
to put 50% of Secured Promissory Notes originally purchased back to the Company, for an amount equal to the principal plus accrued
but unpaid interest, on 30 days written notice. The Secured Promissory Notes were issued in two tranches, one closed on April
7, 2011 for $2,470,000 and the other closed on April 21, 2011 for $300,000.
The total proceeds raised in the transaction
above were accounted for as an issuance of debt with warrants. The total proceeds of $2,770,000 have been allocated to these
individual instruments based on the relative fair values of each instrument at the time of issuance.
Based
on the fair value allocation method, the value of the warrants issued in connection with the Secured Promissory Notes received
was $420,000, which was recorded as a discount on the debt and applied against the Secured Promissory Notes.
On October 11,
2011, the Company repurchased the $100,000
Secured Promissory Note from
a former officer and
director in connection with his separation from the Company.
On November
16, 2011, the Company entered into e
xchange agreements with certain Secured Promissory Note investors whereby the investors
agree to exchange the Secured Promissory Notes and Warrants for shares of common stock and new warrants to purchase shares of
common stock of the Company as follows.
|
(a)
|
For the Secured Promissory Notes,
a number of new shares of common stock equal to (i) the total
amount of principal plus accrued but unpaid interest of the Secured
Promissory Notes submitted for cancellation divided by (ii) an
amount equal to 80% of the average closing price per share of
common stock as quoted on the exchange on which it principally
trades for the 30 day period ending two days prior to the closing
date (the AP); plus
|
|
(b)
|
For the Warrants, 1.25 new warrants
for each Warrant converted, with each new warrant carrying an
exercise price equal to 110% of the AP.
|
Fifteen investors
agreed to exchange $1,750,000 principal balance of the
Secured Promissory Notes plus $22,000 accrued interest for 2,373,505
shares of common stock and 188,126 warrants.
The Company accounted for this transaction
in accordance with ASC 470,
Debt
, as an extinguishment of debt, whereby a gain or loss was calculated as the difference
between the reacquisition price and net carrying value of the debt. The reacquisition price was determined as the sum of the fair
value of the common stock and new warrants less the fair value of the original Warrants. The warrants were valued using the Black-Scholes
fair value model. A loss of $1,134,000 was recorded on the transaction based on a reacquisition price of $2,688,000 and net carrying
value, including interest, of $1,554,000.
As of December
31, 2011, $636,000 of the Secured Promissory Notes, net of $84,000 discount, remain outstanding and are included in notes payable
in the Company’s consolidated statements of financial condition. The remaining Secured Promissory Notes issued to Insiders
of
$176,000, net of $24,000 discount, are included in notes payable to related parties in the Company’s consolidated
statements of financial condition.
For the year ended
December
31
, 2011, the Company incurred $178,000 in interest in relation to these notes. A
s of December
31, 2011, $23,000 of interest remains outstanding and is included in accrued expenses and other in the consolidated statements
of financial condition.
Series E Convertible Preferred
Stock
On December 30, 2011, the Company issued
2,531,744 shares of Series E Convertible Preferred Stock at $0.63 per share plus warrants to purchase 1,265,874 shares of the
Company’s common stock with an exercise price of $0.63 per share. The warrants expire five years from the effective date.
The total proceeds of $1,595,000 were allocated between the Series E Convertible Preferred Stock and the related warrants based
on the relative fair values of each instrument at the time of issuance. All Series E Convertible Preferred shareholders are directors
of the Company.
The Series E Convertible Preferred Stock
carries a dividend rate of 9% per annum, such dividends will be paid only when, if and as declared by the Board of Directors and
will accumulate until paid. The Company is prohibited from paying any dividends on the Common Stock until all accrued dividends
on the Series D and Series E Convertible Preferred Stock are first paid.
The holders of Series E Convertible Preferred
Stock are entitled to a “liquidation preference payment” of $0.63 per share of Series E Convertible Preferred Stock
plus all accrued but unpaid dividends on such shares prior and in preference to any payment to holders of the Common Stock upon
a merger, acquisition, sale of substantially all the assets, or certain other liquidation events of the Company. Any proceeds
after payment of the “liquidation preference payment” shall be paid pro rata to the holders of the Series D and E
Convertible Preferred Stock and Common Stock on an as converted to Common Stock basis.
Series D Convertible Preferred Stock
Three of the investors in the Series D
Convertible Preferred Stock transaction, Messrs. Andrew Arno, Douglas Bergeron, and Ronald Chez, have since joined the Company’s
Board of Directors. In December 2010 and January 2011, Douglas Bergeron and Andrew Arno left as members of the Board of Directors,
respectively. In addition, the Company’s CEO and former CFO, along with 11 other executives and senior managers of
MC, were also investors in the Series D Convertible Preferred Stock transaction. Finally, all five members of the Company’s
Board of Directors prior to the transaction were investors in the Series D Convertible Preferred Stock transaction.
Board of Directors Compensation
In 2009, the Company formed a Strategic
Advisory Committee of the Board of Directors chaired by Ronald L. Chez, the lead investor in the Series D Convertible Preferred
Stock strategic transaction. During the first year, the Chairman of the Committee was compensated with five-year warrants
to purchase 42,857 shares the Company’s common stock at $4.55 to be issued pro rata on a monthly basis
from
September 2009 to September 2010
. No other compensation was provided for Mr. Chez’s service on the Committee.
For the year ended December 31, 2010, the Company issued 29,525 warrants to Mr. Chez and recorded stock-based compensation expense
of $103,000, respectively, based on the calculated fair value of the warrants using the Black-Scholes option valuation model.
On January 21, 2011, the Company entered
into an amended agreement with Mr. Chez restricting the exercise of these warrants without prior shareholders’ approval.
The Company intends to obtain shareholders’ approval for these warrants in the next shareholders’ meeting.
Due to the modification of the terms of
the warrants, the Company recorded a decrease in the stock-based compensation expense of $176,000 for the year ended December
31, 2011. As of December 31, 2011, the Company recorded accrued expenses of $11,000 as the Company’s best estimate of the
services performed by Mr. Chez as the Chairman of the Strategic Advisory Committee until the warrants are approved by the shareholders.
Other Related Party Transactions
From time to time, officers and employees
of the Company may invest in private placements which the Company arranges and for which the Company charges investment banking
fees.
The Company’s employees may, at times,
provide certain services and supporting functions to its affiliate entities. The Company is not reimbursed for any costs related
to providing those services.
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk
The following discussion about market risk
disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking
statements. We may be exposed to market risks related to changes in equity prices, interest rates and foreign currency exchange
rates. We do not use derivative financial instruments for speculative trading or any other purpose.
Equity Price Risk
The potential for changes in the market
value of our trading positions is referred to as “market risk.” Our trading positions result from proprietary trading
activities. These trading positions in individual equities and equity indices may be either long or short at any given time. Equity
price risks result from exposures to changes in prices and volatilities of individual equities and equity indices. We seek to
manage this risk exposure through diversification and limiting the size of individual positions within the portfolio. The effect
on earnings and cash flows of an immediate 10% increase or decrease in equity prices generally is not ascertainable and could
be positive or negative, depending on the positions we hold at the time. We do not establish hedges in related securities or derivatives.
From time to time, we also hold equity securities received as compensation for our services in investment banking transactions.
These equity positions are always long; however, as the prices of individual equity securities do not necessarily move in tandem
with the direction of the general equity market, the effect on earnings and cash flows of an immediate 10% increase or decrease
in equity prices generally is not ascertainable.
Interest Rate Risk
Our exposure to market risk resulting from
changes in interest rates relates primarily to our investment portfolio and long term debt obligations. Our interest income and
cash flows may be impacted by changes in the general level of U.S. interest rates. We do not hedge this exposure because we believe
that we are not subject to any material market risk exposure due to the short-term nature of our investments. We would not expect
an immediate 10% increase or decrease in current interest rates to have a material effect on the fair market value of our investment
portfolio.
Foreign Currency Risk
We do not have any foreign currency denominated
assets or liabilities or purchase commitments and have not entered into any foreign currency contracts. Accordingly, we are not
exposed to fluctuations in foreign currency exchange rates.
Item 8. Financial Statements and Supplementary
Data
The following financial statements are included
in this report:
|
·
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
|
·
|
Consolidated Statements of Operations
|
|
|
|
|
·
|
Consolidated Statements of Financial Condition
|
|
|
|
|
·
|
Consolidated Statements of Shareholders’ Equity
|
|
|
|
|
·
|
Consolidated Statements of Cash Flows
|
|
|
|
|
·
|
Notes to Consolidated Financial Statements
|
Schedules other than those listed above
are omitted because of the absence of conditions under which they are required or because the required information is presented
in the financial statements or notes thereto.
Report of Independent Registered Public
Accounting Firm
The Board of Directors and Shareholders of
Merriman Holdings, Inc.
We have audited the accompanying consolidated
statements of financial condition of Merriman Holdings, Inc. and subsidiaries (the Company) as of December 31, 2011 and 2010, and
the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the two-year period
ended December 31,2011. The Company’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31,
2011 and 2010, and the consolidated results of their operations and their cash flows for the years ended December 31, 2011 and
2010 in conformity with accounting principles generally accepted in the United States of America.
|
/s/ Burr Pilger Mayer, Inc.
|
|
|
San Francisco, California
|
|
March 29, 2012
|
|
MERRIMAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
13,411,312
|
|
|
$
|
14,937,938
|
|
Principal transactions
|
|
|
(777,495
|
)
|
|
|
1,784,868
|
|
Investment banking
|
|
|
8,439,569
|
|
|
|
13,412,832
|
|
Other
|
|
|
875,894
|
|
|
|
530,673
|
|
Total revenues
|
|
|
21,949,280
|
|
|
|
30,666,311
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
17,164,221
|
|
|
|
19,078,084
|
|
Stock-based compensation
|
|
|
725,179
|
|
|
|
1,636,100
|
|
Brokerage and clearing fees
|
|
|
1,395,820
|
|
|
|
1,483,436
|
|
Professional services
|
|
|
1,359,004
|
|
|
|
1,404,195
|
|
Occupancy and equipment
|
|
|
1,912,617
|
|
|
|
1,910,553
|
|
Communication and technology
|
|
|
1,954,384
|
|
|
|
2,006,615
|
|
Depreciation and amortization
|
|
|
125,726
|
|
|
|
401,346
|
|
Travel and entertainment
|
|
|
894,959
|
|
|
|
1,226,378
|
|
Legal services and litigation settlement expense
|
|
|
710,841
|
|
|
|
3,410,914
|
|
Cost of underwriting capital
|
|
|
97,625
|
|
|
|
1,068,520
|
|
Other
|
|
|
1,898,884
|
|
|
|
2,351,864
|
|
Total operating expenses
|
|
|
28,239,260
|
|
|
|
35,978,005
|
|
Operating loss
|
|
|
(6,289,980
|
)
|
|
|
(5,311,694
|
)
|
Other income
|
|
|
51,601
|
|
|
|
25,418
|
|
Interest income
|
|
|
6,249
|
|
|
|
13,576
|
|
Interest expense
|
|
|
(378,239
|
)
|
|
|
(84,793
|
)
|
Amortization of debt discount
|
|
|
(93,269
|
)
|
|
|
(81,035
|
)
|
Loss on early extinguishment of debt
|
|
|
(1,183,917
|
)
|
|
|
-
|
|
Loss from continuing operations before income taxes
|
|
|
(7,887,555
|
)
|
|
|
(5,438,528
|
)
|
Income tax (expense) benefit
|
|
|
(6,107
|
)
|
|
|
5,005
|
|
Loss from continuing operations
|
|
|
(7,893,662
|
)
|
|
|
(5,433,523
|
)
|
Income from discontinued operations
|
|
|
-
|
|
|
|
95,104
|
|
Net loss
|
|
|
(7,893,662
|
)
|
|
|
(5,338,419
|
)
|
Preferred stock cash dividend
|
|
|
(491,334
|
)
|
|
|
(591,125
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(8,384,996
|
)
|
|
$
|
(5,929,544
|
)
|
Basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(2.70
|
)
|
|
$
|
(2.71
|
)
|
Income from discontinued operations
|
|
|
-
|
|
|
|
0.05
|
|
Net loss
|
|
$
|
(2.70
|
)
|
|
$
|
(2.66
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(2.87
|
)
|
|
$
|
(2.96
|
)
|
Weighted average number of common shares:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
2,919,316
|
|
|
|
2,002,305
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
MERRIMAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,003,512
|
|
|
$
|
4,898,093
|
|
Securities owned:
|
|
|
|
|
|
|
|
|
Marketable, at fair value
|
|
|
2,136,352
|
|
|
|
2,401,722
|
|
Non-marketable, at estimated fair value
|
|
|
347,218
|
|
|
|
2,741,452
|
|
Restricted cash
|
|
|
680,028
|
|
|
|
965,000
|
|
Due from clearing broker
|
|
|
124,805
|
|
|
|
34,072
|
|
Accounts receivable, net
|
|
|
359,900
|
|
|
|
1,574,644
|
|
Prepaid expenses and other assets
|
|
|
506,708
|
|
|
|
313,537
|
|
Equipment and fixtures, net
|
|
|
30,537
|
|
|
|
136,706
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,189,060
|
|
|
$
|
13,065,226
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
246,040
|
|
|
$
|
361,237
|
|
Commissions and bonus payable
|
|
|
986,722
|
|
|
|
3,240,021
|
|
Accrued expenses and other
|
|
|
1,757,342
|
|
|
|
2,514,020
|
|
Deferred rent
|
|
|
236,996
|
|
|
|
319,274
|
|
Deferred revenue
|
|
|
688,074
|
|
|
|
175,712
|
|
Capital lease obligation
|
|
|
-
|
|
|
|
120,453
|
|
Notes payable
|
|
|
679,454
|
|
|
|
299,997
|
|
Notes payable to related parties
|
|
|
1,006,765
|
|
|
|
1,098,840
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,601,393
|
|
|
|
8,129,554
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Convertible Preferred stock, Series A–$0.0001 par value; 2,000,000 shares authorized; 2,000,000 shares issued and 0 shares outstanding as of December 31, 2011 and 2010; aggregate liquidation preference of $0
|
|
|
-
|
|
|
|
-
|
|
Convertible Preferred stock, Series B–$0.0001 par value; 12,500,000 shares authorized; 8,750,000 shares issued and 0 shares outstanding as of December 31, 2011 and 2010; aggregate liquidation preference of $0
|
|
|
-
|
|
|
|
-
|
|
Convertible Preferred stock, Series C–$0.0001 par value; 14,200,000 shares authorized; 11,800,000 shares issued and 0 shares outstanding as of December 31, 2011 and 2010; aggregate liquidation preference of $0
|
|
|
-
|
|
|
|
-
|
|
Convertible Preferred stock, Series D–$0.0001 par value; 24,000,000 shares authorized, 23,720,916 and 23,720,916 shares issued and 19,563,206 and 22,058,128 shares outstanding as of December 31, 2011 and December 31, 2010, respectively; aggregate liquidation preference of $8,454,239 prior to conversion, and pari passu with common stock on conversion
|
|
|
1,957
|
|
|
|
2,206
|
|
Convertible Preferred stock, Series E–$0.0001 par value; 5,000,000 shares authorized, 2,531,744 and 0 shares issued and 2,531,744 and 0 shares outstanding as of December 31, 2011 and December 31, 2010, respectively; aggregate liquidation preference of $1,594,999 prior to conversion, and pari passu with common stock on conversion
|
|
|
253
|
|
|
|
-
|
|
Common stock, $0.0001 par value; 300,000,000 shares authorized; 6,183,815 and 2,384,499 shares issued and 6,154,379 and 2,355,063 shares outstanding as of December 31, 2011 and 2010, respectively
|
|
|
619
|
|
|
|
239
|
|
Common stock payable
|
|
|
-
|
|
|
|
461,675
|
|
Additional paid-in capital
|
|
|
140,857,954
|
|
|
|
134,851,006
|
|
Treasury stock
|
|
|
(225,613
|
)
|
|
|
(225,613
|
)
|
Accumulated deficit
|
|
|
(138,047,503
|
)
|
|
|
(130,153,841
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
2,587,667
|
|
|
|
4,935,672
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
8,189,060
|
|
|
$
|
13,065,226
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
MERRIMAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Common Stock Payable
|
|
|
Treasury Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2010
|
|
|
23,720,916
|
|
|
$
|
2,372
|
|
|
|
1,855,444
|
|
|
$
|
183
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
(29,436
|
)
|
|
$
|
(225,613
|
)
|
|
$
|
133,055,308
|
|
|
$
|
(124,815,422
|
)
|
|
$
|
8,016,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,338,419
|
)
|
|
|
(5,338,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series D Convertible Preferred Stock to common stock
|
|
|
(1,662,788
|
)
|
|
|
(166
|
)
|
|
|
237,538
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
141
|
|
|
|
-
|
|
|
|
-
|
|
Common stock payable
for
legal settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
606,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
606,000
|
|
Issuance of equity for legal settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
47,632
|
|
|
|
5
|
|
|
|
(47,632
|
)
|
|
|
(144,325
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
401,690
|
|
|
|
-
|
|
|
|
257,370
|
|
Preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(591,125
|
)
|
|
|
-
|
|
|
|
(591,125
|
)
|
Exercise of common stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
15,428
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,718
|
|
|
|
-
|
|
|
|
36,720
|
|
Issuance of restricted common stock, net of cancellations
|
|
|
-
|
|
|
|
-
|
|
|
|
73,972
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
233,599
|
|
|
|
-
|
|
|
|
233,607
|
|
Issuance of warrants to board member
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
103,068
|
|
|
|
-
|
|
|
|
103,068
|
|
Issuance of common stock in connection with issuance of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
154,485
|
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
312,182
|
|
|
|
-
|
|
|
|
312,198
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,299,425
|
|
|
|
-
|
|
|
|
1,299,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
22,058,128
|
|
|
|
2,206
|
|
|
|
2,384,499
|
|
|
|
239
|
|
|
|
152,368
|
|
|
|
461,675
|
|
|
|
(29,436
|
)
|
|
|
(225,613
|
)
|
|
|
134,851,006
|
|
|
|
(130,153,841
|
)
|
|
|
4,935,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,893,662
|
)
|
|
|
(7,893,662
|
)
|
Issuance of Series E Convertible Preferred Stock
|
|
|
2,531,744
|
|
|
|
253
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,249,747
|
|
|
|
-
|
|
|
|
1,250,000
|
|
Issuance of warrants in connection with Series E Convertible Preferred
Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
345,000
|
|
|
|
-
|
|
|
|
345,000
|
|
Conversion of Series D Convertible Preferred Stock to common stock
|
|
|
(2,494,922
|
)
|
|
|
(249
|
)
|
|
|
356,415
|
|
|
|
36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
213
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of equity for legal settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
152,368
|
|
|
|
15
|
|
|
|
(152,368
|
)
|
|
|
(461,675
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
461,660
|
|
|
|
-
|
|
|
|
-
|
|
Preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(491,334
|
)
|
|
|
-
|
|
|
|
(491,334
|
)
|
Issuance of restricted common stock, net of cancellations
|
|
|
-
|
|
|
|
-
|
|
|
|
67,328
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71,068
|
|
|
|
-
|
|
|
|
71,075
|
|
Return of common stock issued in connection with debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(54,817
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(105,759
|
)
|
|
|
|
|
|
|
(105,764
|
)
|
Issuance of warrants in connection with issuance of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
419,637
|
|
|
|
-
|
|
|
|
419,637
|
|
Issuance of common stock in connection with debt conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
3,278,022
|
|
|
|
327
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,311,597
|
|
|
|
-
|
|
|
|
3,311,924
|
|
Issuance of warrants in connection with debt conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
102,036
|
|
|
|
-
|
|
|
|
102,036
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
643,083
|
|
|
|
-
|
|
|
|
643,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
22,094,950
|
|
|
$
|
2,210
|
|
|
|
6,183,815
|
|
|
$
|
619
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
(29,436
|
)
|
|
$
|
(225,613
|
)
|
|
$
|
140,857,954
|
|
|
$
|
(138,047,503
|
)
|
|
$
|
2,587,667
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
MERRIMAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,893,662
|
)
|
|
$
|
(5,338,419
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
125,726
|
|
|
|
401,346
|
|
Stock-based compensation
|
|
|
714,158
|
|
|
|
1,636,100
|
|
Amortization of debt discount and debt issuance costs
|
|
|
93,269
|
|
|
|
81,035
|
|
Noncash legal settlement and professional fees
|
|
|
-
|
|
|
|
606,000
|
|
(Gain) loss on disposal of equipment and fixtures
|
|
|
13,359
|
|
|
|
(2,987
|
)
|
Loss on early extinguishment of debt
|
|
|
1,183,917
|
|
|
|
-
|
|
Provision for uncollectible accounts receivable
|
|
|
73,234
|
|
|
|
448,022
|
|
Cashless Exercise
|
|
|
(296,285
|
)
|
|
|
-
|
|
Securities received for services
|
|
|
(384,833
|
)
|
|
|
(1,440,162
|
)
|
Unrealized (gain) loss on securities owned
|
|
|
1,984,023
|
|
|
|
(1,229,675
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Securities owned
|
|
|
1,356,700
|
|
|
|
2,434,053
|
|
Restricted cash
|
|
|
284,972
|
|
|
|
107,086
|
|
Due from clearing broker
|
|
|
(90,733
|
)
|
|
|
2,512,509
|
|
Accounts receivable
|
|
|
1,650,320
|
|
|
|
(1,601,673
|
)
|
Prepaid expenses and other assets
|
|
|
(213,074
|
)
|
|
|
488,409
|
|
Accounts payable
|
|
|
(67,771
|
)
|
|
|
18,592
|
|
Commissions and bonus payable
|
|
|
(2,253,298
|
)
|
|
|
(893,903
|
)
|
Accrued expenses and other
|
|
|
(747,475
|
)
|
|
|
249,025
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(4,467,453
|
)
|
|
|
(1,524,642
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of equipment and fixtures
|
|
|
(42,916
|
)
|
|
|
(32,230
|
)
|
Proceeds from sale of equipment and fixtures
|
|
|
10,000
|
|
|
|
3,700
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(32,916
|
)
|
|
|
(28,530
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options and warrants
|
|
|
-
|
|
|
|
36,720
|
|
Proceeds from debt issuance
|
|
|
5,900,000
|
|
|
|
24,350,000
|
|
Payment of debt
|
|
|
(3,230,000
|
)
|
|
|
(22,720,000
|
)
|
Issuance of preferred stock
|
|
|
1,595,000
|
|
|
|
-
|
|
Payment of preferred stock dividend
|
|
|
(538,759
|
)
|
|
|
(594,700
|
)
|
Debt service principal payments
|
|
|
(120,453
|
)
|
|
|
(277,505
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,605,788
|
|
|
|
794,515
|
|
|
|
|
|
|
|
|
|
|
Decreases in cash and cash equivalents
|
|
|
(894,581
|
)
|
|
|
(758,657
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
4,898,093
|
|
|
|
5,656,750
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
4,003,512
|
|
|
$
|
4,898,093
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
MERRIMAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
— (Continued)
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Supplementary disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year:
|
|
|
|
|
|
|
|
|
Interest and cost of underwriting capital
|
|
$
|
426,636
|
|
|
$
|
1,073,874
|
|
Income taxes
|
|
$
|
10,290
|
|
|
$
|
35,000
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Stocks and warrants issued in connection with legal settlement
|
|
$
|
-
|
|
|
$
|
401,690
|
|
Stocks issued in connection with issuance of debt
|
|
$
|
419,637
|
|
|
$
|
312,198
|
|
Cancellation of stock issued in connection with subordinated debt
|
|
$
|
105,759
|
|
|
$
|
-
|
|
Issuance of equity for extinguishment of debt
|
|
$
|
2,380,000
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Merriman Holdings, Inc. and subsidiaries,
formerly Merriman Curhan Ford Group, Inc. (the Company), is a financial services holding company that provides investment banking,
capital markets services, corporate services, and investment banking through its primary operating subsidiary, Merriman Capital,
Inc. (hereafter MC). MC is an investment bank and securities broker-dealer focused on fast-growing companies and institutional
investors. MC is registered with the Securities and Exchange Commission (SEC) as a broker-dealer and is a member of the Financial
Industry Regulatory Authority (FINRA) and Securities Investor Protection Corporation.
