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, 2014
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 |
|
11-2936371 |
|
(State or Other Jurisdiction of
Incorporation or Organization) |
|
(IRS Employer
Identification No.) |
250 Montgomery Street, 16th Floor
San Francisco, CA 94104
(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 x
No ¨
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 ¨ |
Accelerated filer ¨ |
| Non-accelerated filer (Do not check if a smaller reporting company) ¨ |
Smaller Reporting Company x |
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 4,518,633
shares of common stock of the Registrant issued and outstanding as of September 30, 2014, the last business day of the registrant’s
most recently completed third fiscal quarter, was $11,522,514. This amount is based on the closing price of the common stock on
OTCQX of $2.55 per share on September 30, 2014.
The number of shares of Registrant’s
common stock outstanding as of March 24, 2015 was 4,518,633.
TABLE OF CONTENTS
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.
PART I
Item 1. Business
Overview
Merriman Holdings, Inc. and subsidiaries
(the Company) is a financial services holding company that provides capital markets advisory and research, corporate and investment
banking services through its wholly-owned operating subsidiary, Merriman Capital, Inc. (hereafter MC). MC is an investment bank
and securities broker-dealer whose clients are fast growing public and private companies and the entrepreneurs who manage those
companies. MC facilitates efficient capital formation through a proprietary digital network (DCN). MC is registered with the Securities
and Exchange Commission (SEC) as a broker-dealer and is a member of the Financial Industry Regulatory Authority (FINRA) and Securities
Investor Protection Corporation (SIPC).
Our mission is to be the leader in
advising, financing, trading and investing in fast-growing companies under $1 billion in market capitalization. We
originate differentiated equity research, brokerage and trading services primarily to institutional and family office
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, 2014, we had 31 employees.
COR Clearing LLC became
the Company’s clearing broker effective March 16, 2015.
Liquidity/Going Concern
The Company incurred substantial losses
in 2014 and 2013, having net losses of $1,628,000 and $3,992,000, respectively. As of December 31, 2014, the Company had an accumulated
deficit of $150,537,000 and a shareholders’ deficit of $102,000. These facts raise substantial doubt as to the Company’s
ability to continue as a going concern.
The consolidated financial
statements have been prepared assuming the Company will continue on a going concern basis which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business and do not include any adjustments that might result
from uncertainty about the Company’s ability to continue as a going concern.
Management’s plan to alleviate the
going-concern uncertainty includes, but is not limited to, the issuance of equity and debt instruments for working capital. The
Company’s continued existence is also dependent upon its ability to increase revenues generated from operations which will
enable the Company to achieve a profitable level of operations.
If anticipated
operating results are not achieved, management has the intent, and believes it has the ability, to further delay or reduce expenditures.
In such case, the further reduction in operating expenses might need to be substantial. Failure to generate sufficient cash flows
from operations, raise additional capital, or reduce certain discretionary spending would have a material adverse effect on the
Company’s ability to achieve its intended business objectives. The Company can give no assurance that it will be successful
in its plans and can give no assurance that additional financing will be available on terms advantageous to the existing terms
or that additional financing will be available at all. Should the Company not be successful in obtaining the necessary financing
to fund its operations, the Company would need to curtail certain or all of its operational activities and/or contemplate the
sale of its assets if necessary.
Principal Services
Our investment banking /broker-dealer
subsidiary provides four distinctive lines of business: investment banking, institutional brokerage, capital markets advisory
and financial entrepreneur platform. We also provide focused research-based financial services to companies with market
capitalization up to $1 billion, which we believe is an under-served 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
primarily of 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 extensive 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 efficiently, timely 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, OTCQX,
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 programs. We also serve the needs of company executives
with restricted stock transactions, cashless exercise of options, and liquidity strategies.
Capital Markets Advisory Group –
MC began offering services to sponsor companies on the International and Domestic OTCQX markets in 2007. Since 2008 we have
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
Currently, the Company’s
business results are categorized into three operating segments: MC, Financial Entrepreneurial Platform (FEP) and Capital
Market Advisory Services (CMAG). FEP is an investment banking division assisting corporate issuers in raising capital through
a network of independent investment bankers. CMAG is its capital market advisory services assisting clients to obtain listing
on OTCQX, a tier of Pink Sheets as well as general advisory services. The Company recognizes revenues earned by FEP 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 FEP.
The Company's reportable segments are strategic
business units that offer products and services which are compatible with its core business strategy. 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 FEP segment includes capital raising services through a network of
independent investment bankers and CMAG includes assisting corporate issuers in listing on OTCQX, the premier OTC Market tier,
along with other services that facilitate the access to institutional capital markets.
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. Many smaller firms have ceased their operations in the last five years. 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:
| · | Identifying, assessing
and reporting on corporate risk exposures and trends; |
| · | Establishing and revising
policies, procedures and risk limits, as necessary; |
| · | Monitoring and reporting
on adherence with risk policies and limits; |
| · | Developing and applying
new measurement methods to the risk process as appropriate; and |
| · | Approving new product
developments or business initiatives. |
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 fixed assets, 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
1000% 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 interests and
dividends, repay debt, and redeem or repurchase shares of our outstanding capital stock.
Except for the period from February
28, 2015 through March 23, 2015, we believe that we have been in compliance with the applicable minimum net capital rules of
the SEC and FINRA at all times. For further details, see notes 15 and 17 to the consolidated financial statements.
The failure of a 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 (CMAG) and our Financial Entrepreneur Platform. We may be unable to achieve
profitability if we fail to do any of the following:
| · | establish, maintain,
and increase our client base; |
| · | manage the quality of
our services; |
| · | compete effectively with
existing and potential competitors; |
| · | further develop our business
activities; |
| · | attract and retain qualified
personnel; |
| · | limit operating costs; and |
| · | maintain adequate working
capital. |
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
five 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.
We may not be able
to continue operating our business
The Company incurred significant losses
in 2014 and 2013. Even if we are successful in executing our plans, we will not be capable of sustaining losses such as those incurred
in 2014 and 2013. 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 2015, 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.
Prior claims on assets in liquidation
There can be no assurance that there will
be any proceeds available in liquidation for our common shareholders after payments to holders of our Secured Promissory Notes
and Unsecured Promissory Notes.
Common shareholders may receive nothing
in liquidation or receive much less than they would if there were no Secured Promissory Notes and Unsecured Promissory Notes outstanding.
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 customers 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 operational problems that affect our trading capability.
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.
Factors which could impede our ability
to access additional capital include the recent extreme volatility in the equity markets and our recent operating results. If we
are not able to access additional capital, we might not be able to meet our obligations in a timely manner, which would have a
material adverse effect on the Company’s ability to achieve its intended business objectives.
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.
Our business and prospects increasingly rely on new business
lines and new ways of doing business.
Our business and financial prospects rely
in part on new and unproven business lines and ways of doing business, including the Digital Capital Network. Since they are new,
it may be difficult to evaluate prospects for future business from such sources. Any failure of such business lines and ways of
doing business to evolve in the manner expected could adversely affect our stock price, financial condition and prospects. An increasing
percentage of our revenue producers are independent contractors rather than employees of the Company. Such contractors may be more
likely to sever their relationships with the Company than the employees we have typically relied on in the past, and if they do
so, they may be more likely to take important client relationships with them. Furthermore, such contractors may work more independently
from the Company than employees typically have and may be more likely to work from remote locations rather than from the Company’s
two office locations. These factors may increase the risk of claims and litigation arising from the actions of such independent
contractors.
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 could 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 senior professionals. 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 or any
other senior professionals who manage substantial client relationships and possess 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.
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 2014, 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 small investment bank with 31 employees
as of December 31, 2014 and revenues of approximately $16 million in 2014. 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 $1,628,000
and $3,392,000 for the years ended December 31, 2014 and 2013. 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, and 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.