Institutional Cash Distributors (ICD) was
a division of MC which brokers money market funds serving the short-term investing needs of corporate finance departments at companies
throughout the United States and Europe. In January 2009, we sold the primary assets related to ICD operations to a
group of investors which included some of our employees. To assist in the transition of operations to the new owners,
we provided substantial services to ICD, including collecting its revenues. In the second quarter of 2010, ICD, LLC,
formed by the new group of investors, started supporting its operations fully and as such, did not require significant assistance
from MC. The Company terminated all employees supporting ICD business, and does not have any significant involvement on ICD. The
Company determined that the criteria for discontinued operations under the guidance found in Accounting Standards Codification
(ASC) Topic 205,
Discontinued Operations
(ASC 205), were met in 2010. As a result, the revenue and expenses of ICD have
been included in discontinued operations in the consolidated statements of operations for the year ended December 31, 2010.
In January 2009, Merriman Holdings, Inc.
sold its primary research business, Panel Intelligence, LLC (Panel), and has presented its results of operations as discontinued
operations in its consolidated financial statements for the year ended December 31, 2010. Panel offered primary research
services to biotechnology, pharmaceutical, medical device, clean technology and financial services companies.
MCF Asset Management, LLC managed absolute
return investment products for institutional and high-net worth clients. In the fourth quarter of 2008, Merriman Holdings,
Inc. decided to begin the process of liquidating the funds under management by MCF Asset Management, LLC. We no longer have,
for all practical purposes, a subsidiary dedicated to asset management. As of December 31, 2010, all assets were effectively
distributed to the investors.
Merriman Holdings,
Inc. is a Delaware corporation incorporated on May 6, 1987. The Company’s common stock was listed on the American Stock Exchange
in July 2000 and on the NASDAQ Stock Market in February 2008. Since November 2011, the Company’s common stock was listed
on the OTCQX, where it currently trades under the symbol “MERR.” The Company’s corporate office is located in
San Francisco, CA.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business (continued)
Change in Company and Subsidiary Name
At the shareholders’ annual meeting
on August 10, 2010, the shareholders approved the adoption of an amendment to the Company’s Amended Certificate of Incorporation
changing the Company’s name from Merriman Curhan Ford Group, Inc. to Merriman Holdings, Inc. In September 2010,
the Company also changed the name of its subsidiary from Merriman Curhan Ford & Co. to Merriman Capital, Inc.
Reverse Stock Split
At the shareholders’ annual meeting
on August 10, 2010, the shareholders voted to approve the amendment to the Company’s Amended Certificate of Incorporation
to affect a one-for-seven reverse stock split. The reverse stock split became effective at 12:01 am, Eastern Time, on
August 16, 2010. Pursuant to the reverse stock split, each seven shares of authorized and outstanding common stock was reclassified
and combined into one share of new common stock. In addition, upon the effectiveness of the reverse stock split, each seven shares
of Series D Convertible Preferred Stock are convertible into one share of common stock of the Company. The reverse stock split
did not change the number of authorized shares or the par value per share of common stock or preferred stock designated by the
Company's Certificate of Incorporation. Currently, the Company has authorized 300,000,000 shares of common stock. All references
to share and per share data for all periods presented have been retroactively adjusted to give effect to the one-for-seven reverse
stock split.
Liquidity
The Company incurred
substantial losses in 2011 and 2010. The Company had net losses attributable to common shareholders of $8,385,000 and $5,930,000
in 2011 and 2010, respectively, and negative operating cash flows of $4,467,000 and $1,525,000 in 2011 and 2010, respectively.
As of December 31, 2011, the Company had an accumulated deficit of $138,048,000. While the Company believes its current funds will
be sufficient to enable it to meet its planned expenditures through at least January 1, 2013, if anticipated operating results
are not achieved, management has the intent and believes it has the ability to delay or reduce expenditures. Failure to generate
sufficient cash flows from operations, raise additional capital, or reduce certain discretionary spending could have a material
adverse effect on the Company’s ability to achieve its intended business objectives.
In the fourth quarter, the Company decided
to shift its strategic focus away from the traditional broker dealer model in and around research and institutional sales toward
a model of recurring revenue and platform revenue which represents a more scalable, predictable and profitable model in today’s
environment and management believes that they will result in reduced fixed operating costs going forward. However, given the Company’s
historical track recorded in Investment Banking and Institutional Equities and Options we will continue to help firms raise the
capital needed to fuel innovation.
2. Summary of Significant
Accounting Policies
Basis and Presentation
The accompanying financial statements are
presented in accordance with accounting principles generally accepted in the United States (U.S. GAAP).
Under Accounting Standards
Codification (ASC) 855,
Subsequent Events
, the Company has evaluated all subsequent events until the date these consolidated
financial statements were filed with the SEC.
For the purposes of presentation, dollar
amounts displayed in these Notes to Consolidated Financial Statements were rounded to the nearest thousand.
Principles of Consolidation
As of December 31, 2011, the Company has
two wholly-owned U.S. subsidiaries. The subsidiaries, MC and Merriman Asset Management, Inc. have been consolidated in the
accompanying consolidated financial statements. All significant intercompany accounts and transactions have been eliminated.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment Reporting
In January 2011, MC formed a new investment
banking division, Riverbank Partners (Riverbank), to assist corporate issuers in raising capital through a network of independent
investment bankers. Also, in January 2011, the Company repositioned its OTCQX Advisory Services (OTCQX) offering and fee structure.
Accordingly, effective January 1, 2011, the Company reorganized its business around three operating segments: MC, Riverbank and
OTCQX. The Company's reportable segments are strategic business units that offer products and services which are compatible with
our core business strategy.
Use of Estimates
The preparation of financial statements
in conformity with U. S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts
of assets, liabilities, revenue and expenses. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made
to the prior year’s consolidated financial statements to conform to the presentation of the current year’s consolidated
financial statements.
Advertising Costs
Advertising costs include expenses associated
with investor relations and are expensed as incurred. We recorded $58,000 and $207,000 of advertising costs for the
years ended December 31, 2011 and 2010, respectively.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies
(continued)
Commissions and Principal Transactions Revenue
Commission revenue includes revenue resulting
from executing stock exchange-listed securities, over-the-counter securities and other transactions as agent for the Company’s
clients. Principal transactions consist of a portion of dealer spreads attributed to the Company’s securities trading activities
as principal in NASDAQ-listed and other securities, and include transactions derived from activities as a market-maker. Additionally,
principal transactions include gains and losses resulting from market price fluctuations that occur while holding positions in
trading security inventory. Commission revenue 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 and commodities transactions entered into for the account and risk of the Company are recorded on a trade-date
basis.
Investment Banking Revenue
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,
selling concessions and underwriting fees. 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 presented
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.
Riverbank Revenues
The Company recognizes revenues earned
by Riverbank on a gross basis in accordance with ASC 605-45, “
Revenue Recognition: Principal Agent Considerations
,”
as the Company is the primary obligor in the arrangements entered into by Riverbank. Revenues earned by Riverbank are recognized
consistent with the Company’s revenue recognition policies as disclosed herein.
Other Revenues and Deferred Revenue
The Company provides OTCQX Advisory Services,
in the form of assistance to its clients in listing on OTCQX, a tier of Pink Sheets, along with other services that facilitate
their access to institutional capital markets.
Deferred revenue mainly represents customer
billings made in advance to certain clients for due diligence services, and annual support contract for providing services as their
Principal American Liaison (PAL) if a non-U.S. company or a Designated Advisor for Disclosure (DAD), if a U.S. company. Effective
January 1, 2011, the Company repositioned its service offerings and fee structure for OTCQX. OTCQX Advisory Services revenues are
primarily recognized on a straight-line basis from the completion of the due diligence until the end of the engagement term, which
is generally one year.
Other revenues consist primarily of revenues
generated by the OTCQX Advisory Services. In addition, immaterial amounts of revenue that do not conform to the types described
above are also recorded as other revenues.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies
(continued)
Stock-Based Compensation Expense
The Company measures and recognizes compensation
expense based on estimated fair values for all stock-based awards made to employees and directors, including stock options, restricted
stock, and warrants. The Company estimates fair value of stock-based awards on the date of grant using the Black-Scholes option-pricing
model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company’s
consolidated statements of operations over the requisite service periods. Because stock-based compensation expense is based on
awards that are ultimately expected to vest, stock-based compensation expense has been reduced to account for estimated forfeitures.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates.
To calculate stock-based compensation resulting
from the issuance of options, restricted common stock, and warrants, the Company uses the Black-Scholes option pricing model, which
is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These variables
include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. No tax benefits were attributed to the share-based compensation expense because
a valuation allowance was maintained for all net deferred tax assets.
Cost of Underwriting Capital
The Company incurs fees on financing arrangements
entered into to supplement underwriting capacity and working capital for the broker-dealer subsidiary. These fees are
recorded as cost of underwriting capital as incurred.
Income Taxes
The Company uses the asset and liability
method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are determined based on temporary differences between the financial statement carrying
amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which temporary differences
are expected to reverse. A valuation allowance is recorded to reduce deferred tax assets to an amount whose realization is more
likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements
of operations in the period that includes the enactment date.
The Company adopted
FASB Interpretation ASC 740-10
, “Accounting for Uncertainty in Income Taxes" (FIN
48), on January 1, 2008. Prior to adoption, the Company’s policy was to establish reserves that reflected the probable outcome
of known tax contingencies. The effects of final resolution, if any, were recognized as changes to the effective income tax rate
in the period of resolution. ASC 740-10 requires application of a more likely than not threshold to the recognition and de-recognition
of uncertain tax positions. ASC 740-10 permits the Company to recognize the amount of tax benefit that has a greater than 50 percent
likelihood of being ultimately realized upon settlement. It further requires that a change in judgment related to the expected
ultimate resolution of uncertain tax positions be recognized in earnings in the quarter of such change.
Loss Per Share
Basic loss per share is computed by dividing
net loss by the weighted-average number of common shares outstanding. Diluted loss per share is calculated by dividing net loss
by the weighted-average number of common shares used in the basic loss per share calculation plus the number of common shares that
would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding. Diluted loss per share is
unchanged from basic loss per share for the years ended December 31, 2011 and 2010, because the addition of common shares and share
equivalents that would be issued assuming exercise or conversion would be anti-dilutive.
New Accounting Pronouncements
In June 2011, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “
Comprehensive
Income (Topic 220):Presentation of Comprehensive Income
,” that will require a company to present components of net income
and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There are no changes
to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted.
The Company does not expect the adoption of ASU 2011-05 to have a material effect on its consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04,
“
Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in
U.S. GAAP and IFRSs
.” The amendments in this ASU generally represent clarification of Topic 820, but also include instances
where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has
changed. This update results in common principles and requirements for measuring fair value and for disclosing information about
fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). The
amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively.
Early application is not permitted. The Company does not expect the adoption of ASU 2011-04 to have a material impact on its consolidated
financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments
purchased with original maturities of ninety days or less to be cash equivalents.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies
(continued)
Restricted Cash and Letters of Credit
Restricted cash includes cash deposited
with our clearing broker and cash collateral for a stand-by letter of credit with a commercial bank. The letters of
credit satisfy deposit requirements of the Company’s operating leases.
Due From/To Clearing Broker
The Company clears all of its brokerage
transactions through other broker-dealers on a fully disclosed basis. Due from clearing broker amount relates to the aforementioned
transactions. The Company monitors the credit standing of the clearing organizations as deemed necessary.
Securities Owned
Securities owned and securities sold, not
yet purchased in the consolidated statements of financial condition consist of financial instruments carried at fair value with
related unrealized gains or losses recognized in principal transactions in the consolidated statement of operations. The
securities owned are classified into “Marketable,” “Non-marketable,” and “Other.” Marketable
securities are those that can readily be sold, either through a stock exchange or through a direct sales arrangement. Non-marketable
securities are typically securities restricted under the Federal Securities Act of 1933 provided by SEC Rule 144 (Rule 144) or
have some restriction on their sale whether or not a buyer is identified.
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, 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 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
subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
Level 1 — Unadjusted, quoted prices
are available in active markets for identical assets or liabilities at the measurement date. The types of assets and liabilities
carried at Level 1 fair value generally are G-7 government and agency securities, equities listed in active markets, investments
in publicly traded mutual funds with quoted market prices and listed derivatives.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Level 2 — Pricing inputs (other than
quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation
with market data at the measurement date and for the duration of the instrument’s anticipated life. Fair valued
assets which are generally included in this category are stock warrants for which market-based implied volatilities are available,
and unregistered common stock.
Level 3 — Pricing inputs are both
significant to the fair value measurement and unobservable. These inputs generally reflect management’s best estimate
of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the
risk inherent in the valuation technique and the risk inherent in the inputs to the model. Fair valued assets which are generally
included in this category are stock warrants for which market-based implied volatilities are not available.
In certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the
level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest
level input that is significant to the fair value measurement in its entirety.
For further information on financial assets
and liabilities that are measured at fair value on a recurring and nonrecurring basis, and a description of valuation techniques,
see Note 5.
Accounts Receivable
Accounts receivable are recorded at the
invoiced amount and do not bear interest. To the extent deemed necessary, the Company maintains an allowance for estimated losses
from the inability of clients to make required payments. The collectability of outstanding invoices is continually assessed. In
estimating the allowance for doubtful accounts, the Company considers factors such as historical collections, a client’s
current creditworthiness, age of the receivable balance and general economic conditions that may affect a client’s ability
to pay.
Allowance for uncollectible accounts was
$436,000 as of December 31, 2010. No allowance for uncollectible accounts was required as of December 31, 2011.
At December 31, 2010, the Company had $330,000
outstanding accounts receivable pledged as collateral to secure a promissory note which are included in accounts receivable, net,
in the Company’s statement of financial condition. Also refer to Note 3 – Issuance of Debt.
Equipment and Fixtures
Equipment and fixtures are reported at historical
cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method
over useful lives of three to five years. Leasehold improvements are amortized using the straight-line method over the lesser of
the life of the lease or the service lives of the improvements.
Long-Lived Assets
The Company evaluates its long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. When assets are considered to be impaired, the impairment to be recognized is measured
as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies
(continued)
Discontinued Operations
For those businesses where management has
committed to a plan to divest, each business is valued at the lower of its carrying amount or estimated fair value less estimated
cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. For businesses classified
as discontinued operations, statement of operations results are reclassified from their historical presentation to discontinued
operations in the consolidated statements of operations for all periods presented. The gains or losses associated with these divested
businesses are recorded in loss from discontinued operations in the consolidated statements of operations.
Warrant Liabilities
Stock warrants to purchase the Company’s
common stock issued to our investors and creditors are rights to purchase our common stock. Such positions are considered
illiquid and do not have readily determinable fair values, and therefore require significant management judgment or estimation.
We used the Black-Scholes valuation methodology or similar techniques to estimate its value.
Concentrations of Risk
Substantially all of the Company’s
cash and cash equivalents are held at two major U.S. financial institutions. The majority of the Company’s cash equivalents
consist of short-term marketable securities. Deposits held with banks may exceed the amount of insurance provided on such deposits.
Generally, these deposits may be redeemed upon demand.
As of December 31, 2011 and 2010, the Company
held concentrated positions in three and two securities with total fair values in the amounts of $1,343,000 and $3,563,000, respectively.
The prices of these securities are highly volatile.
As of December 31, 2011 and 2010, the Company
held concentrated positions in accounts receivable with three clients, each of which exceeded 10% of total accounts receivable The
clients referred to as of 2010 were not the same ones as the clients as of 2011.
During 2011 and 2010, one sales professional
accounted for more than 10% of total revenue and one customer accounted for more than 10% of revenue.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Issuance of Debt
Subordinated Notes Payable
On September 29, 2010, the Company borrowed
$1,000,000 from nine individual lenders, all of whom were directors, officers or employees of the Company at the time of issuance,
pursuant to a series of unsecured promissory notes (Subordinated Notes). The Subordinated Notes are for a term of three
years and provide for interest comprising two components: (i) six percent (6.0%) per annum to be paid in cash monthly; and (ii)
eight percent (8.0%) per annum to be accrued and paid in cash upon maturity. Additional consideration was paid to the
lenders at closing comprising a number of shares of common stock of the Company equal to: (A) 30% of the principal amount
lent; divided by (B) $3.01 per share. The total effective interest on the note is approximately 21.73%. Proceeds were
used to supplement underwriting capacity and working capital for MC.
The total proceeds of $1,000,000 raised
in the transaction above were accounted for as an issuance of debt with stock. The total proceeds of $1,000,000 have been allocated
to these individual instruments based on the relative fair values of each instrument. Based on such allocation method, the value
of the stocks issued in connection with the Subordinated Notes was $206,000, which was recorded as a discount on the debt and applied
against the Subordinated Notes. As of December 31, 2010, the Subordinated Notes of $809,000, net of $191,000 discount, remained
outstanding and is included in notes payable to related parties in the Company’s consolidated statements of financial condition.
As of December
31, 2011, $830,000 of the
Subordinated Notes, net of $120,000 discount
, remain outstanding and
is included in notes payable to related parties in the Company’s consolidated statements of financial condition. The remaining
Subordinated Notes held by parties no longer related to the Company of $44,000, net of $6,000 discount, are included in notes payable
in the Company’s consolidated statements of financial condition. The discount on the note is amortized over the term of the
loan using the effective interest method. For the year ended December 31, 2011, the Company incurred $140,000 in interest on the
Subordinated Notes
. Total interest of $105,000 remains outstanding as of December 31, 2011 and
is included in accrued expenses and other in the consolidated statements of financial condition.
2010 Chez Secured Promissory Note
On November 17, 2010, the Company borrowed
$1,050,000 from Ronald L. Chez, its Co-Chairman of the Board of Directors, pursuant to a secured promissory note (2010 Chez Secured
Promissory Note). The 2010 Chez Secured Promissory Note is secured by certain accounts receivable which were purchased
by the Company from MC with the proceeds of the transaction being used for such purchase. The 2010 Chez Secured
Promissory Note is due and payable in two tranches as the accounts receivable became due, with $950,000 due on January 19, 2011
and $100,000 due on February 28, 2011. It provides for interest of 29.2% per annum and additional consideration comprising two
components (i) 50,000 shares of the Company’s Series D Preferred Stock (which is convertible into 7,142 shares of our Common
Stock); and (ii) a cash fee of $15,000. The proceeds were used to supplement underwriting capacity for MC.
As
of December 31, 2010, the 2010 Chez Secured Promissory Note
of $330,000 remained outstanding
and is included in notes payable to related parties in the Company’s consolidated statements of financial condition.
On January 21, 2011, the 2010 Chez
Secured Promissory Note was amended to extend the maturity date to April 15, 2011 and change the 50,000 Series D Convertible Preferred
Stock consideration to cash compensation of $21,000. For the year ended
December 31
, 2011, the
Company incurred $42,000 in fees, composed of $15,000 and $21,000 in cash fees, and $6,000 of interest at 29.2% per annum. On
March 24, 2011, all principal and related fees were paid and no balance remains outstanding.
Unsecured Promissory Notes
On November 1, 2010, the Company issued
$300,000 in unsecured promissory notes (Unsecured Promissory Notes) to four of its Series D Convertible Preferred Stock investors
with a maturity date of the earlier of January 31, 2011 or the consummation of a qualified financing, as defined. The
Unsecured Promissory Notes provide for interest of twelve percent (12%) per annum to be paid in cash at maturity. Additional
consideration was paid to the lenders at closing comprising a number of shares of common stock of the Company equal to 55% of the
principal amount lent divided by $3.01 per share.
The total proceeds of $300,000 raised in
the transaction above were accounted for as an issuance of debt with stock. The total proceeds of $300,000 have been
allocated to these individual instruments based on the relative fair values of each instrument at the time of issuance. Based
on such allocation method, the value of the stock issued in connection with the Unsecured Promissory Notes was $106,000, which
was recorded as a discount on the debt and applied against the Unsecured Promissory Notes. As of December 31, 2010, Unsecured Promissory
Notes of $260,000, net of $40,000 discount, remain outstanding and is included in notes payable in the Company’s consolidated
statements of financial condition.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 31, 2011, the Company amended
its Unsecured Promissory Notes to extend their maturity dates from January 31, 2011 to December 31, 2011. The interest
rate from the amendment date to the maturity date was increased to 13%. Furthermore, the additional common stock consideration
was cancelled and returned to the Company, as such $65,000 of previously amortized discount on debt was reversed. For the year
ended December 31, 2011, the Company incurred $37,000 in interest in relation to this note.
On December 14,
2011, the Company entered into e
xchange agreements with the Unsecured Promissory Note investors whereby the investors agree
to exchange the Unsecured Promissory Notes and Warrants for shares of common stock and new warrants to purchase shares of common
stock of the Company as follows.
|
(a)
|
For the Unsecured Promissory Notes, a number of new shares of common stock equal to (i) the total
amount of principal plus accrued but unpaid interest of the Unsecured Promissory Notes submitted for cancellation divided by (ii)
an amount equal to 80% of the average closing price per share of common stock as quoted on the exchange on which it principally
trades for the 30 day period ending two days prior to the closing date (the AP); plus
|
|
(b)
|
For the Warrants, 1.25 new warrants for each Warrant converted, with each new warrant carrying
an exercise price equal to 110% of the AP.
|
On December 14, 2011, the $300,000 principal
balance and $43,000 accrued interest was converted into 459,218 common shares and 83,496 warrants.
The Company accounted for this transaction
in accordance with ASC 470,
Debt
, as an extinguishment of debt, whereby a gain or loss was calculated as the difference
between the reacquisition price and net carrying value of the debt. The reacquisition price was determined as the sum of the fair
value of the common stock and new warrants. The warrants were valued using the Black-Scholes fair value model. A gain of $107,000
was recorded on the transaction based on a reacquisition price of $236,000 and net carrying value, including interest, of $343,000.
Secured Promissory Notes
In April 2011, the Company raised $2,770,000
from 24 investors, of which 11 were directors, officers, consultants or employees of the Company at the time of issuance, pursuant
to a series of secured promissory notes (Secured Promissory Notes). The Secured Promissory Notes are for a term of three years
and provide for interest of ten percent (10.0%) per annum to be paid in cash quarterly. Additional consideration was paid
to the lenders at closing comprising warrants to purchase shares of the common stock of the Company at a price per share equal
to 85% of the Company’s stock price at the closing date (the Warrants). 86 Warrants were issued for each $1,000 invested. A
total of 238,220 Warrants were issued. The Warrants issued to directors, officers, consultants and employees (Insider
Warrants) of the Company provide that the Insider Warrants will not be exercisable unless first approved by the Company’s
stockholders. These notes are secured by a security interest in and right of setoff against all of such the Company’s
right, title and interest in, to all of the capital stock of MC, together with all proceeds, rents, profits and returns of and
from any of the foregoing. Also, beginning on the date which is one year from the issuance date, if there is an equity financing
of the Company resulting in gross proceeds of at least $15,000,000 in new money, holders shall have the option to put 50% of Secured
Promissory Notes originally purchased back to the Company, for an amount equal to the principal plus accrued but unpaid interest,
on 30 days written notice. The Secured Promissory Notes were issued in two tranches, one closed on April 7, 2011 for $2,470,000
and the other closed on April 21, 2011 for $300,000.
The total proceeds raised in the transaction
above were accounted for as an issuance of debt with warrants. The total proceeds of $2,770,000 have been allocated to these
individual instruments based on the relative fair values of each instrument at the time of issuance.
Based
on the fair value allocation method, the value of the warrants issued in connection with the Secured Promissory Notes received
was $420,000, which was recorded as a discount on the debt and applied against the Secured Promissory Notes.
On October 11,
2011, the Company repurchased the $100,000
Secured Promissory Note from
a former officer and
director in connection with his separation from the Company.
On November 16,
2011, the Company entered into e
xchange agreements with certain Secured Promissory Note investors whereby the investors
agree to exchange the Secured Promissory Notes and Warrants for shares of common stock and new warrants to purchase shares of common
stock of the Company as follows.
|
(c)
|
For the Secured Promissory Notes, a number of new shares of common stock equal to (i) the total
amount of principal plus accrued but unpaid interest of the Secured Promissory Notes submitted for cancellation divided by (ii)
an amount equal to 80% of the average closing price per share of common stock as quoted on the exchange on which it principally
trades for the 30 day period ending two days prior to the closing date (the AP); plus
|
|
(d)
|
For the Warrants, 1.25 new warrants for each Warrant converted, with each new warrant carrying
an exercise price equal to 110% of the AP.
|
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifteen investors
agreed to exchange $1,750,000 principal balance of the
Secured Promissory Notes plus $22,000 accrued interest for 2,373,505
shares of common stock and 188,126 warrants.
The Company accounted for this transaction
in accordance with ASC 470,
Debt
, as an extinguishment of debt, whereby a gain or loss was calculated as the difference
between the reacquisition price and net carrying value of the debt. The reacquisition price was determined as the sum of the fair
value of the common stock and new warrants less the fair value of the original Warrants. The warrants were valued using the Black-Scholes
fair value model. A loss of $1,134,000 was recorded on the transaction based on a reacquisition price of $2,688,000 and net carrying
value, including interest, of $1,554,000.
As of December
31, 2011, $636,000 of the Secured Promissory Notes, net of $84,000 discount, remain outstanding and are included in notes payable
in the Company’s consolidated statements of financial condition. The remaining Secured Promissory Notes issued to Insiders
of
$176,000, net of $24,000 discount, are included in notes payable to related parties in the Company’s consolidated
statements of financial condition.
For the year ended
December
31
, 2011, the Company incurred $178,000 in interest in relation to these notes. A
s of December
31, 2011, $23,000 of interest remains outstanding and is included in accrued expenses and other in the consolidated statements
of financial condition.
2011 Chez Secured Promissory Note
On April 7, 2011, the Company’s Co-Chairman
of the Board of Directors, Ronald L. Chez, invested $330,000 in a three year secured promissory note (2011 Chez Secured Promissory
Note) at an interest rate of six percent (6%) per annum payable quarterly. This note is secured by a security interest in
and right of setoff against all of such the Company’s right, title and interest in, to all of the capital stock of Merriman
Capital Inc., together with all proceeds, rents, profits and returns of and from any of the foregoing. Also, beginning on the date
which is one year from the issuance date, if there is an equity financing of the Company resulting in gross proceeds of at least
$15,000,000 in new money, holders shall have the option to put 50% of Secured Promissory Notes originally purchased back to the
Company, for an amount equal to the principal plus accrued but unpaid interest, on 30 days written notice.
On November 16,
2011,
the 2011 Chez Secured Promissory Note plus accrued interest of $3,000 was exchanged for 445,299 shares of common stock
of the Company calculated as (i) the total amount of principal plus accrued but unpaid interest divided by (ii) an amount equal
to 80% of the average closing price per share of common stock as quoted on the exchange on which it principally trades for the
30 day period ending two days prior to the closing date.
The Company accounted for this transaction
in accordance with ASC 470,
Debt
, as an extinguishment of debt, whereby a gain or loss was calculated as the difference
between the reacquisition price and net carrying value of the debt. The reacquisition price was determined as the sum of the fair
value of the common stock and new warrants. The warrants were valued using the Black-Scholes fair value model. A loss of $157,000
was recorded on the transaction based on a reacquisition price of $490,000 and net carrying value, including interest, of $333,000.
For the year ended December 31, 2011, the
Company incurred $12,000 in interest in relation to this note.
Temporary Subordinated Loan
During the first
quarter of 2011, the Company issued a loan in the form of temporary subordinated loans to supplement the Company’s net capital
and enable it to underwrite initial public offerings, in accordance with Rule 15c3-1 of the Securities Exchange Act of 1934. All
temporary subordinated loan transactions are disclosed separately in Note 17
–
Related
Party Transactions.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Shareholders’ Equity
Series D Convertible Preferred Stock
On September 8, 2009, the Company issued
23,720,916 shares of Series D Convertible Preferred Stock along with 5-year warrants to purchase 3,388,677 shares of the Company’s
common stock with an exercise price of $4.55 per share on a post-reverse split basis. The investor group constituted of 56
individuals and entities, including certain officers, directors and employees of the Company, as well as outside investors.
The Series D Convertible Preferred Stock
was issued in a private placement exempt from registration requirements pursuant to Regulation D of the Securities Act of 1933. Effective
upon the reverse-stock split as discussed in Note 1, seven shares of Series D Convertible Preferred Stock is convertible into one
share of common stock of the Company. For the year ended December 31, 2011, 2,494,922 shares of Series D Convertible Preferred
Stock were converted to 356,415 shares of common stock.
The Series D Convertible Preferred Stock
carries a dividend rate of 6% per annum, payable monthly in arrears. For the year ended December 31, 2011 and 2010, total Series
D Convertible Preferred Stock dividends were $491,000 and $591,000, respectively. Of the total dividends recorded, $0 and
$47,000 remain outstanding as of December 31, 2011 and 2010, respectively, which is included in accounts payable in the consolidated
statements of financial condition.
Both the Series D Convertible Preferred
Stock and the warrants issued in connection with the Series D Convertible Preferred Stock had, when issued, anti-dilution features
including a full ratchet provision so that if the Company pays dividends, splits its common shares forward or reverse, issues additional
shares at a lower price than the Series D Convertible Preferred Stock price, or adjusts its shares outstanding due to a combination,
the conversion and exercises prices would also adjust proportionally. The full ratchet provision resulted in the warrants
being accounted for as derivative instruments, since the exercise price was not fixed and could be lowered if the Company had issued
securities at prices lower than the original exercise price of the warrant. On December 28, 2009, 100% of the holders of the warrants
issued in connection with the Series D convertible Preferred Stock agreed to amend their warrants to remove the full ratchet provision
(see Note 5 for warrant accounting).
The warrants will expire five years from
the date of the transaction. Holders of the Series D Convertible Preferred Stock may convert them into shares of the
Company’s common stock at any time in amounts no less than $100,000 unless all of the shares held by the holder are for a
lesser amount. The Series D Convertible Preferred Stock will automatically convert at the discretion of the Company upon 10-day
notice given when the average closing price of the Company’s common stock over a 30-day period is at or above $21.00 per
share on a post-reverse split basis and when the average trading volume for the immediately prior four-week period is 4,285 shares
or more, provided that the shares have been effectively registered with the Securities and Exchange Commission or all of the Series
D Convertible Preferred Stock may be sold under Rule 144 of the 1933 Exchange Act.
The holders of Series D Convertible Preferred
Stock are entitled to a “liquidation preference payment” of $0.43 per share of Series D Convertible Preferred Stock
plus all accrued but unpaid dividends on such shares prior and in preference to any payment to holders of the Common Stock upon
a merger, acquisition, sale of substantially all the assets, or certain other liquidation events of the Company. Any proceeds after
payment of the “liquidation preference payment” shall be paid pro rata to the holders of the Series D Convertible Preferred
Stock and Common Stock on an as converted to Common Stock basis.
The Company has accounted for this transaction
as the issuance of convertible preferred stock and a detachable stock warrant. The total gross proceeds of $10,200,000, which
include $1,392,000 from conversions of prior notes (see Note 3), have been allocated to these individual instruments based on the
residual method. Of the total cash proceeds, $4,300,000 was used to settle certain legal claims which had an aggregate
exposure of $43,577,000. The remaining cash of $4,508,000 was used for working capital.
As discussed above, the Company issued warrants
to purchase 3,388,677 shares of common stock in conjunction with the sale of the Series D Convertible Preferred Stock. The proceeds
of the transaction were allocated between the Series D Convertible Preferred Stock and the warrants using the residual method in
which proceeds are first allocated to the warrant liability and any remaining value is then allocated to the preferred stock. The
warrants were valued using the Black-Scholes fair value model. The grant date fair value of the warrants issued with the Series
D Convertible Preferred Stock was $15,264,000. As the fair value of the warrants exceeds the proceeds received, the Company allocated
all of the proceeds, with the exception of the par value of the Series D Convertible Preferred Stock, to the warrant liability.
The additional value needed to record the warrants at fair value was recorded as a charge to additional paid-in capital (APIC)
and shown as deemed dividend on the consolidated statements of operations.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During November 2011, as required by the
Series D certificate of designation, more than 50% of the holders of the outstanding Series D Convertible Preferred Stock of the
Company agreed to amend certain provisions of the Series D certificate of designation. Accordingly, the following amendments
became applicable to all of the outstanding Series D Convertible Preferred Stock; an amendment to require that until such time
as the directors declare a dividend, any unpaid and undeclared dividends accumulate, compound and will not be payable, and an amendment
to decrease the “full ratchet” anti-dilution provision of the Series D certificate of designation to an amount to equal
two times the AP, as applicable to the conversion of the Secured Promissory Notes and Unsecured Promissory Notes described above.
During December 2011, the Series D certificate
of designation was amended again to decrease the “full ratchet” anti-dilution provision of the Series D certificate
of designation to an amount equal to two times the price at which such additional shares of common stock are issued in connection
with the sale of Series E Convertible Preferred Stock.
Series E Convertible Preferred
Stock
On December 30, 2011, the Company issued
2,531,744 shares of Series E Convertible Preferred Stock at $0.63 per share plus warrants to purchase 1,265,874 shares of the Company’s
common stock with an exercise price of $0.63 per share. The warrants expire five years from the effective date. The total proceeds
of $1,595,000 were allocated between the Series E Convertible Preferred Stock and the related warrants based on the relative fair
values of each instrument at the time of issuance. All Series E Convertible Preferred shareholders are directors of the Company.
The Series E Convertible Preferred Stock
carries a dividend rate of 9% per annum, such dividends will be paid only when, if and as declared by the Board of Directors and
will accumulate until paid. The Company is prohibited from paying any dividends on the Common Stock until all accrued dividends
on the Series D and Series E Convertible Preferred Stock are first paid.
The holders of Series E Convertible Preferred
Stock are entitled to a “liquidation preference payment” of $0.63 per share of Series E Convertible Preferred Stock
plus all accrued but unpaid dividends on such shares prior and in preference to any payment to holders of the Common Stock upon
a merger, acquisition, sale of substantially all the assets, or certain other liquidation events of the Company. Any proceeds after
payment of the “liquidation preference payment” shall be paid pro rata to the holders of the Series D and E Convertible
Preferred Stock and Common Stock on an as converted to Common Stock basis.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Fair Value of Assets and Liabilities
A description of the valuation techniques
applied to the Company’s major categories of assets and liabilities measured at fair value on a recurring basis follows.
Securities Owned
Corporate Equities
Corporate equities are comprised primarily
of exchange-traded equity securities in which the Company takes selective proprietary positions based on expectations of future
market movements and conditions.
Also, as compensation for investment banking
services, the Company frequently receives common stock of the client as an additional compensation to cash fees. The
common stock is typically issued prior to a registration statement is effective. The Company classifies these securities
as “non-marketable securities” as they are restricted stock and may be freely traded only upon the effectiveness of
a registration statement covering them or upon the satisfaction of the requirements to qualify under Rule 144, including the requisite
holding period. Once a registration statement covering the securities is declared effective by the SEC or the securities
have satisfied the Rule 144 requirements, the Company classifies them as “marketable securities.”
Typically, the common stock is traded on
stock exchanges and most are classified as Level 1 securities. The fair value is based on observed closing stock price
at the measurement date.
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 traded 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. Valuation inputs
used in the Black-Scholes model include interest rate, stock volatility, expected term and market price of the underlying stock. As
of December 31, 2011, the fair value of this type of securities included in securities owned in the statement of financial condition
is $ 907,000. Had these securities been valued using observed closing prices, the total value of the securities would
have been $ 957,000.
Stock Warrants
Also as partial compensation for investment
banking services, the Company may receive stock warrants issued by the client. Stock warrants provide their holders
with the right to purchase equity in a company. If the underlying stock of the warrants is freely tradable, the warrants
are considered to be marketable. If the underlying stock is restricted, subject to a registration statement or to satisfying
the requirements for a Rule 144 exemption, the warrants are considered to be non-marketable. Such positions are considered
illiquid and do not have readily determinable fair values, and therefore require significant management judgment or estimation.
The fair value of the stock warrants is
determined using the Black-Scholes model or similar valuation techniques. Valuation inputs used in the Black-Scholes model include
interest rate, stock volatility, expected term and market price of the underlying stock. As these require significant management
assumptions, they are classified as Level 3 securities.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Fair Value of Assets and Liabilities (continued)
Underwriters’ Purchase Options
The Company may receive partial compensation
for its investment banking services also in the form underwriters’ purchase options (UPOs). UPOs are identical
to warrants other than with respect to the securities for which they are exercisable. UPOs grant the holder the right to purchase
a “bundle” of securities, including common stock and warrants to purchase common stock. UPOs grant the right
to purchase securities of companies for which the Company acted as an underwriter to account for any overallotment of these securities
in a public offering. Such positions are considered illiquid and do not have readily determinable fair values, and therefore
require significant management judgment or estimation.
The fair value of the UPO is determined
using the Black-Scholes model or similar technique, applied in two stages. The first stage is to determine the value
of the warrants contained within the “bundle” which is then added to the fair value of the stock within the bundle. Once
the fair value of the underlying “bundle” is established, the Black-Scholes model is used again to estimate a value
for the UPO. The fair value of the “bundle” as estimated by Black-Scholes in the first stage is used instead
of the price of the underlying stock as one of the inputs in the second stage of the Black-Scholes. The use of the valuation
techniques requires significant management assumptions and therefore UPOs are classified as Level 3 securities.
Preferred Stock
Preferred stock represents preferred equity
in companies. The preferred stock owned by the Company is convertible at the Company’s discretion. For these securities,
the Company uses the exchange-quoted price of the common stock equivalents to value the securities. They are classified within
Level 2 or Level 3 of the fair value hierarchy depending on the availability of an observable stock price on actively traded markets.
Summary
In accordance with ASC 820, assets measured
at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the
valuations.
|
|
Assets at Fair Value at December 31, 2011
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equities
|
|
$
|
886,497
|
|
|
$
|
-
|
|
|
$
|
907,495
|
|
|
$
|
1,793,992
|
|
Stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
683,211
|
|
|
|
683,211
|
|
Underwriters’ purchase option
|
|
|
-
|
|
|
|
-
|
|
|
|
5,972
|
|
|
|
5,972
|
|
Preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
395
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities owned
|
|
$
|
886,497
|
|
|
$
|
-
|
|
|
$
|
1,597,073
|
|
|
$
|
2,483,570
|
|
Of the total securities owned as of December
31, 2011, $1,680,000 of corporate equities and $ 456,000 of stock warrants and underwriters’ purchase options whose underlying
stock is freely traded are considered to be marketable.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Fair Value of Assets and Liabilities (continued)
|
|
Assets at Fair Value at December 31, 2010
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equities
|
|
$
|
1,241,760
|
|
|
|
-
|
|
|
$
|
57,797
|
|
|
$
|
1,299,557
|
|
Stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
2,324,901
|
|
|
|
2,324,901
|
|
Underwriters’ purchase option
|
|
|
-
|
|
|
|
-
|
|
|
|
1,518,465
|
|
|
|
1,518,465
|
|
Preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
251
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities owned
|
|
$
|
1,241,760
|
|
|
$
|
-
|
|
|
$
|
3,901,414
|
|
|
$
|
5,143,174
|
|
Of the total securities owned as of December
31, 2010, $1,217,000 of corporate equities and preferred stock, and $1,185,000 of stock warrants and underwriters’ purchase
options whose underlying stock is freely traded are considered to be marketable.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Fair Value of Assets and Liabilities (continued)
The following table presents additional
information about Level 3 assets measured at fair value on a recurring basis for the year ended December 31, 2011 and 2010.
|
|
|
|
|
|
|
|
Underwriters’
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Stock
|
|
|
Purchase
|
|
|
Preferred
|
|
|
|
|
|
|
Equities
|
|
|
Warrants
|
|
|
Option
|
|
|
Stock
|
|
|
Total
|
|
Balance at January 1, 2010
|
|
$
|
21,731
|
|
|
$
|
1,575,481
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,597,212
|
|
Purchases or receipt (a)
|
|
|
96,890
|
|
|
|
316,184
|
|
|
|
956,707
|
|
|
|
-
|
|
|
|
1,369,781
|
|
Sales or exercises
|
|
|
(21,731
|
)
|
|
|
(409,528
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(431,259
|
)
|
Transfers into
|
|
|
248,637
|
(b)
|
|
|
-
|
|
|
|
-
|
|
|
|
434
|
|
|
|
249,071
|
|
Gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
(287,730
|
)
|
|
|
842,764
|
|
|
|
561,758
|
|
|
|
(183
|
)
|
|
|
1,116,609
|
|
Balance at December 31, 2010
|
|
$
|
57,797
|
|
|
$
|
2,324,901
|
|
|
$
|
1,518,465
|
|
|
$
|
251
|
|
|
$
|
3,901,414
|
|
Purchases or receipt (a)
|
|
|
2,955
|
|
|
|
754,847
|
|
|
|
-
|
|
|
|
-
|
|
|
|
757,802
|
|
Sales or exercises
|
|
|
722,575
|
|
|
|
(420,178
|
)
|
|
|
(881,804
|
)
|
|
|
-
|
|
|
|
(579,407
|
)
|
Transfers out of
|
|
|
(10,658
|
)(c)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,658
|
)
|
Gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
(292,278
|
)
|
|
|
(13,342
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(305,620
|
)
|
Unrealized
|
|
|
427,104
|
|
|
|
(1,963,017
|
)
|
|
|
(630,689
|
)
|
|
|
144
|
|
|
|
(2,166,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
907,495
|
|
|
$
|
683,211
|
|
|
$
|
5,972
|
|
|
$
|
395
|
|
|
$
|
1,597,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to instruments still held at December 31, 2011
|
|
$
|
150,938
|
|
|
$
|
(1,135,978
|
)
|
|
$
|
(59,187
|
)
|
|
$
|
143
|
|
|
$
|
(1,044,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to instruments still held at December 31, 2010
|
|
$
|
(287,730
|
)
|
|
$
|
868,761
|
|
|
$
|
561,758
|
|
|
$
|
(183
|
)
|
|
$
|
1,142,606
|
|
|
(a)
|
Includes purchases of securities and securities received
for services
|
|
(b)
|
Principally reflects transfers from Level 1, due to reduced
trading activity, and therefore price transparency, on the underlying instruments
|
|
(c)
|
Principally reflects transfer to Level 1, due to availability
of market data and therefore more price transparency
|
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Fair Value of Assets and Liabilities (continued)
Net gains and losses (both realized and
unrealized) for Level 3 financial assets are a component of principal transactions in the consolidated statements of operations.
6. Equipment and Fixtures
Equipment and fixtures consisted of the
following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
564,906
|
|
|
$
|
553,526
|
|
Furniture and equipment
|
|
|
934,882
|
|
|
|
931,955
|
|
Software
|
|
|
191,744
|
|
|
|
191,744
|
|
Leasehold improvements
|
|
|
1,113,769
|
|
|
|
1,113,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,805,301
|
|
|
|
2,790,994
|
|
Less accumulated depreciation
|
|
|
(2,774,764
|
)
|
|
|
(2,654,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,537
|
|
|
$
|
136,706
|
|
No equipment or fixtures
were purchased through capital lease financing during 2011. At December 31, 2011, there were no outstanding capital leases.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Discontinued Operations
Panel Intelligence, LLC
On April 17, 2007, Merriman Holdings, Inc.
acquired 100% of the outstanding common shares of MedPanel Corp. which was subsequently renamed Panel Intelligence, LLC (“Panel”)
and made into a subsidiary of the Company. As a result of the acquisition, the Company began providing independent market data
and information to clients in the biotechnology, pharmaceutical, medical device, and financial industries by leveraging Panel’s
proprietary methodology and vast network of medical experts.