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 decade, 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. There is potential 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.
Risks Related to
Ownership of Our Common Stock
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:
| | |
December 31, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Series D convertible preferred stock warrants | |
| - | | |
| 112,927 | |
| Series E convertible preferred stock warrants | |
| 113,741 | | |
| 113,741 | |
| Stock options | |
| 865,704 | | |
| 425,029 | |
| Warrants issued in connection with secured promissory notes | |
| 13,495 | | |
| 13,495 | |
| Warrants issued in connection with recapitalization | |
| 1,164,530 | | |
| 1,164,530 | |
| Other outstanding warrants | |
| 274,236 | | |
| 33,661 | |
| Potentially dilutive securities oustanding | |
| 2,431,706 | | |
| 1,863,383 | |
In addition to the potentially dilutive
securities listed above, the total number of common shares outstanding as of March 24, 2015
was 4,518,633.
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 52% of our outstanding common stock including exercise of their
options 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.
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.
Item 1b. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2014, all of our real
estate properties are leased. Our principal 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
From time to time, the Company is involved
in ordinary routine litigation incidental to our business. Currently, there are no litigations against the Company.
Certain conditions may exist as of the date
the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when
one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company,
or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings
or un-asserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially
material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature
of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are
generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed. There can be no assurance
that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations
or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Stock and Related
Stockholder Matters
Our common stock is
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 | |
| | |
| | |
| |
| 2014 | |
| | |
| |
| Fourth Quarter | |
$ | 2.60 | | |
$ | 1.70 | |
| Third Quarter | |
$ | 4.00 | | |
$ | 2.55 | |
| Second Quarter | |
$ | 4.50 | | |
$ | 3.00 | |
| First Quarter | |
$ | 4.50 | | |
$ | 2.70 | |
| | |
| | | |
| | |
| 2013 | |
| | | |
| | |
| Fourth Quarter | |
$ | 4.50 | | |
$ | 1.80 | |
| Third Quarter | |
$ | 6.00 | | |
$ | 3.00 | |
| Second Quarter | |
$ | 8.40 | | |
$ | 2.70 | |
| First Quarter | |
$ | 7.80 | | |
$ | 1.50 | |
The closing sale price for the common stock
on March 24, 2015 was $1.32. 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 195 shareholders of record as of December 31, 2014. 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.
Recent Issuance
of Unregistered Securities
None
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
The following discussion and analysis
should be read in conjunction with our consolidated financial statements and the notes thereto in Part II, Item 8 to this Annual
Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations. Actual results and
the timing of events may differ significantly from those projected in forward- looking statements due to a number of factors, including
those set forth in Item 1A “Risk Factors” of this Annual Report on Form 10-K.
Overview
Merriman Holdings, Inc. and
subsidiaries (the Company) is a financial services holding company that provides capital markets advisory and research, corporate
and investment banking services through its wholly-owned operating subsidiary, Merriman Capital, Inc. (hereafter MC). MC is an
investment bank and securities broker-dealer whose clients are fast growing public and private companies and the entrepreneurs
who manage those companies. MC facilitates efficient capital formation through a proprietary Digital Capital network (DCN). MC
is registered with the Securities and Exchange Commission (SEC) as a broker-dealer and is a member of the Financial Industry Regulatory
Authority (FINRA) and Securities Investor Protection Corporation (SIPC).
Our mission is to be the leader in advising,
financing, trading and investing in fast-growing companies under $1 billion in market capitalization. We originate differentiated
equity research, brokerage and trading services primarily to institutional investors, as well as investment banking and advisory
services to our fast-growing corporate clients.
We recognize that there is an opportunity
to build an institutional quality, fully compliant platform to streamline the incredibly inefficient process of fundraising for
and advising emerging companies. We have since launched the DCN, an online capital marketplace. We are now a financial technology
company focused on taking a significant role in changing how high growth emerging public and private companies are funded.