In December 2008, the Company determined
that the sale of Panel would reduce investments required to develop Panel’s business. Its sale would also generate
capital necessary for the Company’s core business. The Company determined that the plan of sale criteria in ASC 360,
Property, Plant and Equipment,
had been met. As a result, the revenue and expenses of Panel have been reclassified and included
in discontinued operations in the consolidated statements of operations. Accordingly, the carrying value of the Panel assets
was adjusted to their fair value less costs to sell in 2008. In January 2009, the Company sold Panel to Panel Intelligence,
LLC (Newco) for $1,000,000 and shares of the Company’s common stock in the amount of $100,000.
For the year ended December 31, 2010, income
from discontinued operations related to Panel was $33,000. As of December 31, 2011 and 2010, there were no assets or liabilities
held for sale by the Company that related to Panel that were included in the Company’s consolidated statements of financial
condition.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Discontinued Operations (continued)
Institutional Cash Distributors
On January 16, 2009, the Company entered
into an agreement to sell the assets of ICD, a division of MC, for $2,000,000 to a group of investors who were also its employees
in order to raise capital. The assets sold included MC’s rights in trademark, copyright, and other intellectual property
used in the business, customer lists, marketing materials, and books and records, which did not have any carrying values. In
accordance with SEC Staff Accounting Bulletin (SAB) 104, “
Revenue Recognition
”, the Company recognized $2,000,000
as other income in the consolidated statement of operations during the year ended December 31, 2009. In the second quarter
of 2010, ICD, LLC, formed by the new group of investors, started supporting its operations fully and as such, did not require significant
assistance from MC. The Company terminated all employees supporting ICD business, and does not have significant involvement
going forward. The Company determined that the criteria for discontinued operations under the guidance of ASC 205, have been met
as of June 30, 2010. As a result, the revenue and expenses of ICD have been included in discontinued operations in the consolidated
statements of operations.
For the year ended December 31, 2010, income
from discontinued operations related to ICD was $62,000. As of December 31, 2011 and 2010, there were no assets or liabilities
held for sale by the Company that related to ICD that were included in the Company’s consolidated statements of financial
condition.
The following revenue and expenses related
to Panel and ICD have been reclassified as discontinued operations for the year ended December 31, 2010:
|
|
December 31, 2010
|
|
|
|
|
|
|
Revenue
|
|
$
|
9,167,983
|
|
Operating expenses:
|
|
|
|
|
Compensation and benefits
|
|
|
7,870,502
|
|
Brokerage and clearing fees
|
|
|
27,219
|
|
Professional services
|
|
|
269,932
|
|
Occupancy and equipment
|
|
|
180,948
|
|
Communication and technology
|
|
|
213,867
|
|
Travel and entertainment
|
|
|
348,905
|
|
Legal services
|
|
|
75,519
|
|
Other expenses
|
|
|
119,328
|
|
|
|
|
|
|
|
|
|
9,106,220
|
|
|
|
|
|
|
Operating income
|
|
|
61,763
|
|
Other income
|
|
|
33,341
|
|
|
|
|
|
|
Net income
|
|
$
|
95,104
|
|
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock-Based Compensation Expense
Stock Options
In 2009, the Company, with shareholder approval,
adopted the 2009 Stock Incentive Plan (the “2009 Plan”). Up to 1,142,857 new shares of its common stock may be
issued pursuant to awards granted under the 2009 Plan. The Company no longer grants options under any of its prior option
plans. Any shares of the Company’s common stock which become available for new grant, upon the termination of employees
holding unvested option grants under existing plans, will be added to the 2009 Plan.
The 2009 Plan, 1999 Stock Option Plan, 2000
Stock Option and Incentive Plan, 2001 Stock Option and Incentive Plan, 2003 Stock Option and Incentive Plan, 2004 Non-Qualified
Stock Option and Inducement Plan and 2006 Directors’ Stock Option and Incentive Plan, collectively the Option Plans, permit
the Company to grant employees, outside directors, and consultants incentive stock options, nonqualified stock options or stock
purchase rights to purchase shares of the Company’s common stock. The Option Plans do not permit the exercise of restricted
stock options, and therefore as of December 31, 2011 and 2010, there were no shares subject to repurchase.
As of December 31, 2011 and 2010, there
were 2,155,915 shares authorized for issuance under the Option Plans, and 87,551 shares authorized for issuance outside of the
Option Plans. As of December 31, 2011 and 2010, 820,765 and 153,026 shares were available for future grants under the Option Plans,
respectively. There were no shares available for future grants outside of the Options Plans as of the end of 2011 and 2010.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock-Based Compensation Expense (continued)
The following table is a summary of the
Company’s stock option activity for the two years ended December 31, 2011 :
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
1,665,083
|
|
|
$
|
5.85
|
|
|
|
1,364,236
|
|
|
$
|
8.68
|
|
Granted
|
|
|
277,892
|
|
|
|
2.44
|
|
|
|
629,578
|
|
|
|
3.38
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,428
|
)
|
|
|
(2.38
|
)
|
Canceled
|
|
|
(1,013,329
|
)
|
|
|
(4.61
|
)
|
|
|
(313,303
|
)
|
|
|
(13.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
929,646
|
|
|
|
6.18
|
|
|
|
1,665,083
|
|
|
|
5.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
519,478
|
|
|
$
|
6.48
|
|
|
|
486,952
|
|
|
$
|
7.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of December 31, 2011
|
|
|
886,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information
with respect to stock options outstanding at December 31, 2011, based on the Company’s closing stock price on December 31,
2011 of $0.43 per share:
|
|
|
Options Outstanding at December 31, 2011
|
|
|
Vested Options at December 31, 2011
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
Range of
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Exercise Price
|
|
|
Number
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Value
|
|
|
Number
|
|
|
Price
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.0000 - $3.4999
|
|
|
|
435,878
|
|
|
|
7.35
|
|
|
$
|
2.82
|
|
|
$
|
-
|
|
|
|
247,529
|
|
|
$
|
2.97
|
|
|
$
|
-
|
|
|
$3.5000 - $6.9999
|
|
|
|
81,936
|
|
|
|
7.14
|
|
|
|
5.92
|
|
|
|
-
|
|
|
|
45,955
|
|
|
|
5.77
|
|
|
|
-
|
|
|
$7.0000 - $10.4999
|
|
|
|
364,045
|
|
|
|
7.83
|
|
|
|
8.42
|
|
|
|
-
|
|
|
|
190,619
|
|
|
|
8.42
|
|
|
|
-
|
|
|
$10.5000 - $13.9999
|
|
|
|
24,181
|
|
|
|
6.06
|
|
|
|
11.42
|
|
|
|
-
|
|
|
|
16,057
|
|
|
|
11.63
|
|
|
|
-
|
|
|
$14.0000 - $27.9999
|
|
|
|
18,365
|
|
|
|
1.62
|
|
|
|
22.35
|
|
|
|
-
|
|
|
|
14,080
|
|
|
|
20.98
|
|
|
|
-
|
|
|
$28.0000 - $48.9999
|
|
|
|
2,232
|
|
|
|
3.55
|
|
|
|
33.89
|
|
|
|
-
|
|
|
|
2,229
|
|
|
|
33.89
|
|
|
|
-
|
|
|
$49.0000 - $84.4999
|
|
|
|
3,009
|
|
|
|
2.02
|
|
|
|
67.92
|
|
|
|
-
|
|
|
|
3,009
|
|
|
|
67.92
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
929,646
|
|
|
|
7.35
|
|
|
$
|
6.18
|
|
|
$
|
-
|
|
|
|
519,478
|
|
|
$
|
6.48
|
|
|
$
|
-
|
|
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock-Based Compensation Expense (continued)
The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 2011 and
2010:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
123
|
%
|
|
|
128
|
%
|
Average expected term (years)
|
|
|
3.7
|
|
|
|
3.1
|
|
Risk-free interest rate
|
|
|
1.49
|
%
|
|
|
1.63
|
%
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
Consistent with ASC 718,
Stock Compensation
, the Company considered the historical volatility of its stock price in determining its expected volatility, and, finding this
to be reliable, determined that the historical volatility would result in the best estimate of expected volatility. Since the Company
does not have any traded options or other traded financial instruments such as convertible debt, implied volatilities are not available.
The expected life of employee stock options
represents the weighted-average period the stock options are expected to remain outstanding. The Company calculated the expected
term using the Black-Scholes model with specific assumptions about the suboptimal exercise behavior, post-vesting termination rates
and other relevant factors.
The risk-free interest rate assumption is
based upon observed interest rates appropriate for the term of the Company’s employee stock options.
The dividend yield assumption is based on
the Company’s history and expectation of dividend payouts. The Company has not paid and currently does not plan to declare
dividends on its common stock.
As stock-based compensation
expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures were
estimated based on the Company’s historical experience.
The weighted-average
grant date fair value of stock options granted during 2011 and 2010 was $2.11 and $2.56, respectively. Compensation expense for
stock options during the years ended December 31, 2011 and 2010 was $824,000 and $1,594,000, respectively. Of the total stock
compensation expense for the year ended December 31, 2010, $138,000 was incurred due to acceleration of vesting terms of stock
options of three employees upon their termination. As of December 31, 2011, total unrecognized compensation expense related
to unvested stock options was $1,416,000. This amount is expected to be recognized as expense over a weighted-average period of
1.97 years.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock-Based Compensation Expense (continued)
Restricted Stock
At the date of grant, the recipients of
restricted stock have most of the rights of a stockholder other than voting rights, subject to certain restrictions on transferability
and a risk of forfeiture. Restricted shares typically vest over a two to four year period beginning on the date of grant. The fair
value of each restricted stock award is based on the market value of the Company’s stock on the date of grant. The
Company recognizes the compensation expense for restricted stock on a straight-line basis over the requisite service period. Compensation
expense for restricted stock during the years ended December 31, 2011 and 2010 was $76,000 and ($61,000), respectively. We
had a negative stock compensation expense for the year ended December 31, 2010 due to cancellation of restricted stock that had
been granted to an employee who was terminated in March 2010.
The following table is a summary of the
Company’s restricted stock activity, based on the Company’s closing stock price on December 31, 2011 of $0.43 per share:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Non-Vested
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Stock
|
|
|
Grant Date
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Fair Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2010
|
|
|
5,522
|
|
|
|
74.07
|
|
|
$
|
33,629
|
|
Granted
|
|
|
78,694
|
|
|
|
3.17
|
|
|
|
|
|
Vested
|
|
|
(68,660
|
)
|
|
|
(3.79
|
)
|
|
|
|
|
Canceled
|
|
|
(4,725
|
)
|
|
|
(79.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
10,831
|
|
|
|
6.68
|
|
|
$
|
23,828
|
|
Granted
|
|
|
199,606
|
|
|
|
2.05
|
|
|
|
|
|
Vested
|
|
|
(7,526
|
)
|
|
|
(4.01
|
)
|
|
|
|
|
Canceled
|
|
|
(132,306
|
)
|
|
|
(2.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
|
70,605
|
|
|
$
|
2.12
|
|
|
$
|
30,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of December 31, 2011
|
|
|
54,713
|
|
|
|
|
|
|
|
|
|
The total fair value of restricted stock
that vested during the years ended December 31, 2011 and 2010 was $30,000 and $260,000, respectively.
As of December 31, 2011, total unrecognized
compensation expense related to restricted stock was $60,000. This expense is expected to be recognized over a weighted-average
period of 1.12 years.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock-Based Compensation Expense (continued)
Board of Directors Compensation
In 2009, the Company formed a Strategic
Advisory Committee of the Board of Directors chaired by Mr. Ronald Chez, the lead investor in the Series D Convertible Preferred
Stock strategic transaction. During the first year, the Chairman of the Committee was compensated with five-year warrants
to purchase 42,857 shares the Company’s common stock at $4.55 to be issued pro rata on a monthly basis
from
September 2009 to September 2010
. No other compensation was provided for his service on the Committee. For the year
ended December 31, 2010, the Company issued 29,525 warrants to Mr. Chez and recorded stock-based compensation expense of $103,000,
based on the calculated fair value of the warrants using the Black-Scholes option valuation model.
On January 21, 2011, the Company entered
into an amended agreement with Mr. Chez restricting the exercise of the 42,857 warrants without prior shareholders’ approval.
The Company intends to shareholders’ approval for these warrants in the next shareholders’ meeting.
Due to the modification of the terms of
the warrants, the Company recorded a decrease in the stock-based compensation expense of $176,000 for the year ended December 31,
2011. As of December 31, 2011, the Company recorded accrued expenses of $11,000 as the Company’s best estimate of the services
performed by Mr. Chez as the chairman of the Strategic Advisory Committee until the warrants are approved by the shareholders.
In August 2010, the shareholders approved
Mr. Chez to be the Co-Chairman of the Board of Directors of the Company. For the first year of his term as co-chairman, Mr.
Chez was compensated with 42,857 shares of the Company’s common stock and the Company recorded $135,000 of stock-based compensation
expense.
9. Employee Benefit Plans
The Company has a 401(k) defined contribution
plan. The 401(k) plan allows eligible employees to contribute up to 15% of their compensation, subject to a statutory prescribed
annual limit. Employee contributions and earnings thereon vest immediately. Although the Company may make discretionary contributions
to the 401(k) plan, none were made during the two years ended December 31, 2011.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes
Income tax expense (benefit) consisted of
the following for the two years ended December 31:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(344
|
)
|
|
$
|
(5,005
|
)
|
State
|
|
|
6,451
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,107
|
|
|
$
|
(5,005
|
)
|
The following table reconciles the federal
statutory rate to the effective tax rate of the provision for income taxes for the two years ended December 31:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Federal statutory income tax rate (benefit)
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
State income taxes
|
|
|
(8
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
2
|
|
|
|
4
|
|
Meals & entertainment
|
|
|
1
|
|
|
|
3
|
|
Valuation allowance
|
|
|
39
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
The effective tax rate is influenced by
the Company’s performance and tax planning opportunities available in the various jurisdictions in which the Company operates.
The tax effect of temporary
differences that give rise to significant portions of the deferred tax assets as of December 31, 2011 and 2010, are presented as
follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
12,070,793
|
|
|
$
|
9,620,051
|
|
Reserves and accruals
|
|
|
671,646
|
|
|
|
1,251,339
|
|
Unrealized gain/ loss
|
|
|
4,201,193
|
|
|
|
3,293,738
|
|
Other
|
|
|
1,341,841
|
|
|
|
652,033
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
18,285,473
|
|
|
|
14,817,161
|
|
Valuation allowance
|
|
|
(18,285,473
|
)
|
|
|
(14,817,161
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes (continued)
The net change in the valuation allowance
for the year ended December 31, 2011 was an increase of $3,468,000. This increase was primary the result of the addition of net
operating loss carry-forward from loss generated in current year. The Company has established a valuation allowance against that
portion of deferred tax assets where management was not able to determine that it is more likely than not that the asset will be
realized.
As of December 31, 2011, the Company had
federal and state operating loss carry-forwards of approximately $28,528,000
and $21,854,000, respectively. If not earlier
utilized, the federal net operating loss carry-forward will expire between 2021 and 2031 and the state loss carry-forward will
expire between 2012 and 2032.
The Tax Reform Act of 1986 and similar state
legislation impose substantial restrictions on the utilization of net operating losses and tax credits in the events of an "ownership
change" of a corporation. Accordingly, the Company has analyzed the impact of "ownership change" limitations on
its ability to utilize net operating losses and credit carry-forwards. As a result, the Company has reduced the net operating losses.
The Company adopted
FASB Interpretation ASC 740-10
, “Accounting for Uncertainty in Income Taxes" (FIN
48), on January 1, 2008. Prior to adoption, the Company’s policy was to establish reserves that reflected the probable outcome
of known tax contingencies. The effects of final resolution, if any, were recognized as changes to the effective income tax rate
in the period of resolution. ASC 740-10 requires application of a more likely than not threshold to the recognition and de-recognition
of uncertain tax positions. ASC 740-10 permits the Company to recognize the amount of tax benefit that has a greater than 50 percent
likelihood of being ultimately realized upon settlement. It further requires that a change in judgment related to the expected
ultimate resolution of uncertain tax positions be recognized in earnings in the quarter of such change.
The Company does not have any material accrued
interest or penalties associated with any unrecognized tax benefits. The Company's policy is to account for interest, if any, as
interest expense and penalties as income tax expense.
The Company’s tax years 2001-2011
will remain open for examination by the U.S. federal tax authorities. The Company’s tax years 2001-2011 will remain open
for all tax years with loss carry-overs for examination by state tax authorities. Net operating losses deducted are subject to
review and adjustment for three to four years after the net operating losses are deducted on the U.S. and state returns filed.
11. Loss per Share
The following is a reconciliation of net
loss to net loss attributable to common stockholders:
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(7,893,662
|
)
|
|
$
|
(5,433,523
|
)
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
-
|
|
|
|
95,104
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,893,662
|
)
|
|
$
|
(5,338,419
|
)
|
Convertible preferred stock, series D dividends
|
|
|
(491,334
|
)
|
|
|
(591,125
|
)
|
Net loss attributable to common shareholders - basic and diluted
|
|
$
|
(8,384,996
|
)
|
|
$
|
(5,929,544
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares -basic
|
|
|
2,919,316
|
|
|
|
2,002,305
|
|
Assumed exercise or conversion of all potentially dilutive common shares
outstanding
|
|
|
-
|
|
|
|
-
|
|
Weighted-average number of common shares -diluted
|
|
|
2,919,316
|
|
|
|
2,002,305
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(2.70
|
)
|
|
$
|
(2.71
|
)
|
Income from discontinued operations
|
|
|
-
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(2.70
|
)
|
|
$
|
(2.67
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common shareholders
|
|
$
|
(2.87
|
)
|
|
$
|
(2.96
|
)
|
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Loss per Share (continued)
Basic earnings (loss) per share is computed
by dividing net income (loss) by the weighted average number of common shares outstanding, excluding shares of non-vested stock.
Diluted income per share is calculated by dividing net income by the weighted average number of common shares used in the basic
income per share calculation plus the number of common shares that would be issued assuming exercise or conversion of all potentially
dilutive common shares outstanding, including non-vested stock. Diluted loss per share is unchanged from basic loss per share because
the addition of common shares that would be issued assuming exercise or conversion would be anti-dilutive. Interest and dividends
are also not considered since including them in the calculation of diluted loss per share would be anti-dilutive.
Shares used in the diluted net income per
share computation include the dilutive impact of the Company’s stock options and warrants. The impact of the Company’s
stock options and warrants on shares used for the diluted income per share computation is calculated based on the average share
price of the Company’s common stock for each period using the treasury stock method. Under the treasury stock method, the
tax-effected proceeds that would be hypothetically received from the exercise of all stock options and warrants with exercise prices
below the average share price of the Company’s common stock are assumed to be used to repurchase shares of the Company’s
common stock.
The Company excludes all potentially dilutive
securities from its diluted net loss per share computation when their effect would be anti-dilutive. The following common stock
equivalents were excluded from the earnings per share computation, as their inclusion would have been anti-dilutive:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Stock options and warrants excluded due to the exercise price exceeding the average fair value of the Company's common stock during the period
|
|
|
5,566,720
|
|
|
|
5,135,055
|
|
|
|
|
|
|
|
|
|
|
Weighted-average restricted stock, stock options and stock warrants, calculated using the treasury stock method, that were excluded due to the Company reporting a net loss during the period
|
|
|
51,043
|
|
|
|
48,509
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares issuable upon conversion of the Convertible Preferred stock, Series D
|
|
|
6,856,502
|
|
|
|
3,288,549
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares issuable upon conversion of the Convertible Preferred stock, Series E
|
|
|
13,873
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Common stock payable
|
|
|
-
|
|
|
|
152,368
|
|
|
|
|
|
|
|
|
|
|
Total common stock equivalents excluded from diluted net loss per share
|
|
|
12,488,138
|
|
|
|
8,624,481
|
|
As of December 31,
2011, the Company has outstanding warrants of 5,685,459 with a weighted average exercise price of $3.50 and weighted average remaining
term of 3.62 years. As of December 31, 2010, the Company has outstanding warrants of 4,190,816, with a weighted average exercise
price of $4.54 and weighted average remaining term of 4.24 years.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Segment Reporting
Effective January 1, 2011, the Company’s
business results are categorized into the following three segments: MC, Riverbank and OTCQX. The MC segment includes a broad range
of services, such as capital raising and financial advisory services for corporate clients, and brokerage and equity research services
for our institutional investor clients. The Riverbank segment includes capital raising services through a network of independent
investment bankers and OTCQX includes assistance to corporate issuers in listing on OTCQX, the premier OTC Market tier, along with
other services that facilitate the access to institutional capital markets.
The accounting policies of the segments
are consistent with those described in the Significant Accounting Policies in Note 1. The Company evaluates segment results based
on revenue and segment income. There are no revenue generating activities between segments.
Segment asset disclosures are not provided
as no significant assets are separately determinable for Riverbank or OTCQX.
Revenue and expenses directly associated
with each segment are included in determining segment income, which is also the internal performance measure used by management
to assess the performance of each business in a given period.
Corporate items and eliminations include
the effects of eliminating transactions between operating segments, and certain non-allocated amounts. Corporate items and eliminations
is not an operating segment. Rather, it is added to operating segment totals to reconcile to consolidated totals on the financial
statements. Certain amounts included in corporate items and elimination costs are not allocated to operating segments because they
are excluded from the measurement of their operating performance for internal purposes. These include Board of Directors compensation,
interest on general borrowings, litigation settlement costs and other charges.
Management believes that the following
information provides a reasonable representation of each segment’s contribution to revenue and loss or operating results:
|
|
Year Ended
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
MC
|
|
$
|
18,055,175
|
|
|
$
|
30,298,295
|
|
Riverbank
|
|
|
3,198,976
|
|
|
|
-
|
|
OTCQX
|
|
|
667,579
|
|
|
|
392,804
|
|
Total segment revenues
|
|
|
21,921,730
|
|
|
|
30,691,099
|
|
Consolidation items and elimination
|
|
|
27,550
|
|
|
|
(24,788
|
)
|
Consolidated revenues
|
|
$
|
21,949,280
|
|
|
$
|
30,666,311
|
|
|
|
|
|
|
|
|
|
|
Segment loss
|
|
|
|
|
|
|
|
|
MC
|
|
$
|
(6,432,813
|
)
|
|
$
|
(1,962,388
|
)
|
Riverbank
|
|
|
77,427
|
|
|
|
-
|
|
OTCQX
|
|
|
138,826
|
|
|
|
93,209
|
|
Total segment loss
|
|
|
(6,216,560
|
)
|
|
|
(1,869,179
|
)
|
Consolidation items and elimination
|
|
|
(1,677,102
|
)
|
|
|
(3,564,344
|
)
|
Consolidated loss from continuing operations
|
|
$
|
(7,893,662
|
)
|
|
$
|
(5,433,523
|
)
|
Substantially all of our revenues are from
customers located in the United States and all of our long-lived assets are located in the United States.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Commitments and Contingencies
The following is a table summarizing significant
commitments as of December 31, 2011, consisting of notes payable, operating commitments, future minimum lease payments under all
non-cancelable operating leases and capital leases with initial or remaining terms in excess of one year.
|
|
Notes
|
|
|
Operating
|
|
|
Operating
|
|
|
|
|
|
|
Payable
|
|
|
Commitments
|
|
|
Leases
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
$
|
175,063
|
|
|
$
|
1,467,813
|
|
|
$
|
1,774,002
|
|
|
$
|
3,416,878
|
|
2013
|
|
|
1,381,580
|
|
|
|
360,520
|
|
|
|
1,327,563
|
|
|
|
3,069,663
|
|
2014
|
|
|
967,907
|
|
|
|
65,000
|
|
|
|
-
|
|
|
|
1,032,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
|
2,524,550
|
|
|
|
1,893,333
|
|
|
|
3,101,565
|
|
|
|
7,519,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(604,550
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(604,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net commitments
|
|
$
|
1,920,000
|
|
|
$
|
1,893,333
|
|
|
$
|
3,101,565
|
|
|
$
|
6,914,898
|
|
The Company leases its San Francisco corporate
office and its New York office under non-cancelable operating leases expiring in December 2013 and August 2013, respectively. Future
annual minimum lease payments related to its various operating leases are included in the table above. Rent expense was approximately
$1,460,000 in 2011, net of $158,000 sublease rent received, $1,324,000 in 2010, net of $143,000 sublease rent received.
The Company exited its primary research
business when it sold the assets of its subsidiary Panel and liquidated the remaining assets under management by MCF Asset Management,
LLC during 2010. The Company subleased its Cambridge office to the buyers of Panel Intelligence and subleased the office space
in San Francisco, previously occupied by MCF Asset Management, to a third party. The Cambridge lease was assigned to the buyers
of Panel Intelligence during 2010. The San Francisco sublease expired in December 2011.
In connection with its underwriting activities,
the Company enters into firm commitments for the purchase of securities in return for a fee. These commitments require it
to purchase securities at a specified price. Securities underwriting exposes the Company to market and credit risk, primarily in
the event that, for any reason, securities purchased by the Company cannot be distributed at anticipated price levels. As
December 31, 2011 and 2010, the Company had no open underwriting commitments.
Marketable securities, restricted cash,
and cash held by the clearing broker may be used to maintain margin requirements. At December 31, 2011 and 2010, the Company
had $250,000 of cash on deposit with its clearing broker. Furthermore, the marketable securities owned may be hypothecated
or borrowed by the clearing broker.
From time to time, the Company may obtain
funds through capital leases to purchase furniture and equipment, to replace current ones or for expansion. The Company did
not enter into any capital lease agreements in 2011 or 2010.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Commitments and Contingencies (continued)
Legal Proceedings
Del Biaggio/Cacchione Matters
A
number of lawsuits have been filed against the Company and its
broker dealer subsidiary, MC
(collectively,
“Merriman Parties”), in connection with the actions of William Del Biaggio III (Del Biaggio), a former customer of
the Company and David Scott Cacchione (Cacchione), a former retail broker of the Company.
Del Biaggio and Cacchione plead
guilty to securities fraud and were subsequently imprisoned.
Lawsuits against the Company in connection
with Cacchione’s activities are as follows:
Trustee for the Bankruptcy estates of
William James “Boots” Del Biaggio and BDB Management, LLC v. Merriman Capital, Inc. and D. Jonathan Merriman.
On September 2, 2011,
a complaint was filed in FINRA arbitration against MC and D. Jonathan Merriman by the bankruptcy estates of William James “Boots”
Del Biaggio III and BDB Management, LLC. The complaint alleges various causes of action arising from alleged unauthorized trading
and cross collateralization in plaintiff’s accounts at MC and seeks damages of $7.2 million. MC believes that it has valid
defenses and intends to contest these claims vigorously. On November 2, 2011, MC filed an answer to the complaint on behalf of
itself and D. Jonathan Merriman, denying the allegations and asserting, among other things, the right to set off damages caused
to the Merriman Parties by Del Biaggio, who is currently serving an eight year sentence in federal prison for fraud, in an amount
well in excess of plaintiff’s alleged damages. MC believes it has meritorious defenses and intends to contest these claims
vigorously. Since MC
believes that the likelihood of an unfavorable outcome in the case is remote, management
has not provided an accrual for this lawsuit.
Khachaturian, Peterson and Salvi v. Merriman Capital, Inc.
and Merriman Holdings, Inc.
Complaints were filed
in the San Francisco County Superior Court, California, by Henry Khachaturian in January 2011, by Chuck Peterson in February 2010
and by Dolores Salvi in October 2010. The complaints also named as defendants the Company’s officers and former officers
D. Jonathan Merriman, Gregory Curhan, and Robert Ford. Messrs Curhan and Ford were dropped from the case in January 2011.
The complaints were consolidated into one case in March 2011. The complaints allege that plaintiffs were convinced by the Company
to purchase shares of a small, risky stock in which the Company held a position. It further alleges that the Company’s broker
dealer subsidiary, Merriman Capital, Inc. did not permit plaintiffs to sell the shares when the stock’s price fell. The complaints
seek unspecified compensatory and punitive damages. The Company believes it has meritorious defenses and intends to contest these
claims vigorously. Since
the Company believes that the likelihood of an unfavorable outcome in the case
is remote, management has not provided an accrual for this lawsuit.
Don Arata and Gary Thronhill, et al. v. Merriman Capital,
Inc. et al.
In
July 2008, the Company and its
broker dealer subsidiary, MC
were served with complaints filed
in the San Francisco County, California Superior Court by several plaintiffs who invested money with Del Biaggio and related entities.
In March 2009, the Company and MC were served with an amended consolidated complaint on behalf of 39 plaintiffs which consolidated
several similar pending actions filed by the same law firm.
Plaintiffs allege, among other things, fraud
based on Cacchione’s alleged assistance to Del Biaggio in connection with the fraudulent investments and the Company’s
failure to discover and stop the continuing fraud. Plaintiffs in this lawsuit seek damages of over $9 million. The Merriman Parties
responded to the amended consolidated complaint in June 2009 denying all liability. Although we believed that the Merriman Parties
had meritorious defenses, the Company and MC signed separate comprehensive settlement agreements with the plaintiffs on May 9,
2011. MC was dismissed from the case with prejudice in May 2011. The Company was dismissed from the case with prejudice in January
2012.
Pacific Capital Bank v. Merriman Capital,
Inc.
In October 2008, MC
was served with a complaint filed in the San Francisco County Superior Court by Pacific Capital Bank. Plaintiff alleges, among
other things, fraud based on Cacchione having induced plaintiff into making loans to Del Biaggio. Plaintiff in this lawsuit alleges
damages of $1.84 million. MC settled all claims in this case on January 28, 2011.
Other Litigation
Other legal cases not
arising out of the Del Biaggio/Cacchione matters are as follows:
Spare Backup v. Merriman Capital, Inc. (Settled)
In April 2008, MC entered into an engagement
to provide investment banking services to Spare Backup, Inc. MC completed a bridge financing for Spare Backup, Inc. in the amount
of $1,300,000 in June 2008. As a result of closing the financing transaction, MC was entitled to reimbursement of its expenses,
a convertible note with principal valued at $161,100 and 370,370 shares of Spare Backup, Inc.’s common stock. As of November
2008, these transaction fees had not been paid to MC. We hired counsel to seek payment of the fees and to proceed to arbitration,
as is specified in the engagement letter. In January 2009, MC filed a petition to compel arbitration in the San Francisco County
Superior Court. In response to the petition to compel arbitration, Spare Backup filed a complaint in the Riverside County Superior
Court, Indio Branch, for fraud and declaratory relief alleging that MC fraudulently induced it to execute the investment banking
engagement letter. The petition for arbitration was granted in May of 2009 and the Indio action was stayed for all purposes pending
the outcome of arbitration. The parties settled the case by mutual agreement on March 22, 2011.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Commitments and Contingencies (continued)
Additionally, from time to time, the Company
is involved in ordinary routine litigation incidental to our business.
The expenses incurred by the Company for
the years ended December 31, 2011 and 2010 for legal services and litigation settlements amounted to $698,000 and $3,411,000, respectively.
Of the total legal settlement and professional fees incurred for the year ended December 31, 2010, $606,000 was settled in common
stock, of which $461,675 remain issuable in 2011.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Financial Instruments, Off-Balance
Sheet Arrangements and Credit Risk
Financial Instruments
The Company’s broker-dealer entity
trades securities that are primarily traded in United States markets. As of December 31, 2011 and 2010, the Company had not entered
into any transactions involving financial instruments, such as financial futures, forward contracts, options, swaps or derivatives
that would expose the Company to significant related off-balance-sheet risk.
In addition, the Company, from time to time,
has sold securities it does not currently own in anticipation of a decline in the fair value of that security (securities sold,
not yet purchased). When the Company sells a security short and borrows the security to make a delivery, a gain, limited to the
price at which the Company sold the security short, or a loss, unlimited in size, is realized as the fair value of the underlying
security decreases or increases, respectively.
Market risk is primarily caused by movements
in market prices of the Company’s trading and investment account securities. The Company’s trading securities and investments
are also subject to interest rate volatility and possible illiquidity in markets in which the Company trades or invests. The Company
seeks to control market risk through monitoring procedures. The Company’s principal transactions are primarily long and short
equity transactions.
Off-Balance Sheet Arrangements
The Company was not a party to any off-balance
sheet arrangements during the two years ended December 31, 2011. In particular, the Company does not have any interest in so-called
limited purpose entities, which include special purpose entities and structured finance entities.
Credit Risk
The Company’s broker-dealer subsidiary
functions as an introducing broker that places and executes customer orders. The orders are then settled by an unrelated clearing
organization that maintains custody of customers’ securities and provides financing to customers. Through indemnification
provisions in agreements with clearing organizations, customer activities may expose the Company to off-balance-sheet credit risk.
Financial instruments may have to be purchased or sold at prevailing market prices in the event a customer fails to settle a trade
on its original terms or in the event cash and securities in customer margin accounts are not sufficient to fully cover customer
obligations. The Company seeks to control the risks associated with customer activities through customer screening and selection
procedures, as well as through requirements on customers to maintain margin collateral in compliance with various regulations and
clearing organization policies.
The Company is also
exposed to credit risk as it relates to the collection of receivables from third parties, including lead managers in underwriting
transactions and the Company’s corporate clients related to private placements of securities and financial advisory services.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Compliance with Listing Requirements
On December 8, 2010, the Company was notified
by the NASDAQ Stock Market that it had violated NASDAQ Listing Rule 5635 by issuing warrants to Ronald L. Chez, the Company’s
Co-Chairman of the Board of Directors, without shareholders’ approval. The warrants were issued in August 2009 to purchase
42,857 shares (after adjusting for the Company’s 1-for-7 reverse stock split in August 2010) of the Company’s common
stock, and were for Mr. Chez’s service as Chairman of the Strategic Advisory Committee in connection with the Company’s
Series D Preferred Stock financing.
On January 21, 2011, the Company entered
into an amended agreement with Mr. Chez restricting the exercise of these warrants without prior shareholders’ approval.
The Company intends to obtain shareholders’ approval for these warrants in the next shareholders’ meeting. On February
8, 2011, the Company was notified by the NASDAQ Stock Market that the matter had been resolved. In connection with such resolution,
the Company was issued a Letter of Reprimand in accordance with NASDAQ Listing Rule 5810(c)(4).
On February 8, 2011, the Company was also
notified by the NASDAQ Stock Market that Mr. Chez, who served on the Company’s Audit Committee from August 10, 2010 to December
21, 2010, was ineligible to do so under NASDAQ Listing Rule 5605(c)(A)(ii). The Company took immediate corrective action and upon
Mr. Chez’s resignation from the Audit Committee and replacement by an independent director, the Company has since been in
compliance with NASDAQ Listing Rules.
16. Regulatory Requirements
MC is a broker-dealer subject to Rule 15c3-1
of the Securities Exchange Act of 1934, which specifies uniform minimum net capital requirements, as defined, for their registrants.
As of December 31, 2011, MC had regulatory net capital, as defined, of $1,894,000, which exceeded the amount required by $1,644,000.
MC complies with the alternative net capital requirement allowed in Appendix E of Rule 15c3-1. MC is exempt from Rules 15c3-3 and
17a-13 under the Securities Exchange Act of 1934 because it does not carry customer accounts, nor does it hold customer securities
or cash.
Under its rules, FINRA may prohibit a member
firm from expanding its business or paying dividends if resulting net capital would be less than 5 percent of aggregate debit balances.
Advances to affiliates, repayment of subordinated debt, dividend payments and other equity withdrawals by MC are subject to certain
notification and other provisions of the SEC and FINRA rules. In addition, MC is subject to certain notification requirements related
to withdrawals of excess net capital.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Related Party Transactions
Sale of Convertible Notes Receivable
On December 30, 2010, the Company sold its
convertible note receivable from a corporate issuer, Digital Display Networks, Inc., with a face value of $50,000, including any
accrued interest, to Peter Coleman, the Company’s previous Chief Financial Officer and Ronald L. Chez, its Co-Chairman of
the Board of Directors, for a total selling price of $50,000. The convertible note receivable accrued interest at an annual
rate of 12%. As of December 31, 2010, the convertible note receivable was no longer included in the Company’s consolidated
statement of financial condition. In relation to the sale, the Company incurred an immaterial loss, which is included in other
income, net in the Company’s consolidated statement of operations.
Temporary Subordinated Borrowings
On
January 31, 2011, the Company borrowed $2,800,000 from Ronald L. Chez, its
Co-Chairman of the Board of Directors
.
The loan was in the form of a temporary subordinated loan in accordance with Rule 15c3-1 of the Securities Exchange Act of 1934.
The Company incurred $56,000 in loan fees, which amount was included in cost of underwriting capital in the Company’s consolidated
statement of operations. The loan and related fees were paid in full on February 7, 2011.
On September 28, 2010, the Company borrowed
$4,000,000 from DGB Investment, Inc. (DGB). DGB is controlled by Douglas G. Bergeron, who was a previous member of the Board
of Directors. The loan was in the form of a temporary subordinated loan in accordance with Rule 15c3-1 of the Securities Exchange
Act of 1934. Interest on the loan was $60,000 for each 10-day period. For the year ended December 31, 2010, the
Company incurred of $60,000 in loan fees, which amount was included in cost of underwriting capital in the Company’s consolidated
statement of operations. The loan and related fees were paid in full in October 2010.
On April 23, 2010, the Company borrowed
$1,000,000 from DGB and $6,000,000 from Ronald L. Chez. The loan was in the form of a temporary subordinated loan in accordance
with Rule 15c3-1 of the Securities Exchange Act of 1934. The Company incurred $230,000 in loan fees, which amount was included
in cost of underwriting capital in the Company’s consolidated statement of operations. The loan and related fees were
paid in full in May 2010.
On January 20, 2010, the Company borrowed
$11,000,000 from DGB and the Bergeron Family Trust, both controlled by Douglas G. Bergeron. The loan was in the form of a temporary
subordinated loan in accordance with Rule 15c3-1 of the Securities Exchange Act of 1934. The Company incurred $731,000 in loan
fees, which amount was included in cost of underwriting capital in the Company’s consolidated statement of operations. The
loan and related fees were paid in full in February 2010.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Related Party Transactions (continued)
Subordinated Notes Payable to Related Parties
On September 29, 2010, the Company borrowed
$1,000,000 from nine individual lenders, all of whom were directors, officers or employees of the Company at the time of issuance,
pursuant to a series of unsecured promissory notes (Subordinated Notes). The Subordinated Notes are for a term of three years
and provide for interest comprising two components: (i) six percent (6.0%) per annum to be paid in cash monthly; and (ii) eight
percent (8.0%) per annum to be accrued and paid in cash upon maturity. Additional consideration was paid to the lenders at
closing comprising a number of shares of common stock of the Company equal to: (A) 30% of the principal amount lent; divided
by (B) $3.01 per share. The total effective interest on the note is approximately 21.73%. Proceeds were used to supplement
underwriting capacity and working capital for MC.
The total proceeds of $1,000,000 raised
in the transaction above were accounted for as an issuance of debt with stock. The total proceeds of $1,000,000 have been allocated
to these individual instruments based on the relative fair values of each instrument. Based on such allocation method, the value
of the stocks issued in connection with the Subordinated Notes was $206,000, which was recorded as a discount on the debt and applied
against the Subordinated Notes. As of December 31, 2010, the Subordinated Notes of $809,000, net of $191,000 discount, remained
outstanding and is included in notes payable to related parties in the Company’s consolidated statements of financial condition.
As of December
31, 2011, $830,000 of the
Subordinated Notes, net of $120,000 discount
, remain outstanding and
is included in notes payable to related parties in the Company’s consolidated statements of financial condition. The remaining
Subordinated Notes held by parties no longer related to the Company of $44,000, net of $6,000 discount, are included in notes payable
in the Company’s consolidated statements of financial condition. The discount on the note is amortized over the term of the
loan using the effective interest method. For the year ended December 31, 2011, the Company incurred $140,000 in interest on the
Subordinated Notes
. Total interest of $105,000 remains outstanding as of December 31, 2011 and
is included in accrued expenses and other in the consolidated statements of financial condition.
2010 Chez Secured Promissory Note
On November 17, 2010, the Company borrowed
$1,050,000 from Ronald L. Chez, its Co-Chairman of the Board of Directors, pursuant to a secured promissory note (2010 Chez Secured
Promissory Note). The 2010 Chez Secured Promissory Note is secured by certain accounts receivable which were purchased by
the Company from MC with the proceeds of the transaction being used for such purchase. The 2010 Chez Secured Promissory
Note is due and payable in two tranches as the accounts receivable became due, with $950,000 due on January 19, 2011 and $100,000
due on February 28, 2011. It provides for interest of 29.2% per annum and additional consideration comprising two components
(i) 50,000 shares of the Company’s Series D Preferred Stock (which is convertible into 7,142 shares of our Common Stock);
and (ii) a cash fee of $15,000. The proceeds were used to supplement underwriting capacity for MC. The Company paid off
$720,000 of the Secured Promissory Note on December 22, 2010.
As of December 31, 2010, the 2010 Chez
Secured Promissory Note
of $330,000 remained outstanding and is included in notes payable to
related parties in the Company’s consolidated statements of financial condition.
On January 21, 2011, the 2010 Chez
Secured Promissory Note was amended to extend the maturity date to April 15, 2011 and change the 50,000 Series D Convertible Preferred
Stock consideration to cash compensation of $21,000. For the year ended
December 31
, 2011, the
Company incurred $42,000 in fees, composed of $15,000 and $21,000 in cash fees, and $6,000 of interest at 29.2% per annum. On
March 24, 2011, all principal and related fees were paid and no balance remains outstanding.
2011 Chez Secured Promissory Note
On April 7, 2011, Ronald L. Chez, the Company’s
Co-Chairman of the Board of Directors, invested $330,000 in a three year secured promissory note (2011 Chez Secured Promissory
Note) at an interest rate of six percent (6%) per annum payable quarterly. This note is secured by a security interest in
and right of setoff against all of such the Company’s right, title and interest in, to all of the capital stock of Merriman
Capital Inc., together with all proceeds, rents, profits and returns of and from any of the foregoing. Also, beginning on the date
which is one year from the issuance date, if there is an equity financing of the Company resulting in gross proceeds of at least
$15,000,000 in new money, holders shall have the option to put 50% of Secured Promissory Notes originally purchased back to the
Company, for an amount equal to the principal plus accrued but unpaid interest, on 30 days written notice.
On November 16,
2011,
the 2011 Chez Secured Promissory Note plus accrued interest of $3,000 was exchanged for 445,299 shares of common stock
of the Company calculated as (i) the total amount of principal plus accrued but unpaid interest divided by (ii) an amount equal
to 80% of the average closing price per share of common stock as quoted on the exchange on which it principally trades for the
30 day period ending two days prior to the closing date.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounted for this transaction
in accordance with ASC 470,
Debt
, as an extinguishment of debt, whereby a gain or loss was calculated as the difference
between the reacquisition price and net carrying value of the debt. The reacquisition price was determined as the sum of the fair
value of the common stock and new warrants. The warrants were valued using the Black-Scholes fair value model. A loss of $157,000
was recorded on the transaction based on a reacquisition price of $490,000 and net carrying value, including interest, of $333,000.
For the year ended December 31, 2011, the
Company incurred $12,000 in interest in relation to this note.
Secured Promissory Notes
In April 2011, the Company raised $2,770,000
from 24 investors, of which 11 were directors, officers, consultants or employees of the Company at the time of issuance, pursuant
to a series of secured promissory notes (Secured Promissory Notes). The Secured Promissory Notes are for a term of three years
and provide for interest of ten percent (10.0%) per annum to be paid in cash quarterly. Additional consideration was paid
to the lenders at closing comprising warrants to purchase shares of the common stock of the Company at a price per share equal
to 85% of the Company’s stock price at the closing date (the Warrants). 86 Warrants were issued for each $1,000 invested. A
total of 238,220 Warrants were issued. The Warrants issued to directors, officers, consultants and employees (Insider
Warrants) of the Company provide that the Insider Warrants will not be exercisable unless first approved by the Company’s
stockholders. These notes are secured by a security interest in and right of setoff against all of such the Company’s
right, title and interest in, to all of the capital stock of MC, together with all proceeds, rents, profits and returns of and
from any of the foregoing. Also, beginning on the date which is one year from the issuance date, if there is an equity financing
of the Company resulting in gross proceeds of at least $15,000,000 in new money, holders shall have the option to put 50% of Secured
Promissory Notes originally purchased back to the Company, for an amount equal to the principal plus accrued but unpaid interest,
on 30 days written notice. The Secured Promissory Notes were issued in two tranches, one closed on April 7, 2011 for $2,470,000
and the other closed on April 21, 2011 for $300,000.