With DCN, we are creating a turnkey solution
for investors to screen dozens of investment opportunities across multiple investment strategies, sectors, deal sizes and locations. By
increasing the number of investment opportunities available to them, institutions and family offices will be able to focus on evaluating
deals rather than sourcing them. As a result, they will be able to make better investment decisions and improve the diversification
of their portfolios. DCN also enables issuers with the ability to have their deals viewed immediately by dozens of qualified investors,
something that previously would have taken months of travel, lengthy conference calls, and expensive road shows.
MC’s Financial Entrepreneur Platform
(FEP) exclusively supports highly ethical, independent investment bankers, respected research professionals and wealth managers
and their clients. Many of our FEP members have recently gained independence from large and mid-tier investment banks, and are
now looking for a platform where they can grow their own practice and brand within a compliant, professional and synergistic financial
service environment. We currently have 30 professionals with experience in the major verticals and can advise on most structures.
This variable cost model allows us to service our clients while keeping our operational expenses down.
We are headquartered
in San Francisco, CA with an additional office in New York, NY. As of December 31, 2014, we had 31 employees.
Executive Summary
Our total revenues increased by 60% to approximately
$15,928,000 in 2014 from approximately $9,960,000 in 2013. Net loss for 2014 was 59% less than that of 2013. Our 2014 net cash
provided by operating activities was approximately $356,000 primarily due to a reduction in net operating loss and decrease in
our securities positions.
Commissions – Commission revenue
from institutional brokerage business increased by 27% to approximately $5,319,000 in 2014 from approximately $4,202,000 in 2013.
The increase was primarily due to the hiring of two producers and increased production of the existing producers as a result of
favorable market conditions. The brokerage business continues to face increasing challenges, including the proliferation of
electronic communication networks which have reduced commission rates and profitability in the brokerage industry. Many large investment
banks have responded to lower margins within their equity brokerage divisions by reducing research coverage, particularly for smaller
companies, consolidating sales and trading services, and reducing headcount of sales and trading professionals.
Principal Transactions – Principal
transactions increased 354% to approximately $548,000 in 2014 from a net loss of approximately $215,000 in 2013. The increase was
due to trading gains, increased trading volume and favorable mark to market as a result of favorable market conditions. Principal
transaction revenues consist of customer principal trades, profits from our market making and proprietary trading activities, and
unrealized gain / (loss) on trading inventory and securities received in connection with certain investment banking transactions.
Our marketable security positions are accounted
for on a trade date basis and marked to market value daily. Returns from market making and proprietary trading activities tend
to be more volatile than those from customer agency and principal activities.
Investment Banking – Our investment
banking revenues, including FEP’s, increased 106% to $7,994,000 in 2014 from $3,887,000 in 2013. The increase is comprised
of a $2,979,000 or 150% increase in FEP’s revenues and a $1,127,000 or 83% increase in internal investment banking revenues.
Increase in investment banking revenues was primarily due to increased fees from two existing producers and the addition of two
producing groups in 2014.
Other Revenues – MC offers
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 were flat from year to year.