The total proceeds raised in the transaction
above were accounted for as an issuance of debt with warrants. The total proceeds of $2,770,000 have been allocated to these
individual instruments based on the relative fair values of each instrument at the time of issuance.
Based
on the fair value allocation method, the value of the warrants issued in connection with the Secured Promissory Notes received
was $420,000, which was recorded as a discount on the debt and applied against the Secured Promissory Notes.
On October 11,
2011, the Company repurchased the $100,000
Secured Promissory Note from
a former officer and
director in connection with his separation from the Company.
On November 16,
2011, the Company entered into e
xchange agreements with certain Secured Promissory Note investors whereby the investors
agree to exchange the Secured Promissory Notes and Warrants for shares of common stock and new warrants to purchase shares of common
stock of the Company as follows.
|
(c)
|
For the Secured Promissory Notes, a number of new shares of common stock equal to (i) the total
amount of principal plus accrued but unpaid interest of the Secured Promissory Notes submitted for cancellation divided by (ii)
an amount equal to 80% of the average closing price per share of common stock as quoted on the exchange on which it principally
trades for the 30 day period ending two days prior to the closing date (the AP); plus
|
|
(d)
|
For the Warrants, 1.25 new warrants for each Warrant converted, with each new warrant carrying
an exercise price equal to 110% of the AP.
|
Fifteen investors
agreed to exchange $1,750,000 principal balance of the
Secured Promissory Notes plus $22,000 accrued interest for 2,373,505
shares of common stock and 188,126 warrants.
The Company accounted for this transaction
in accordance with ASC 470,
Debt
, as an extinguishment of debt, whereby a gain or loss was calculated as the difference
between the reacquisition price and net carrying value of the debt. The reacquisition price was determined as the sum of the fair
value of the common stock and new warrants less the fair value of the original Warrants. The warrants were valued using the Black-Scholes
fair value model. A loss of $1,134,000 was recorded on the transaction based on a reacquisition price of $2,688,000 and net carrying
value, including interest, of $1,554,000.
As of December
31, 2011, $636,000 of the Secured Promissory Notes, net of $84,000 discount, remain outstanding and are included in notes payable
in the Company’s consolidated statements of financial condition. The remaining Secured Promissory Notes issued to Insiders
of
$176,000, net of $24,000 discount, are included in notes payable to related parties in the Company’s consolidated
statements of financial condition.
For the year ended
December
31
, 2011, the Company incurred $178,000 in interest in relation to these notes. A
s of December
31, 2011, $23,000 of interest remains outstanding and is included in accrued expenses and other in the consolidated statements
of financial condition.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Related Party Transactions (continued)
Series D Convertible Preferred Stock
Three of the investors in the Series D Convertible
Preferred Stock transaction, Messrs. Andrew Arno, Douglas Bergeron, and Ronald Chez, joined the Company’s Board of Directors. In
December 2010 and January 2011, Douglas Bergeron and Andrew Arno left as members of the Board of Directors, respectively. In
addition, the Company’s CEO and former CFO, along with 11 other executives and senior managers of MC, were also investors
in the Series D Convertible Preferred Stock transaction. Finally, all five members of the Company’s Board of Directors
prior to the transaction were investors in the Series D Convertible Preferred Stock transaction.
Series E Convertible Preferred
Stock
On December 30, 2011, the Company issued
2,531,744 shares of Series E Convertible Preferred Stock at $0.63 per share plus warrants to purchase 1,265,874 shares of the Company’s
common stock with an exercise price of $0.63 per share. The warrants expire five years from the effective date. All Series E Convertible
Preferred shareholders are directors of the Company.
The Series E Convertible Preferred Stock
carries a dividend rate of 9% per annum, such dividends will be paid only when, if and as declared by the Board of Directors and
will accumulate until paid. The Company is prohibited from paying any dividends on the Common Stock until all accrued dividends
on the Series D and Series E Convertible Preferred Stock are first paid.
The holders of Series E Convertible Preferred
Stock are entitled to a “liquidation preference payment” of $0.63 per share of Series E Convertible Preferred Stock
plus all accrued but unpaid dividends on such shares prior and in preference to any payment to holders of the Common Stock upon
a merger, acquisition, sale of substantially all the assets, or certain other liquidation events of the Company. Any proceeds after
payment of the “liquidation preference payment” shall be paid pro rata to the holders of the Series D and E Convertible
Preferred Stock and Common Stock on an as converted to Common Stock basis.
Board of Directors Compensation
In 2009, the Company formed a Strategic
Advisory Committee of the Board of Directors chaired by Ronald L. Chez, the lead investor in the Series D Convertible Preferred
Stock strategic transaction. During the first year, the Chairman of the Committee was compensated with five-year warrants
to purchase 42,857 shares the Company’s common stock at $4.55 to be issued pro rata on a monthly basis
from
September 2009 to September 2010
. No other compensation was provided for Mr. Chez’s service on the Committee.
For the year ended December 31, 2010, the Company issued 29,525 warrants to Mr. Chez and recorded stock-based compensation expense
of $103,000 based on the calculated fair value of the warrants using the Black-Scholes option valuation model.
On January 21, 2011, the Company entered
into an amended agreement with Mr. Chez restricting the exercise of these warrants without prior shareholders’ approval.
The Company intends to obtain shareholders’ approval for these warrants in the next shareholders’ meeting.
Due to the modification of the terms of
the warrants, the Company recorded a decrease in the stock-based compensation expense of $176,000 for the year ended December 31,
2011. As of December 31, 2011, the Company recorded accrued expenses of $11,000 as the Company’s best estimate of the services
performed by Mr. Chez as the Chairman of the Strategic Advisory Committee until the warrants are approved by the shareholders.
Other Related Party Transactions
From time to time, officers and employees
of the Company may invest in private placements which the Company arranges and for which the Company charges investment banking
fees.
The Company’s employees may, at times,
provide certain services and supporting functions to its affiliate entities. The Company is not reimbursed for any costs related
to providing those services.
18. Quarterly Financial Data (Unaudited)
The table below sets forth the operating
results represented by certain items in the Company’s consolidated statements of operations for each of the eight quarters
in the two years ended December 31, 2011. This information is unaudited, but in the Company’s opinion, reflects all adjustments
(consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of such information
in accordance with generally accepted accounting principles. The results for any quarter are not necessarily indicative of results
for any future period.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Quarterly Financial Data (Unaudited) (continued)
|
|
2011
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue*
|
|
$
|
9,526,088
|
|
|
$
|
5,400,732
|
|
|
$
|
4,086,538
|
|
|
$
|
2,935,922
|
|
Operating expenses*
|
|
|
9,024,803
|
|
|
|
8,336,680
|
|
|
|
5,770,164
|
|
|
|
5,107,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from continuing operations
|
|
|
501,285
|
|
|
|
(2,935,948
|
)
|
|
|
(1,683,626
|
)
|
|
|
(2,171,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
442,766
|
|
|
|
(3,025,584
|
)
|
|
|
(1,842,526
|
)
|
|
|
(3,468,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
442,766
|
|
|
$
|
(3,025,584
|
)
|
|
$
|
(1,842,526
|
)
|
|
$
|
(3,468,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
302,694
|
|
|
$
|
(3,163,292
|
)
|
|
$
|
(1,971,959
|
)
|
|
$
|
(3,552,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.19
|
|
|
$
|
(1.23
|
)
|
|
$
|
(0.69
|
)
|
|
$
|
(0.79
|
)
|
Income from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
0.19
|
|
|
$
|
(1.23
|
)
|
|
$
|
(0.69
|
)
|
|
$
|
(0.79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.08
|
|
|
$
|
(1.23
|
)
|
|
$
|
(0.69
|
)
|
|
$
|
(0.79
|
)
|
Income from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
0.08
|
|
|
$
|
(1.23
|
)
|
|
$
|
(0.69
|
)
|
|
$
|
(0.79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
0.05
|
|
|
$
|
(1.28
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(0.81
|
)
|
* Total revenue and operating expenses do not include revenue
and operating expenses from discontinued operations
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Quarterly Financial Data (Unaudited) (continued)
|
|
2010
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4
th
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue*
|
|
$
|
9,385,917
|
|
|
$
|
6,159,621
|
|
|
$
|
4,236,826
|
|
|
$
|
10,883,947
|
|
Operating expenses*
|
|
|
9,053,178
|
|
|
|
8,653,186
|
|
|
|
8,779,294
|
|
|
|
9,492,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations
|
|
|
332,739
|
|
|
|
(2,493,565
|
)
|
|
|
(4,542,468
|
)
|
|
|
1,391,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
305,859
|
|
|
|
(2,492,613
|
)
|
|
|
(4,512,696
|
)
|
|
|
1,265,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
34,487
|
|
|
|
60,617
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
340,346
|
|
|
$
|
(2,431,996
|
)
|
|
$
|
(4,512,696
|
)
|
|
$
|
1,265,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders
|
|
$
|
188,546
|
|
|
$
|
(2,579,896
|
)
|
|
$
|
(4,659,096
|
)
|
|
$
|
1,120,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
0.17
|
|
|
$
|
(1.28
|
)
|
|
$
|
(2.22
|
)
|
|
$
|
0.57
|
|
Income (loss) from discontinued operations
|
|
|
0.02
|
|
|
|
0.03
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share
|
|
$
|
0.19
|
|
|
$
|
(1.25
|
)
|
|
$
|
(2.22
|
)
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
0.05
|
|
|
$
|
(1.28
|
)
|
|
$
|
(2.22
|
)
|
|
$
|
0.23
|
|
Income (loss) from discontinued operations
|
|
|
-
|
|
|
|
0.03
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share
|
|
$
|
0.05
|
|
|
$
|
(1.25
|
)
|
|
$
|
(2.22
|
)
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
0.03
|
|
|
$
|
(1.32
|
)
|
|
$
|
(2.29
|
)
|
|
$
|
0.51
|
|
* Total revenue and operating expenses do not include revenue
and operating expenses from discontinued operations
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Subsequent Events
The Company evaluated subsequent events
through the date these financial statements were issued. The Company determined the following to be material subsequent events
that require disclosure.
Related Party Transactions
On
January 26, 2012, the Company borrowed $2,500,000 from Ronald L. Chez,
its Co-Chairman of the Board of Directors
.
The loan was in the form of a temporary subordinated loan in accordance with Rule 15c3-1 of the Securities Exchange Act of 1934.
Total fees incurred were $110,000. The loan and related fees were paid in full on February 17, 2012.
On February 14, 2012,
the Company sold certain trade receivables with a value of $507,000 at a discount to Mr. Chez for $500,000. Mr. Chez assumed the
risk of collection with respect to the receivables he purchased.
Series E Convertible Preferred Stock
On January 31, 2012, the Company issued
158,730 shares of Series E Convertible Preferred Stock at $0.63 per share plus warrants to purchase 79,365 shares of the Company’s
common stock with an exercise price of $0.63 per share. The investor is not a related party to the Company.
Operating Lease
On February 22, 2012,
the Company signed an amendment to its existing New York office operating lease expiring on July 31, 2013. The amendment extends
the term of the lease for a period of 7 years commencing on August 1, 2013 and ending on July 31, 2020 with minimum rent at the
following rates:
|
(a)
|
$960,00 per annum ($80,000 per month) for the first 3 years and 6 months;
|
|
(b)
|
$1,024,000 per annum ($85,333 per month) for the remainder of the lease term.
|
The amendment also
provides for $256,000 of tenant improvement allowance and a six month abatement of minimum rent of $88,000 per month for June 2012,
July 2012, August 2012, April 2013, May 2013 and June 2013.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
The financial statements included in this
report have been audited by Burr Pilger Mayer, Inc. (“BPM”), an independent registered public accounting firm, as
stated in its audit report appearing herein.
During the year ended December 31, 2011
and through the date of this Annual Report on Form 10-K, there were no disagreements with BPM on any matter of accounting principle
or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to BPM’s satisfaction,
would have caused them to make reference to the subject matter in connection with their report on the Company’s consolidated
financial statements; and there were no reportable events as set forth in applicable SEC regulations.
Item 9a. Controls and Procedures
Evaluation of Disclosure Controls and
Procedures
– We have established disclosure controls and procedures to ensure that material information relating to
the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company’s financial
reports and to other members of senior management and the Board of Directors.
Based on their evaluation as of December
31, 2011, the principal executive officer and principal financial officer of the Company have concluded that the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are
not effective because of a material weakness in internal controls over financial reporting related to our finance department as
described below.
Management’s Report on Internal
Control Over Financial Reporting
– Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rules 13a-15(f), to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with the United States Generally Accepted Accounting Principles (U.S. GAAP). The internal control includes policies
and procedures to provide reasonable assurance that transactions are properly accounted for in accordance with U.S. GAAP.
Due to its inherent limitations, there
is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.
Projections of any evaluation of effectiveness to future periods are subject to the risk that policies and procedures may become
inadequate because of changes in conditions, or that the degree of compliance may deteriorate. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation. These inherent limitations are taken into
consideration in the design of the financial reporting internal control to reduce, though not eliminate, this risk.
Management assessed the effectiveness of
our internal control over financial reporting as of December 31, 2011 and based on that evaluation, they concluded that such internal
controls and procedures were not effective based on the material weakness described below.
The material weakness identified related
to deficiencies in the accounting research and reporting functions and the closing and reporting process. This material weakness
resulted in improper applications of U.S. GAAP to certain equity and debt transactions and the improper valuation of securities.
As a result we recorded certain adjustments, including a loss on early extinguishment of debt of $1,184,000 to correct these errors.
Planned Remediation
Efforts to Address Material Weakness
Management has determined
that its processes and procedures over the accounting research, accounting close and reporting processes was not adequate due
to unexpected personnel turnover in the finance department. As a result the Company has brought in a senior financial person and
plans to hire additional qualified personnel to remediate the material weakness discussed above.
Management is committed
to improving the Company’s internal control over financial reporting processes and will meet frequently with the Audit Committee
to monitor and report on the ongoing effectiveness of such remediation activities and controls. The Company expects to complete
the required remediation during 2012.
Changes in Internal Controls
–
Except as otherwise discussed above, there were no changes in the Company’s internal control over financial reporting (as
defined in Rules 13a-15(d) and 15d-15(d) of the Exchange Act) occurred during the quarter ended December 31, 2011, that materially
affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9b. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
D. Jonathan Merriman
, 51, has served as our Chief
Executive Officer from October 2000 to the present and served as Chairman of the Board of Directors from February 2001 to November
2007. In September 2010, Mr. Merriman was appointed co-chairman of the Board of Directors with Mr. Ronald L. Chez. Prior to that
period, Mr. Merriman was President and CEO of Ratexchange Corporation, the predecessor company to Merriman Holdings, Inc. Mr.
Merriman and his team engineered the transition from Ratexchange, a software trading platform company, into a full-service institutional
investment bank, Merriman Capital, Inc. From June 1998 to October 2000, Mr. Merriman was Managing Director and Head of the Equity
Capital Markets Group and member of the Board of Directors at First Security Van Kasper. In this capacity, he oversaw the Research,
Institutional Sales, Equity Trading, Syndicate and Derivatives Trading departments. From June 1997 to June 1998, Mr. Merriman
served as Managing Director and Head of Capital Markets at The Seidler Companies in Los Angeles, where he also served on the firm’s
Board of Directors. Before Seidler, Mr. Merriman was Director of Equities for Dabney/Resnick/Imperial, LLC. In 1989, Mr. Merriman
co-founded the hedge fund company Curhan, Merriman Capital Management, Inc. which managed money for high net worth individuals
and corporations. Before Curhan, Merriman Capital Management, Inc., he worked in the Risk Arbitrage Department at Bear Stearns
& Co. as a trader. Prior to Bear Stearns, Mr. Merriman worked at Merrill Lynch as a financial analyst and as an institutional
equity salesman. Mr. Merriman received his Bachelor of Arts in Psychology from Dartmouth College and completed coursework at New
York University’s Graduate School of Business. Mr. Merriman has served on several for-profit and nonprofit Boards over the
past ten years, including Points International (PCOM), Leading Brands, Inc. (LBIX) and the San Francisco Art Institute, among
others.
Ronald L. Chez
, 71, has served as a member of
our Board of Directors since September 2009 and started his term as the co-chairman of the Board of Directors in September 2010.
He also served as the chairman of the Board’s Strategic Advisory Committee from September 2009 to September 2010.
Mr. Chez also serves as president and sole owner of Ronald L. Chez, Inc., a corporation that deals with financial management consulting,
public and private investment, turnaround strategies, structuring of new ventures, and mergers and acquisitions. He is currently
chairman of the board of EpiWorks, Inc., and serves on the advisory boards of JP Morgan, Chase and Hambrecht & Quist Access
Technology Fund. Mr. Chez’s past experience includes: advisor to Motorola’s New Ventures Program; board membership
and investment committee member for Abbott Capital; consultant and board member for Motorola Process Control and Motorola Teleprograms;
and board member and investor in Travelocity.
William J. Febbo
, 43, has served as a member
of our Board of Director since April 2007. From January 1999 to April 2007, Mr. Febbo was Chief Executive Officer and co-founder
of MedPanel, Inc., an online medical market intelligence firm. At MedPanel, Mr. Febbo oversaw the company's sales, marketing,
technology, finance and content development organizations. The Company acquired MedPanel, Inc. in April 2007 (and changed its
name to Panel Intelligence, LLC) where Mr. Febbo continued his responsibilities. Given the market changes, Mr. Febbo and
other investors formed Panel Intelligence, LLC (a Massachusetts corporation) which acquired the assets of Panel Intelligence,
LLC (a Delaware corporation) from the Company on January 30, 2009. Mr. Febbo continues to serve on our Board of Directors.
Mr. Febbo has been Treasurer on the Board of the United Nations of Greater Boston since November 2004. Prior to founding MedPanel,
Inc., Mr. Febbo was Chairman of the Board of Directors of Pollone, a Brazilian manufacturing venture in the automotive industry,
from January 1998 to January 1999. From January 1996 to January 1999, Mr. Febbo was with Dura Automotive working in business development
and mergers and acquisition overseas. Mr. Febbo received his B.S. degree in international studies, with a focus on economics and
Spanish, from Dickinson College.
Dennis G. Schmal
, 65, has served as a member
of our Board of Directors and as a member of our Audit Committee since August 2003. Mr. Schmal has also served as a member of
our Compensation Committee since March 2007 and has served on the Nominations and Corporate Governance Committee since September
2005. From February 1972 to April 1999, Mr. Schmal served as a partner in the audit practice at Arthur Andersen LLP and holds
a CPA certificate (retired). Besides serving as chairman of the boards of two private companies, Mr. Schmal also serves on the
board of directors of the Genworth GuideMark Mutual Funds (2006) and the Wells Fargo Hedge Funds of Funds (2008), both of which
are publicly registered funds under the Investment Company Act of 1940. Until November 2011, he also served on the board for Varian
Semiconductor Equipment Associates, Inc. (VSEA), a public company and until 2007, the board of NorthBay Bancorp (NBAN), a public
bank holding company, both of which were sold. Mr. Schmal attended California State University, Fresno where he received a Bachelor
of Science in Business Administration – Finance and Accounting Option.
Jeffrey M. Soinski
, 50, has served as a member
of our Board of Directors since August 2008. Mr. Soinski is a Special Venture Partner with Galen Partners, a leading private
equity firm focused solely on the healthcare industry. Since September 2009, Mr. Soinski has served as Chief Executive Officer
of Medical Imaging Holdings, Inc., a Galen Partners portfolio company, as well as Medical Imaging Holdings’ primary operating
company Unisyn Medical Technologies, Inc., a national provider of technology-enabled service solutions to the medical imaging
industry. Prior to Galen Partners, Mr. Soinski was President and CEO of Specialized Health Products International, Inc.,
a publicly-traded manufacturer and marketer of proprietary safety medical products that was acquired by C. R. Bard, Inc. in June
2008. In 2008, Mr. Soinski was named “Utah CEO of the Year” for small public companies by Utah Business magazine.
Prior to Specialized Health Products, Mr. Soinski had been President and CEO of ViroTex Corporation, a ventured-backed pharmaceutical
company he sold to Atrix Laboratories, Inc. in 1998. Earlier in his career, Mr. Soinski worked as an executive at leading
national advertising agencies and was a new product marketing executive at Nabisco Brands. In 2000 and 2001, he led the
full-service advertising agency Mad Dogs & Englishmen as Managing Director and CEO. Mr. Soinski holds a B.A. degree
from Dartmouth College.
Alex W Seiler,
58, served as Chief Executive
Officer of Merriman Capital, Inc. from August 2010 to September 2011 and was a member of our Board of Directors until September
2011. Mr. Seiler was previously Vice-Chairman of Merriman Holdings from February 2010 until he assumed the CEO role.
He previously served as a Managing Director at Atlas Capital Management, a multi-state asset management firm, from September
2007 to July 2009. From May 2005 until May 2007, Mr. Seiler was Managing Director at HSBC Securities (USA) Inc., responsible for equity capital market
distribution in the Americas. Mr. Seiler was co-founder and CEO of Anchor Point Asset Management, a multi-asset
global-macro manager, from January 2003 through May 2005. Prior to that, he served as a Managing Director in Morgan Stanley &
Co.'s institutional equity division from March 1994 through January 2003.
Patrick W. O’Brien,
65, has served as a
member of our Board of Directors and as a member of our Audit and Compensation Committees since December 2010. Mr. O’Brien
is a seasoned executive and business advisor with diverse international experience in private and public companies with an emphasis
on financial analysis and business development. From 2002 to 2007 Mr. O’Brien served as a member of the Board of Directors
of Factory Card & Party Outlet (FCPO, NASDAQ) until its sale to AAH Holdings. In 2005, Mr. O’Brien was a Senior Vice-President
for MTM Luxury Lodging in Kirkland, Washington later in 2005 he joined the Seattle based Bental-Kennedy Associates Real Estate
Counsel where he was Vice President-Asset Management representing pension fund ownership interests in hotel
real estate investments nationwide. In 2009, Mr. O’Brien
formed Granville Wolcott Advisors where he serves as its Managing Director & Principal to provide business consulting, due
diligence, and asset management services for public and private clients. Mr. O’Brien is a graduate of the Eli Broad College
of Business at Michigan State University with a BA in Hotel Management.