Employees – At December 31,
2014 and 2013, the Company had 31 and 29 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 2014. 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, 2014 and 2013:
| | |
Year Ended December 31, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Revenues | |
| | | |
| | |
| Commissions | |
$ | 5,319,002 | | |
$ | 4,201,980 | |
| Principal transactions | |
| 547,702 | | |
| (215,347 | ) |
| Investment banking | |
| 7,993,533 | | |
| 3,887,147 | |
| Advisory and other | |
| 2,067,959 | | |
| 2,086,127 | |
| | |
| | | |
| | |
| Total revenues | |
| 15,928,196 | | |
| 9,959,907 | |
| | |
| | | |
| | |
| Operating expenses | |
| | | |
| | |
| Compensation and benefits | |
| 12,411,925 | | |
| 8,024,014 | |
| Brokerage and clearing fees | |
| 442,590 | | |
| 440,098 | |
| Professional services | |
| 501,821 | | |
| 383,989 | |
| Occupancy and equipment | |
| 1,102,984 | | |
| 1,385,377 | |
| Communications and technology | |
| 813,830 | | |
| 727,286 | |
| Depreciation and amortization | |
| 217,044 | | |
| 82,664 | |
| Travel and entertainment | |
| 290,767 | | |
| 231,122 | |
| Legal services and litigation settlement expense | |
| 51,207 | | |
| 520,200 | |
| Cost of underwriting capital | |
| 10,770 | | |
| 49,600 | |
| Other | |
| 1,016,946 | | |
| 1,345,572 | |
| | |
| | | |
| | |
| Total operating expenses | |
| 16,859,884 | | |
| 13,189,922 | |
| | |
| | | |
| | |
| Operating loss | |
| (931,688 | ) | |
| (3,230,015 | ) |
| | |
| | | |
| | |
| Interest expense | |
| (383,002 | ) | |
| (340,381 | ) |
| Amortization of debt discount | |
| (41,914 | ) | |
| (128,326 | ) |
| Loss on early extinguishment of debt | |
| (271,322 | ) | |
| (293,347 | ) |
| | |
| | | |
| | |
| Net loss before income taxes | |
| (1,627,926 | ) | |
| (3,992,069 | ) |
| | |
| | | |
| | |
| Income tax expense | |
| - | | |
| - | |
| | |
| | | |
| | |
| Net loss | |
$ | (1,627,926 | ) | |
$ | (3,992,069 | ) |
Our total revenues increased
by 60% to approximately $15,928,000 in 2014 from approximately $9,960,000 in 2013. Net loss for 2014 was 59% less than that of
2013.
Investment Banking Revenues
Our investment banking activities include
the following:
| · | Capital Raising
– Capital raising activities include private placements of equity and debt instruments and underwritten public offerings. |
| |
· |
Financial Advisory – Financial advisory activities include advisory assignments with respect to mergers and acquisitions, divestures, restructurings and spin-offs. |
The following table sets forth our revenues
and transaction volumes from our investment banking activities for the years ended December 31:
| | |
2014 | | |
2013 | |
| Revenues: | |
| | | |
| | |
| Capital raising | |
$ | 7,184,537 | | |
$ | 3,196,419 | |
| Financial advisory | |
| 808,996 | | |
| 690,728 | |
| | |
| | | |
| | |
| Total investment banking revenues | |
$ | 7,993,533 | | |
$ | 3,887,147 | |
| | |
| | | |
| | |
| Transaction Volumes: | |
| | | |
| | |
| Public offerings: | |
| | | |
| | |
| Capital underwritten participations | |
$ | 2,925,000 | | |
$ | 93,500,000 | |
| Number of transactions | |
| 1 | | |
| 4 | |
| Private placements: | |
| | | |
| | |
| Capital raised | |
$ | 134,270,282 | | |
$ | 159,180,000 | |
| Number of transactions | |
| 19 | | |
| 14 | |
| Financial advisory: | |
| | | |
| | |
| Transaction amounts | |
$ | 10,000,000 | | |
$ | - | |
| Number of transactions | |
| 2 | | |
| 3 | |
Our investment banking revenues, including
FEP’s, increased 106% to $7,994,000 in 2014 from $3,887,000 in 2013. The increase is comprised of a $2,979,000 or 150% increase
in FEP’s revenues and a $1,127,000 or 83% increase in internal investment banking revenues. Increase in investment banking
revenues was primarily due to increased fees from two existing producers and the addition of two producing groups in 2014.