Executive Officers
D. Jonathan Merriman
, 51, has served as our Chief
Executive Officer from October 2000 to the present and served as Chairman of the Board of Directors from February 2001 to November
2007. In September 2010, Mr. Merriman was appointed co-chairman of the Board of Directors with Mr. Ronald L. Chez. Prior to that
period, Mr. Merriman was President and CEO of Ratexchange Corporation, the predecessor company to Merriman Curhan Ford Group,
Inc. Mr. Merriman and his team engineered the transition from Ratexchange, a software trading platform company, into a full-service
institutional investment bank, Merriman Curhan Ford. From June 1998 to October 2000, Mr. Merriman was Managing Director and Head
of the Equity Capital Markets Group and member of the Board of Directors at First Security Van Kasper. In this capacity, he oversaw
the Research, Institutional Sales, Equity Trading, Syndicate and Derivatives Trading departments. From June 1997 to June 1998,
Mr. Merriman served as Managing Director and Head of Capital Markets at The Seidler Companies in Los Angeles, where he also served
on the firm’s Board of Directors. Before Seidler, Mr. Merriman was Director of Equities for Dabney/Resnick/Imperial, LLC.
In 1989, Mr. Merriman co-founded the hedge fund company Curhan, Merriman Capital Management, Inc., which managed money for high
net worth individuals and corporations. Before Curhan, Merriman Capital Management, Inc., he worked in the Risk Arbitrage Department
at Bear Stearns & Co. as a trader. Prior to Bear Stearns, Mr. Merriman worked at Merrill Lynch as a financial analyst and
as an institutional equity salesman. Mr. Merriman received his Bachelor of Arts in Psychology from Dartmouth College and completed
coursework at New York University’s Graduate School of Business. Mr. Merriman has served on several for-profit and nonprofit
Boards over the past ten years, including Points International (PCOM), Leading Brands, Inc. (LBIX) and the San Francisco Art Institute,
among others.
Peter V. Coleman
, 43, served as Chief Executive
Officer of Merriman Capital, Inc. since June 2009 to September 2010, and Chief Financial Officer for Merriman Holdings, Inc. since
May 2008 to January 2011, and Chief Operating Officer since January 2009 to January 2011. Prior to that, Mr. Coleman was
with ThinkPanmure, an investment bank, where he served as CFO since March 2007, COO since November 2006, Director of Research
from September 2005 until November 2006, Head of Brokerage from June 2006 until June 2007, and was a member of the Board of Directors
since April 2007. Prior to ThinkPanmure, he was a principal and senior research analyst at Schwab SoundView, an investment
bank, focusing on technology from May 2002 to November 2004.
Alex W Seiler,
58, served as Chief Executive
Officer of Merriman Capital, Inc. from August 2010 to September 2011 and was a member of our Board of Directors until September
2011. Mr. Seiler was previously Vice-Chairman of Merriman Holdings from February 2010 until he assumed the CEO role.
He previously served as a Managing Director at Atlas Capital Management, a multi-state asset management firm, from September
2007 to July 2009. From May 2005 until May 2007, Mr. Seiler was Managing Director at HSBC Securities (USA) Inc., responsible for equity capital market
distribution in the Americas. Mr. Seiler was co-founder and CEO of Anchor Point Asset Management, a multi-asset
global-macro manager, from January 2003 through May 2005. Prior to that, he served as a Managing Director in Morgan Stanley &
Co.'s institutional equity division from March 1994 through January 2003.
Jack A. Thrift
, 46, served as Chief Financial
Officer from January 2011 to January 2012. Mr. Thrift was previously Managing Director of Operations of White Oak Global Advisors,
an SEC registered investment advisor, from July 2008 until October 2010. Mr. Thrift was also Chief Financial Officer of White
Oak’s investment banking division. Prior to that, Mr. Thrift was Chief Financial Officer of Pacific Growth Equities, LLC,
an investment banking firm and Chief Operating Officer of Pacific Growth Equity Management, LLC, an SEC registered investment
advisor from February 2005 until June 2008. Mr. Thrift received his B.S. degree in accountancy from the University of Southern
California and is a CPA (inactive) in the state of California.
William J. Febbo
, 43, has served as a member
of our Board of Director since April 2007 and as Chief Operating Officer since January 2012. From January 1999 to April 2007,
Mr. Febbo was Chief Executive Officer and co-founder of MedPanel, Inc., an online medical market intelligence firm. At MedPanel,
Mr. Febbo oversaw the company's sales, marketing, technology, finance and content development organizations. The Company acquired
MedPanel, Inc. in April 2007 (and changed its name to Panel Intelligence, LLC) where Mr. Febbo continued his responsibilities.
Given the market changes, Mr. Febbo and other investors formed Panel Intelligence, LLC (a Massachusetts corporation) which acquired
the assets of Panel Intelligence, LLC (a Delaware corporation) from the Company on January 30, 2009. Mr. Febbo continues
to serve on our Board of Directors. Mr. Febbo has been Treasurer on the Board of the United Nations of Greater Boston since
November 2004. Prior to founding MedPanel, Inc., Mr. Febbo was Chairman of the Board of Directors of Pollone, a Brazilian manufacturing
venture in the automotive industry, from January 1998 to January 1999. From January 1996 to January 1999, Mr. Febbo was with Dura
Automotive working in business development and mergers and acquisition overseas. Mr. Febbo received his B.S. degree in international
studies, with a focus on economics and Spanish, from Dickinson College.
There is no family relationship among any of the foregoing
officers or between any of the foregoing executive officers and any Director of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company’s directors and executive officers to file reports with the SEC on Forms 3, 4 and 5 for the purpose of reporting
their ownership of and transactions in the Company’s equity securities.
Financial Code of Ethics
The Company has adopted and annually reviews its “Code
of Ethics for Senior Financial Officers,” a code of ethics that applies to our Chief Executive Officer and Chief Financial
Officer. The finance code of ethics is publicly available on our website at www.merrimanco.com. If we make any substantive amendments
to the finance code of ethics or grant any waiver, including any implicit waiver, from a provision of the code to our Chief Executive
Officer or Chief Financial Officer, we will disclose the nature of such amendment or waiver on that website or in a report on
Form 8-K.
Audit Committee
The Company has a standing audit committee whose members are
Dennis G. Schmal, Patrick O’Brien, and Jeffrey M. Soinski.
Audit Committee Financial Expert
The Board of Directors has determined that Dennis G. Schmal
is an “audit committee financial expert” and “independent” as defined under applicable SEC and NASDAQ
rules. The Board’s affirmative determination for Dennis G. Schmal was based, among other things, upon his 27 years at Arthur
Andersen LLP, most of those years as a partner in the audit practice.
Item 11. Executive Compensation
SUMMARY 2011 COMPENSATION TABLE
The following table sets forth the compensation
earned by our Chief Executive Officer, our two other most highly compensated executive officers, and one individual for whom disclosure
would have been provided but for the fact that he was not serving as an executive officer for the two years ended December 31,
2011, whom we refer to as our named executive officers.
|
|
Year
|
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Stock Awards ($)
|
|
|
Option Awards ($)
|
|
|
Total ($)
|
|
Name and Principal Position
|
|
(b)
|
|
|
( c)
|
|
|
(d) (1)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
D. Jonathan Merriman
|
|
|
2011
|
|
|
|
200,000
|
|
|
|
111,535
|
|
|
|
49,999
|
|
|
|
-
|
|
|
|
361,534
|
|
Chief Executive Officer
|
|
|
2010
|
|
|
|
231,698
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
231,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Green
|
|
|
2011
|
|
|
|
150,000
|
|
|
|
337,500
|
|
|
|
112,500
|
|
|
|
-
|
|
|
|
600,000
|
|
Head of Investment Banking
|
|
|
2010
|
|
|
|
150,000
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
350,000
|
|
Meriman Capital, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Doran
|
|
|
2011
|
|
|
|
280,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
280,000
|
|
General Counsel
|
|
|
2010
|
|
|
|
280,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
280,000
|
|
Meriman Capital, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Marrus (2)
|
|
|
2011
|
|
|
|
159,090
|
|
|
|
225,000
|
|
|
|
84,999
|
|
|
|
88,675
|
|
|
|
557,764
|
|
Head of Investment Banking
|
|
|
2010
|
|
|
|
162,680
|
|
|
|
-
|
|
|
|
105,910
|
|
|
|
-
|
|
|
|
268,590
|
|
Meriman Capital, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The amounts included in column (d) are bonuses awarded under Executive and Management Bonus Plan (“EMB”),
designed to reward our named executive officers and other employees to the extent that the Company achieves or exceeds its
business plan for a particular year. The EMB provides for a bonus pool to be established based on achieving the Company’s
annual business plan, with the Committee retaining discretion to allocate the bonus pool. If the Company’s business
plan with respect to a calendar year is not met, only small amounts will be paid under the EMB for that year. While the amount
of the total bonus pool that is available for awards under the EMB is based on the Company achieving certain performance targets,
the actual amount to be paid to each of our named executive officers is determined by the Compensation Committee of our Board
and our Board, based on their discretion.
|
|
|
(2)
|
Mr. Marrus resigned as Head of Investment Banking in October 2011.
|
The Black Scholes model assumptions (averaged
over each year) are as follows:
|
|
2011
|
|
|
2010
|
|
Volatility
|
|
|
123
|
%
|
|
|
128
|
%
|
Average expected term (years)
|
|
|
3.7
|
|
|
|
3.1
|
|
Risk-free interest rate
|
|
|
1.49
|
%
|
|
|
1.63
|
%
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
Compensation awarded to our named executive
officers was determined by the compensation committee of our Board.
Pursuant to its practice, the Company provides
Mr. Merriman and Mr. Doran, with parking at the Company’s principal offices.
|
|
OUTSTANDING EQUITY AWARDS AT 2011 FISCAL YEAR-END
|
|
|
|
|
|
|
Option Awards
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Market Value of
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Shares
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
or Units
|
|
|
or Units
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
of Stock That
|
|
|
of Stock That
|
|
|
|
Options (#)
|
|
|
Options (#)
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Have Not
|
|
|
Have Not
|
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
|
|
|
Date
|
|
|
Vested
|
|
|
Vested
|
|
|
|
(b)
|
|
|
(c)
|
|
|
($/Sh) (e)
|
|
|
(f)
|
|
|
(#)(g)
|
|
|
($) (h)
|
|
D. Jonathan Merriman
|
|
|
78,421
|
|
|
|
43,006
|
|
|
|
3.01
|
|
|
|
5/8/2019
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
186,011
|
|
|
|
171,131
|
|
|
|
8.40
|
|
|
|
11/11/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Doran
|
|
|
10,446
|
|
|
|
8,124
|
|
|
|
10.99
|
|
|
|
9/21/2019
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Green
|
|
|
7,142
|
|
|
|
7,143
|
|
|
|
6.02
|
|
|
|
12/23/2019
|
|
|
|
202,465
|
|
|
|
87,060
|
|
DIRECTOR COMPENSATION IN 2011
The following table sets forth information
about the compensation earned by members of our Board of Directors during the fiscal year ended December 31, 2011. Mr. D. Jonathan
Merriman, who served as Chief Executive Officer and as Co-Chairman of the Board of Directors and Mr. Ronald L. Chez who served
as Co-Chairman of the Board of Directors did not receive any compensation for their service as directors.
For the year ended December 31, 2011, directors
did not receive any compensation in the form of participation in non-equity incentive or pension plans, or any other form of compensation
other than awards of cash, stock, and stock options. The Company’s director compensation program for 2011 took into consideration
service on committees of the Board. For service on the Board and attendance at the four scheduled quarterly meetings, each of
our independent directors was awarded, on an annual basis, a cash award, a number of fully vested shares, and shares of stock
options immediately exercisable. The number of shares and of stock options awarded was determined by a value established by the
Board prior to the beginning of the year and the price of the Company’s share of common stock on the grant date. However,
starting the second quarter of 2010, compensation to the Board members was only provided in the form of cash. As the Board and
each committee have four scheduled meetings each year, one-fourth of each Director’s award was granted on each of the scheduled
meeting dates, provided the Director attended. Additional meetings (whether by phone or in person) were scheduled as necessary
for which no additional compensation was awarded. Directors who served on any of the Board’s committees were awarded an
additional number of shares for each committee.
Accordingly, the compensation earned by
our Directors in 2011 was as follows:
|
|
Fees Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or Paid in
|
|
|
Stock
|
|
|
Option
|
|
|
All Other
|
|
|
|
|
Name
|
|
Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Total
|
|
(a)
|
|
($) (b)
|
|
|
($) (c) (1)
|
|
|
($) (d)
|
|
|
($) (e)
|
|
|
($) (f)
|
|
Ronald L. Chez, Chair (2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
William J. Febbo (5)
|
|
|
30,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,000
|
|
D. Jonathan Merriman (3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Dennis G. Schmal
|
|
|
30,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,000
|
|
Jeffrey M. Soinski
|
|
|
30,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,000
|
|
Patrick O'Brien
|
|
|
30,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,000
|
|
Alex Seiler (4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
(1)
|
The amounts in this column reflect the value of the shares of stock awarded, calculated by multiplying
the closing price of a share of our common stock on the applicable grant date by the number of shares awarded on such date.
All grants were made on the day of the Board meeting, were immediately vested and any restrictions were removed.
|
|
|
(2)
|
Mr. Chez has served as Co-Chairman of the Board of Directors since September 2010.
|
|
|
(3)
|
Mr. Merriman is also the Chief Executive Officer of the Company for which compensation is not included in this table.
In accordance to Company practice, employees of the Company and its subsidiaries do not receive additional compensation for
service on the Board. Mr. Merriman has served as Co-Chairman of the Board of Directors since September 2010.
|
(4)
|
Mr. Alex Seiler served as the Chief
Executive Officer of the Company’s operating subsidiary, Merriman Capital, Inc. until September 2011, for which compensation
is not included in this table. In accordance with Company practice, employees of the Company and its subsidiaries do not receive
additional compensation for service on the Board.
|
|
|
(5)
|
Mr. Febbo also serves as the Chief Operating Officer since
January 2012.
|
The Board of Directors annually reviews the Company’s
director compensation program.
Item 12. Security Ownership of Certain Beneficial Owners
and Management
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about
the Company’s common stock that may be issued upon the exercise of options and warrants under all of our existing equity
compensation plans as of December 31, 2011 including the 1999 Stock Option Plan, the 2000 Stock Option and Incentive Plan, the
2001 Stock Option and Incentive Plan, the 2003 Stock Option and Incentive Plan, the 2009 Stock Incentive Plan, the 2006 Directors’
Stock Option and Incentive Plan, and the 2002 Employee Stock Purchase Plan.
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
|
|
Securities
|
|
|
|
Securities to
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
be Issued
|
|
|
Average
|
|
|
Available
|
|
|
|
Upon
|
|
|
Exercise
|
|
|
For Future
|
|
|
|
Exercise of
|
|
|
Price of
|
|
|
Issuance
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Under Equity
|
|
|
|
Options and
|
|
|
Options and
|
|
|
Compensation
|
|
Plan Category
|
|
Warrants
|
|
|
Warrants
|
|
|
Plans
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
1999 Stock Option Plan (expired 12/30/08)
|
|
|
8,162
|
|
|
$
|
31.63
|
|
|
|
-
|
|
2000 Stock Option and Incentive Plan (expired 2/28/10)
|
|
|
16,657
|
|
|
$
|
5.90
|
|
|
|
-
|
|
2001 Stock Option and Incentive Plan
|
|
|
19,342
|
|
|
$
|
11.01
|
|
|
|
-
|
|
2003 Stock Option and Incentive Plan
|
|
|
274,994
|
|
|
$
|
4.62
|
|
|
|
-
|
|
2009 Stock Incentive Plan
|
|
|
666,978
|
|
|
$
|
6.48
|
|
|
|
820,765
|
|
2006 Directors’ Stock Option and Incentive Plan
|
|
|
14,118
|
|
|
$
|
3.01
|
|
|
|
-
|
|
Equity compensation not approved by stockholders
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Equity compensation not approved by stockholders
includes shares in a Non-Qualified option plan approved by the Board of Directors of Ratexchange Corporation (now known as Merriman
Curhan Ford Group, Inc.) in 1999 and a Non-Qualified option plan that is consistent with the American Stock Exchange Member Guidelines,
Rule 711, approved by the Board of Directors in 2004. The American Stock Exchange guidelines require that grants from the option
plan be made only as an inducement to a new employee, that the grant be approved by a majority of the independent members of the
Compensation Committee and that a press release is issued promptly disclosing the terms of the option grant. The Non-Qualified
option plan that was established in accordance with the American Stock Exchange guidelines is considered a pre-existing plan,
and is thus considered acceptable under the NASDAQ Stock Market guidelines. The Company’s common stock was listed
on NASDAQ under the symbol MERR until November 2011. Since November 2011, it has been listed on the OTXQX under the same symbol.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial
ownership of each class of our voting securities as of March 31, 2012, by (a) each person who is known by us to own beneficially
more than five percent of each of our outstanding classes of voting securities, (b) each of our directors, (c) each of the named
executive officers and (d) all directors and executive officers as a group.
|
|
Common Stock
|
|
|
Series D Convertible Preferred Stock
(1)
|
|
|
Series E Convertible Preferred Stock
(2)
|
|
Name of Beneficial Owner
|
|
Beneficially
Owned
|
|
|
Percent
(3)
|
|
|
Beneficially
Owned
|
|
|
Percent
|
|
|
Beneficially
Owned
|
|
|
Percent
|
|
D. Jonathan Merriman
|
|
|
1,469,948
|
|
|
|
20
|
%
|
|
|
268,922
|
|
|
|
1
|
%
|
|
|
396,825
|
|
|
|
12
|
%
|
Ronald L. Chez (4)
|
|
|
3,828,058
|
|
|
|
41
|
%
|
|
|
8,085,007
|
|
|
|
43
|
%
|
|
|
1,984,126
|
|
|
|
61
|
%
|
Dennis G. Schmal
|
|
|
214,940
|
|
|
|
3
|
%
|
|
|
116,279
|
*
|
|
|
|
|
|
|
79,365
|
|
|
|
2
|
%
|
Jeffrey M. Soinski
|
|
|
29,678
|
*
|
|
|
|
|
|
|
116,279
|
*
|
|
|
|
|
|
|
15,873
|
*
|
|
|
|
|
William J. Febbo
|
|
|
67,011
|
*
|
|
|
|
|
|
|
116,279
|
*
|
|
|
|
|
|
|
15,873
|
*
|
|
|
|
|
Patrick O'Brien
|
|
|
93,030
|
|
|
|
1
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
39,682
|
|
|
|
1
|
%
|
All directors and executive
officers as a group [11 persons] (5)
|
|
|
5,702,665
|
|
|
|
58
|
%
|
|
|
8,702,766
|
|
|
|
47
|
%
|
|
|
2,531,744
|
|
|
|
78
|
%
|
(1)
|
Ownership of all Series D Convertible Preferred Stock shares was a result of investment in the Company’s
strategic transaction of September 8, 2009. Effective upon the amended Series D Certificate of Designation on December
29, 2011, 3.47 shares of Series D Convertible Preferred Stock is convertible into one share of common stock of the Company.
|
|
(2)
|
Ownership of all Series E Convertible Preferred Stock shares was a result of investment in the Company’s
strategic transaction of December 30, 2011.
|
|
(3)
|
Applicable percentage ownership is based on 7,353,534 shares of common stock outstanding as of March 31, 2012. Pursuant
to the rules of the Securities and Exchange Commission, shares shown as “beneficially” owned include all shares
of which the persons listed have the right to acquire beneficial ownership within 60 days of March 31, 2012, including (a)
shares subject to options, warrants or any other rights exercisable within 60 days March 31, 2012, even if these shares are
not currently outstanding, (b) shares attainable through conversion of other securities, even if these shares are not currently
outstanding, (c) shares that may be obtained under the power to revoke a trust, discretionary account or similar arrangement
and (d) shares that may be obtained pursuant to the automatic termination of a trust, discretionary account or similar arrangement.
This information is not necessarily indicative of beneficial ownership for any other purpose. Our directors and executive
officers have sole voting and investment power over the shares of common stock held in their names, except as noted in the
following footnotes.
|
|
(4)
|
This aggregate amount showed as owned by Mr. Chez does not include the 42,857 warrants compensated to Mr. Chez as the
Chairman of the Strategic Advisory Committee of the Board of Directors that are prohibited from exercise until shareholder
approval has been obtained.
|
|
(5)
|
All directors and executive officers have the business address of 600 California Street, 9th Floor, San Francisco, CA
94108.
|
Item 13. Certain Relationships and Related Transactions
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
William J. Febbo has been a Director of
the Company since April 2007. Mr. Febbo was Chief Executive Officer and founder of MedPanel, Inc., or MedPanel, an online medical
market intelligence firm, from January 1999 to April 2007. At MedPanel, Mr. Febbo oversaw the company's sales, marketing, technology,
finance and content development organizations. Mr. Febbo also owned approximately 18% of the common stock of MedPanel on a fully
diluted basis. In April 2007, MedPanel, was acquired by the Company pursuant to an Agreement and Plan of Merger, a binding agreement
which was signed in November 2006, and became Panel Intelligence, LLC, a subsidiary of the Company. One of the terms of the Agreement
and Plan of Merger was that the Company would use its best efforts to cause Mr. Febbo to be elected to the Company’s Board
of Directors on which he remains. Under the terms of this Agreement and Plan of Merger, the Company paid $6.5 million in common
stock for MedPanel. The selling stockholders of MedPanel would have been entitled to additional consideration on the third anniversary
from the closing based upon Panel Intelligence, LLC (a Delaware corporation) achieving specific revenue and profitability milestones.
The payment of the incentive consideration would have been 50% in cash and 50% in the Company’s common stock and may not
exceed $11,455,000. The payment of the incentive consideration did not occur as the milestones for additional consideration
were deemed unachievable and therefore no longer of value to previous MedPanel Shareholders. (see
Recent Events
, below).
Mr. Febbo and other investors formed Panel
Intelligence, LLC (a Massachusetts corporation), which acquired the assets of Panel Intelligence, LLC (a Delaware corporation)
from the Company on January 30, 2009. The acquisition consideration was $1.1 million, consisting of $1 million in cash and
the return of a number of shares of the Company’s common stock received in the acquisition MedPanel with a value of $100,000.
Mr. Febbo continues to serve on the Company’s Board of Directors. Effective January 2012, Mr. Febbo serves as the Company’s
Chief Operating Officer.
Temporary Subordinated Borrowings
On
January 31, 2011, the Company borrowed $2,800,000 from Ronald L. Chez, its
Co-Chairman of the Board of Directors
.
The loan was in the form of a temporary subordinated loan in accordance with Rule 15c3-1 of the Securities Exchange Act of 1934.
The Company incurred $56,000 in loan fees, which amount was included in cost of underwriting capital in the Company’s consolidated
statement of operations. The loan and related fees were paid in full on February 7, 2011.
Subordinated Notes Payable to Related
Parties
On September 29, 2010, the Company borrowed
$1,000,000 from nine individual lenders, all of whom were directors, officers or employees of the Company at the time of issuance,
pursuant to a series of unsecured promissory notes (Subordinated Notes). The Subordinated Notes are for a term of three years
and provide for interest comprising two components: (i) six percent (6.0%) per annum to be paid in cash monthly; and (ii) eight
percent (8.0%) per annum to be accrued and paid in cash upon maturity. Additional consideration was paid to the lenders at
closing comprising a number of shares of common stock of the Company equal to: (A) 30% of the principal amount lent; divided
by (B) $3.01 per share. The total effective interest on the note is approximately 21.73%. Proceeds were used to supplement
underwriting capacity and working capital for MC.
The total proceeds of $1,000,000 raised
in the transaction above were accounted for as an issuance of debt with stock. The total proceeds of $1,000,000 have been allocated
to these individual instruments based on the relative fair values of each instrument. Based on such allocation method, the value
of the stocks issued in connection with the Subordinated Notes was $206,000, which was recorded as a discount on the debt and
applied against the Subordinated Notes. As of December 31, 2010, the Subordinated Notes of $809,000, net of $191,000 discount,
remained outstanding and is included in notes payable to related parties in the Company’s consolidated statements of financial
condition.
As of December
31, 2011, $830,000 of the
Subordinated Notes, net of $120,000 discount
, remain outstanding and
is included in notes payable to related parties in the Company’s consolidated statements of financial condition. The remaining
Subordinated Notes held by parties no longer related to the Company of $44,000, net of $6,000 discount, are included in notes
payable in the Company’s consolidated statements of financial condition. The discount on the note is amortized over the
term of the loan using the effective interest method. For the year ended December 31, 2011, the Company incurred $140,000 in interest
on the
Subordinated Notes
. Total interest of $105,000 remains outstanding as of December 31,
2011 and is included in accrued expenses and other in the consolidated statements of financial condition.
2010 Chez Secured Promissory Note
On November 17, 2010, the Company borrowed
$1,050,000 from Ronald L. Chez, its Co-Chairman of the Board of Directors, pursuant to a secured promissory note (2010 Chez Secured
Promissory Note). The 2010 Chez Secured Promissory Note is secured by certain accounts receivable which were purchased by
the Company from MC with the proceeds of the transaction being used for such purchase. The 2010 Chez Secured Promissory
Note is due and payable in two tranches as the accounts receivable became due, with $950,000 due on January 19, 2011 and $100,000
due on February 28, 2011. It provides for interest of 29.2% per annum and additional consideration comprising two components
(i) 50,000 shares of the Company’s Series D Preferred Stock (which is convertible into 7,142 shares of our Common Stock);
and (ii) a cash fee of $15,000. The proceeds were used to supplement underwriting capacity for MC. The Company paid
off $720,000 of the Secured Promissory Note on December 22, 2010.
As of December 31, 2010, the 2010
Chez Secured Promissory Note
of $330,000 remained outstanding and is included in notes payable
to related parties in the Company’s consolidated statements of financial condition.
On January 21, 2011, the 2010 Chez
Secured Promissory Note was amended to extend the maturity date to April 15, 2011 and change the 50,000 Series D Convertible Preferred
Stock consideration to cash compensation of $21,000. For the year ended
December 31
, 2011, the
Company incurred $42,000 in fees, composed of $15,000 and $21,000 in cash fees, and $6,000 of interest at 29.2% per annum. On
March 24, 2011, all principal and related fees were paid and no balance remains outstanding.
2011 Chez Secured Promissory Note
On April 7, 2011, Ronald L. Chez, the Company’s
Co-Chairman of the Board of Directors, invested $330,000 in a three year secured promissory note (2011 Chez Secured Promissory
Note) at an interest rate of six percent (6%) per annum payable quarterly. This note is secured by a security interest in
and right of setoff against all of such the Company’s right, title and interest in, to all of the capital stock of
Merriman Capital Inc., together with all proceeds, rents, profits and returns of and from any of the foregoing. Also, beginning
on the date which is one year from the issuance date, if there is an equity financing of the Company resulting in gross proceeds
of at least $15,000,000 in new money, holders shall have the option to put 50% of Secured Promissory Notes originally purchased
back to the Company, for an amount equal to the principal plus accrued but unpaid interest, on 30 days written notice.
On November
16, 2011,
the 2011 Chez Secured Promissory Note plus accrued interest of $3,000 was exchanged for 445,299 shares of common
stock of the Company calculated as (i) the total amount of principal plus accrued but unpaid interest divided by (ii) an amount
equal to 80% of the average closing price per share of common stock as quoted on the exchange on which it principally trades for
the 30 day period ending two days prior to the closing date.
The Company accounted for this transaction
in accordance with ASC 470,
Debt
, as an extinguishment of debt, whereby a gain or loss was calculated as the difference
between the reacquisition price and net carrying value of the debt. The reacquisition price was determined as the sum of the fair
value of the common stock and new warrants. The warrants were valued using the Black-Scholes fair value model. A loss of $157,000
was recorded on the transaction based on a reacquisition price of $490,000 and net carrying value, including interest, of $333,000.
For the year ended December 31, 2011, the
Company incurred $12,000 in interest in relation to this note.
Secured Promissory Notes
In April 2011, the Company raised $2,770,000
from 24 investors, of which 11 were directors, officers, consultants or employees of the Company at the time of issuance, pursuant
to a series of secured promissory notes (Secured Promissory Notes). The Secured Promissory Notes are for a term of three
years and provide for interest of ten percent (10.0%) per annum to be paid in cash quarterly. Additional consideration was
paid to the lenders at closing comprising warrants to purchase shares of the common stock of the Company at a price per share
equal to 85% of the Company’s stock price at the closing date (the Warrants). 86 Warrants were issued for each $1,000
invested. A total of 238,220 Warrants were issued. The Warrants issued to directors, officers, consultants and
employees (Insider Warrants) of the Company provide that the Insider Warrants will not be exercisable unless first approved by
the Company’s stockholders. These notes are secured by a security interest in and right of setoff against all of such
the Company’s right, title and interest in, to all of the capital stock of MC, together with all proceeds, rents, profits
and returns of and from any of the foregoing. Also, beginning on the date which is one year from the issuance date, if there is
an equity financing of the Company resulting in gross proceeds of at least $15,000,000 in new money, holders shall have the option
to put 50% of Secured Promissory Notes originally purchased back to the Company, for an amount equal to the principal plus accrued
but unpaid interest, on 30 days written notice. The Secured Promissory Notes were issued in two tranches, one closed on April
7, 2011 for $2,470,000 and the other closed on April 21, 2011 for $300,000.
The total proceeds raised in the transaction
above were accounted for as an issuance of debt with warrants. The total proceeds of $2,770,000 have been allocated to these
individual instruments based on the relative fair values of each instrument at the time of issuance.
Based
on the fair value allocation method, the value of the warrants issued in connection with the Secured Promissory Notes received
was $420,000, which was recorded as a discount on the debt and applied against the Secured Promissory Notes.
On October 11,
2011, the Company repurchased the $100,000
Secured Promissory Note from
a former officer and
director in connection with his separation from the Company.
On November
16, 2011, the Company entered into e
xchange agreements with certain Secured Promissory Note investors whereby the investors
agree to exchange the Secured Promissory Notes and Warrants for shares of common stock and new warrants to purchase shares of
common stock of the Company as follows.
|
(e)
|
For the Secured Promissory Notes,
a number of new shares of common stock equal to (i) the total
amount of principal plus accrued but unpaid interest of the Secured
Promissory Notes submitted for cancellation divided by (ii) an
amount equal to 80% of the average closing price per share of
common stock as quoted on the exchange on which it principally
trades for the 30 day period ending two days prior to the closing
date (the AP); plus
|
|
(f)
|
For the Warrants, 1.25 new warrants
for each Warrant converted, with each new warrant carrying an
exercise price equal to 110% of the AP.
|
Fifteen investors
agreed to exchange $1,750,000 principal balance of the
Secured Promissory Notes plus $22,000 accrued interest for 2,373,505
shares of common stock and 188,126 warrants.
The Company accounted for this transaction
in accordance with ASC 470,
Debt
, as an extinguishment of debt, whereby a gain or loss was calculated as the difference
between the reacquisition price and net carrying value of the debt. The reacquisition price was determined as the sum of the fair
value of the common stock and new warrants less the fair value of the original Warrants. The warrants were valued using the Black-Scholes
fair value model. A loss of $1,134,000 was recorded on the transaction based on a reacquisition price of $2,688,000 and net carrying
value, including interest, of $1,554,000.
As of December
31, 2011, $636,000 of the Secured Promissory Notes, net of $84,000 discount, remain outstanding and are included in notes payable
in the Company’s consolidated statements of financial condition. The remaining Secured Promissory Notes issued to Insiders
of
$176,000, net of $24,000 discount, are included in notes payable to related parties in the Company’s consolidated
statements of financial condition.
For the year ended
December
31
, 2011, the Company incurred $178,000 in interest in relation to these notes. A
s of December
31, 2011, $23,000 of interest remains outstanding and is included in accrued expenses and other in the consolidated statements
of financial condition.
Series D Convertible Preferred Stock
Three of the investors in the Series D
Convertible Preferred Stock transaction, Messrs. Andrew Arno, Douglas Bergeron, and Ronald Chez, joined the Company’s Board
of Directors. In December 2010 and January 2011, Douglas Bergeron and Andrew Arno left as members of the Board of Directors,
respectively. In addition, the Company’s CEO and former CFO, along with 11 other executives and senior managers of
MC, were also investors in the Series D Convertible Preferred Stock transaction. Finally, all five members of the Company’s
Board of Directors prior to the transaction were investors in the Series D Convertible Preferred Stock transaction.
Series E Convertible
Preferred Stock
On December 30, 2011, the Company issued
2,531,744 shares of Series E Convertible Preferred Stock at $0.63 per share plus warrants to purchase 1,265,874 shares of the
Company’s common stock with an exercise price of $0.63 per share. The warrants expire five years from the effective date.
All Series E Convertible Preferred shareholders are directors of the Company.
The Series E Convertible Preferred Stock
carries a dividend rate of 9% per annum, such dividends will be paid only when, if and as declared by the Board of Directors and
will accumulate until paid. The Company is prohibited from paying any dividends on the Common Stock until all accrued dividends
on the Series D and Series E Convertible Preferred Stock are first paid.
The holders of Series E Convertible Preferred
Stock are entitled to a “liquidation preference payment” of $0.63 per share of Series E Convertible Preferred Stock
plus all accrued but unpaid dividends on such shares prior and in preference to any payment to holders of the Common Stock upon
a merger, acquisition, sale of substantially all the assets, or certain other liquidation events of the Company. Any proceeds
after payment of the “liquidation preference payment” shall be paid pro rata to the holders of the Series D and E
Convertible Preferred Stock and Common Stock on an as converted to Common Stock basis.
Other Related Party Transactions
From time to time, officers and employees
of the Company may invest in private placements which the Company arranges and for which the Company charges investment banking
fees.
The Company’s employees may, at times,
provide certain services and supporting functions to its affiliate entities. The Company is not reimbursed for any costs related
to providing those services.
It is the policy for the Board to review
all related party transactions and to secure approval by a majority of disinterested directors. Applying such policy is the responsibility
of each disinterested director for each transaction. Such policy regarding related party transactions is not in writing; as such,
the General Counsel and the Corporate Secretary are responsible for advising on the application of such policies.
Director Independence
The listing standards of The NASDAQ Stock
Market, which the Company was listed on until November 2011, require that a majority of our Board of Directors be comprised of
independent directors. The Board has determined that the following Board members are independent, consistent with the guidelines
of The NASDAQ Stock Market: Dennis G. Schmal, Jeffrey M. Soinski, Patrick O’Brien and Ronald L. Chez. The Board based this
determination primarily on a review of the responses of our directors and executive officers to questions regarding employment
and compensation history, affiliations, and family and other relationships, as well as on discussions with the directors. Accordingly,
only independent members of the Board constitute its Audit Committee, Nominating and Corporate Governance Committee and its Compensation
Committee.
Item 14. Principal Accounting Fees and Service
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS’
FEES
Burr Pilger Mayer, Inc. (“BPM”)
served as the Company’s independent registered public accounting firm for the fiscal years ended December 31, 2011 and 2010.
Representatives of BPM were available at Annual Stockholders’ Meetings in 2011 and are expected to be available in future
Annual Stockholders’ Meetings. Such representatives will have an opportunity to make a statement if they so desire and will
be available to respond to appropriate questions.
The aggregate fees billed by BPM for professional
services to the Company were $206,905 in 2011.
Audit Fees.
The
aggregate fees billed by BPM for professional services rendered for the audit of the Company’s annual financial statements,
the review of the Company’s quarterly financial statements, and services that are normally provided in connection with statutory
and regulatory filings or engagements were approximately $206,905 in 2011 and $409,800 in 2010.
Audit Related Fees.
There
were no aggregate fees billed by BPM for 2011 and 2010 for professional assurance and related services reasonably related to the
performance of the audit of the Company’s financial statements, but not included under Audit Fees.
Tax Fees.
There
were no aggregate fees billed by BPM for 2011 and 2010 for professional services for tax compliance, tax advice and tax planning
in 2011 and 2010.
All Other Fees.
The
aggregate fees for all other services rendered by BPM were $0 in 2011 and $4,700 in 2010. 100% of these fees were approved in
advance by the Audit Committee.
The Audit Committee has formal policies
and procedures in place with regard to the approval in advance of all professional services provided to the Company by its independent
registered public accountants. With regard to audit fees, the Audit Committee reviews the annual audit plan and approves the estimated
annual audit budget in advance. With regard to tax services, the Audit Committee reviews the description and estimated annual
budget for tax services to be provided by the Company’s tax consultants in advance. During 2011, the Audit Committee approved
all of the independent registered public accountants’ fees in advance.
PART IV
Item 15. Exhibits and Financial Statement Schedules
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(a)
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1.
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The information required by this item is included in Item 8 of Part II of this Annual Report on Form 10-K.
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2.
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Financial Statement Schedules
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The required schedules are omitted because of the
absence of conditions under which they are required or because the required information is presented in the financial statements
or notes thereto.
The exhibits listed in the accompanying Exhibit Index
are filed or incorporated by reference as part of this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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Merriman Holdings, Inc.
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April 30, 2012
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By:
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/s/ D. Jonathan Merriman
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D. Jonathan Merriman,
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Chief Executive Officer
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Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature
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Title
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Date
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/s/ D. Jonathan Merriman
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Chief Executive Officer, and
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April 30, 2012
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D. Jonathan Merriman
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Co-Chairman of the Board of Directors
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/s/ Ronald L. Chez
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Co-Chairman of the Board of Directors
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April 30, 2012
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Ronald L. Chez
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/s/ Patrick O’Brien
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Director
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April 30, 2012
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Patrick O’Brien
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/s/ William J. Febbo
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Director
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April 30, 2012
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William J. Febbo
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/s/ Dennis G. Schmal
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Director
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April 30, 2012
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Dennis G. Schmal
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/s/ Jeffrey M. Soinski
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Director
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April 30, 2012
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Jeffrey M. Soinski
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EXHIBIT INDEX
Exhibit No.
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Description
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3.1
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Certificate of Incorporation, as amended (incorporated herein by reference to Exhibit 3.1 to the Company’s Registration
Statement on Form S-1 (Reg. No. 333-37004)).
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3.3
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Amended and Restated Bylaws, as amended. (incorporated by reference to Exhibit 10.3 to the Company’s Registration
Statement on Form S-1 (Reg. No. 333-53316)).
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3.4
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Certificate of Amendment to the Certificate of Incorporation
changing name from MC Corporation to Merriman Holdings, Inc. (incorporated herein by reference to Exhibit 99.2 to the
Company’s Current Report on Form 8-K filed on May 14, 2008 (Reg. No. 001-15831).
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3.5
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Certificate of Designation providing for Series D Preferred
Stock (incorporated by Reference to Exhibit 3.5 of the Company’s Current Report on Form 8-K filed on August 28,
2009).
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3.8
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Amendment to Certificate of Designation amending provisions
for Series D Preferred Stock.
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3.9
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Amendment to Certificate of Designation further amending
provisions for Series D Preferred Stock (incorporated by Reference to Exhibit 3.5 of the Company’s Current Report
on Form 8-K filed on January 5, 2012).
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3.10
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Certificate of Designation providing for Series D Preferred Stock (incorporated by Reference to Exhibit 3.5 of the Company’s
Current Report on Form 8-K filed on January 5, 2012).
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4.1
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Form of Convertible Subordinated Note related to the Company’s private financing, dated November 26, 2001 (incorporated
by reference to Exhibit 4.1 to the Company’s Form 10-K for the year ended December 31, 2001) (Reg. No. 001-15831).
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4.2
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Form of Class A Redeemable Warrant to Purchase Common Stock of the Company related to Merriman Holdings, Inc. private
financing, dated November 26, 2001 (incorporated by reference to Exhibit 4.2 to the Company’s Form 10-K for the year
ended December 31, 2001) (Reg. No. 001-15831).
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10.13+
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Employment Agreement between the Company and D. Jonathan Merriman dated October 5, 2000 (incorporated herein by reference
to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 (Reg. No. 333-53316)).
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10.15+
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1999 Stock Option Plan (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement
on Form S-8 (Reg. No.333-43776)).
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10.16+
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Form of Non-Qualified, Non-Plan Stock Option Agreement dated February 24, 2000 between the Company and Phillip Rice, Nick
Cioll, Paul Wescott, Ross Mayfield, Russ Matulich, Terry Ginn, Donald Sledge, Christopher Vizas, Douglas Cole, Ronald Spears
and Jonathan Merriman (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Forms S-8
(Reg. No. 333-43776)).
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10.17+
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Schedule of non-plan option grants made under Non-Qualified, Non-Plan Stock Option Agreements to directors and executive
officers (incorporated herein by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1 (Reg.
No. 333-53316)).
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10.18+
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2000 Stock Option and Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.20 to the Company’s
Registration Statement on Form S-1 (Reg. No. 333-53316)).
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10.23
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Master Equipment Lease Agreement dated March 16, 2000 (incorporated by reference to Exhibit 10.6 to the Company’s
Registration Statement on Form S-1 (Reg. No. 333-37004)).
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10.29
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Agreement between the Company and BL Partners related to RMG Partners Corporation, dated April 8, 2001 (incorporated by
reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 30, 2001) (Reg. No. 001-15831).
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Exhibit No.
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Description
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10.30+
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Offer of Employment Agreement between the Company and Robert E. Ford, dated February 19, 2001, is Exhibit 10.2 to Form
10-Q for the quarter ended June 30, 2001, and is hereby incorporated by reference (Reg. No. 001-15831).
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10.31
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Ratexchange Placement Agreement with Murphy & Durieu, dated November 28, 2001, for private financing transaction (incorporated
by reference to Exhibit 10.31 to the Company’s Form 10-K for the year ended December 31, 2001) (Reg. No. 001-15831).
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10.32
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Form of Placement Agent Warrant to Murphy & Durieu, dated November 28, 2001 (incorporated by reference to Exhibit
10.32 to the Company’s Form 10-K for the year ended December 31, 2001) (Reg. No. 001-15831).
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10.33
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Convertible Promissory Note held by Forsythe/McArthur Associates, Inc., dated September 1, 2001, related to restructure
of Master Equipment Lease Agreement that is Exhibit 10.23 to Form 10K for the year ended December 31, 2000 (incorporated by
reference to Exhibit 10.33 to the Company’s Form 10-K for the year ended December 31, 2001) (Reg. No. 001-15831).
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10.34+
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Employment Agreement between the Company and Gregory S. Curhan, dated January 9, 2002 (incorporated by reference to Exhibit
10.34 to the Company’s Form 10-K for the year ended December 31, 2001) (Reg. No. 001-15831).
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10.35+
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Employment Agreement between the Company and Robert E. Ford, dated January 1, 2002 (incorporated by reference to Exhibit
10.35 to the Company’s Form 10-K for the year ended December 31, 2001) (Reg. No. 001-15831).
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10.37
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Stock Purchase Agreement by and among the Company and InstreamSecurities, Inc, (formerly known as Spider Securities, Inc.)
and Independent Advantage Financial & Insurance Services, Inc., dated December 7, 2001 (incorporated by reference to Exhibit
10.37 to the Company’s Form 10-K for the year ended December 31, 2001) (Reg. No. 001-15831).
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10.38
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Agreement to Restructure Convertible Promissory Note held by Forsythe McArthur Associates, dated November 20, 2002 (incorporated
by reference to Exhibit 10.38 to the Company’s Form 10-K for the year ended December 31, 2001) (Reg. No. 001-15831).
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10.39
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Securities Exchange Agreement in connection with Merriman Holdings, Inc. dated June 22, 2003 (incorporated by reference
to Exhibit 99.1 to the Company’s Form 8-K filed on July 3, 2003) (Reg. No. 001-15831).
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Exhibit No.
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Description
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10.43
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Stock Purchase Agreement by and between the Company and Ascend Services Ltd., dated April 29, 2005; together with the
following documents which form exhibits thereto: Escrow Agreement and Registration Rights Agreement (incorporated by reference
to the registrant’s Report on Form 10-Q for the quarter ended March 31, 2005) (Reg. No. 001-15831).
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10.44
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Promissory Note issued by Ascend Services Ltd dated April 29, 2005 (incorporated by reference to the registrant’s
Report on Form 10-Q for the quarter ended March 31, 2005) (Reg. No. 001-15831).
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10.45
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Employment Agreement between the Company and Gregory S. Curhan, dated January 1, 2005 (incorporated by reference to the
registrant’s Report on Form 10-Q for the quarter ended June 30, 2005).
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10.46
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Employment Agreement between the Company and Robert E. Ford, dated January 1, 2005. (incorporated by reference to the
registrant’s Report on Form 10-Q for the quarter ended June 30, 2005) (Reg. No. 001-15831).
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10.47
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Form of Unsecured Promissory Note dated September 29,
2010 (incorporated by reference to the Registrant’s Current Report on Form 8-K filed on October 5, 2010).
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10.48
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Form of Secured Promissory Note dated November 17, 2010 (incorporated by reference to the Registrant’s Current Report
on Form 8-K filed on November 23, 2010).
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21.1
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List of Subsidiaries of the Company.
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23.1
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Consent of Independent Registered Public Accounting Firm.
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31.1
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Certification of Principal Executive Officer Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.
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31.2
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Certification of Principal Financial Officer Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.
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32.1
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Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
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Represents management contract or compensatory plan or arrangement.
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