During the year ended December 31, 2014,
one investment banking client accounted for more than 10% of our total revenues. During the year ended December 31, 2013, no one
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 revenues 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 revenues
and losses and several operating metrics which we utilize in measuring and evaluating performance and the results of our trading
operations:
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Commissions: | |
| | | |
| | |
| Commissions on institutional equities | |
$ | 5,319,002 | | |
$ | 4,201,980 | |
| | |
| | | |
| | |
| | |
| | | |
| | |
| Principal transactions: | |
| | | |
| | |
| Customer principal transactions, proprietary | |
| | | |
| | |
| trading and market making | |
$ | 1,017,666 | | |
$ | 67,313 | |
| Investment portfolio | |
| (469,964 | ) | |
| (282,660 | ) |
| | |
| | | |
| | |
| Total principal transaction revenues | |
$ | 547,702 | | |
$ | (215,347 | ) |
| | |
| | | |
| | |
| Transaction volumes: | |
| | | |
| | |
| Number of shares traded | |
| 422,024,137 | | |
| 271,991,648 | |
Commission revenues were approximately $5,319,000
or 33% of total revenues in 2014, representing a $1,117,000 or 27% increase from those in 2013. The increase was primarily due
to the hiring of two producers and increased production of the existing producers as a result of favorable market conditions.
Principal transaction revenues consist of
four different activities – customer principal trades, market making, realized and unrealized gains and losses in our investment
portfolio. As a broker-dealer, we account for all of our marketable security positions on a trade date basis and as a result, all
security positions are marked to fair market values. Returns from market making activities tend to be more volatile than acting
as agent or principal for customers.
For the year ended December 31, 2014, principal
transaction revenues were approximately $548,000, consisting of a $1,018,000 gain from customer principal transactions and proprietary
trading and market making, partially offset by a $470,000 net loss in our investment portfolios.
For the year ended
December 31, 2014, one sales professional accounted for more than 10% of total revenues (approximately $3,230,000), and no customer
accounted for more than 10% of total revenues. For the year ended December 31, 2013, one sales professional accounted for more
than 10% of total revenues (approximately $2,490,000), and no customer accounted for more than 10% of total revenues.
Compensation and Benefit Expenses
Compensation and benefits expenses represent
the majority of our operating expenses and include commission payout, draws, base salaries, discretionary bonuses and stock-based
compensation. Sales professionals are paid commissions based on their production. Incentive compensation varies primarily
based on revenue production. Investment banking, research and support staff and executives are paid base salaries and may participate
in the discretionary bonus plans. Discretionary bonuses paid to investment bankers and research analysts vary with revenue production,
but also include other qualitative factors and are determined by management. Salaries, payroll taxes and employee benefits vary
based primarily on overall headcount.
The following table sets forth the major
components of our compensation and benefits for the years ended December 31, 2014 and 2013:
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Incentive compensation and discretionary bonuses | |
$ | 8,898,444 | | |
$ | 4,614,822 | |
| Salaries and wages | |
| 2,136,062 | | |
| 2,079,128 | |
| Stock-based compensation | |
| 665,680 | | |
| 642,436 | |
| Payroll taxes, benefits and other | |
| 712,350 | | |
| 687,628 | |
| | |
| | | |
| | |
| Total compensation and benefits | |
$ | 12,412,536 | | |
$ | 8,024,014 | |
| | |
| | | |
| | |
| | |
| | | |
| | |
| Total compensation and benefits as a percentage of revenues | |
| 78 | % | |
| 81 | % |
| Cash compensation and benefits as a percentage of revenues | |
| 74 | % | |
| 74 | % |
Total compensation and benefits were approximately
$12,413,000 and $8,024,000 for the years ended December 31, 2014 and 2013, respectively, an increase of approximately $4,389,000
or 55%. The increase mostly consisted of a $4,284,000 or 93% increase in incentive compensation and discretionary bonuses which
directly relates to the increase in revenues.
Of the total compensation and benefits for
the years ended December 31, 2014 and 2013, $3,962,000 and $1,577,000 were for FEP personnel, respectively.
Incentive compensation directly correlates
to commission revenues 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.
Operating Expenses
Brokerage and clearing fees include trade
processing expenses paid to our clearing broker, and execution fees paid to floor brokers and electronic communication networks.
MC is a fully-disclosed broker-dealer which contracts a third party clearing broker to perform all of the clearance functions.
The clearing broker-dealer processes and settles all of MC’s customer transactions and maintains the detailed customer records.
These expenses are almost entirely variable, and are based on commission revenues and trade volumes. Brokerage and clearing fees
in 2014 were flat as compared to 2013 despite increases in trading volumes and commission revenues due to (a) 2013 expenses included
a rebate per the clearing contract and (b) 2014 expenses included the reversal of an over-accrual in past year.
Professional service expenses include audit
and accounting fees, expenses related to investment banking transactions, and various consulting fees. Professional service expenses
in 2014 increased by $118,000 or 31% as compared to 2013 primarily due to (a) an employee hired in 2014 worked as a consultant
for two months prior to becoming a regular employee and (b) the Company outsourced its information technology need commencing in
June 2014.
Occupancy and equipment expenses include
rents and related costs of our office premises, equipment, software and hardware. Occupancy expense is largely fixed in nature
while equipment expense can vary somewhat in relation to our business operations. Occupancy and equipment expenses in 2014 decreased
by $282,000 or 20% as compared to 2013. The decrease is comprised of (a) a $372,000 or 29% decrease in rent, office equipment and
facilities related maintenance due to lower rent and facilities related maintenance expenses at the new premises, and (b) partially
offset by a $89,000 or 88% increase in software expenses as a direct result of a monthly software platform licensing fee commencing
in August 2014.
Communications and technology expenses include
market data and quote services, voice, data and internet service fees, and data processing costs. Communications and technology
expenses in 2014 increased by $87,000 or 12% as compared to 2013 due to higher market data service expenses resulting from new
hires, partially offset by a prior year rebate.
Depreciation and amortization relate to
the depreciation of our fixed assets and amortization of capital leases. Depreciation and amortization are mostly fixed in nature.
The increase in 2014 of approximately $134,000, or 163% as compared to 2013 was due to a number of capital equipment leases entered
into in the third quarter of 2013 and the amortization of capitalized software beginning in July 2014.
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 increase of approximately $60,000 or 26% on a year over year
basis directly related to higher investment banking revenues as more deals were closed in 2014.
Legal services and litigation settlement
expenses relate to our ongoing litigations. The decrease of $469,000 in 2014 or 90% as compared to 2013 is comprised of (a) $390,000
legal settlements incurred in 2013 and (b) $79,000 decrease in legal fees due the fact that in 2014, there were no litigations
against the Company.
Cost of underwriting capital in 2014 represents
borrowing cost of capital to supplement MC’s net capital to enable it to underwrite banking deals. Cost of underwriting capital
decreased by $39,000 or 78% as compared to 2013 due to the fact that only one banking deal closed in 2014 required underwriting
capital.
The following expenses are included in other
operating expenses for the years ended December 31, 2014 and 2013:
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Insurance | |
$ | 328,806 | | |
$ | 520,518 | |
| Regulatory & filing fees | |
| 227,124 | | |
| 203,615 | |
| Provision for uncollectible accounts receivable | |
| 209,750 | | |
| 277,308 | |
| Other | |
| 250,655 | | |
| 344,131 | |
| | |
| | | |
| | |
| Total other operating expenses | |
$ | 1,016,335 | | |
$ | 1,345,572 | |
Other operating expenses include insurance,
regulatory & filing fees, provision for uncollectible accounts receivable, investor conference and other miscellaneous expenses.
The decrease of approximately $329,000 or 24% on a year over year basis was comprised of (a) a $192,000 decrease in insurance due
to lower coverage and higher deductibles, (b) a $68,000 decrease in provision for uncollectible accounts receivable, (c) a $93,000
decrease in other miscellaneous expenses due to a non-recurring expense and office moving costs in 2013, partially offset by a
$24,000 increase in regulatory fees due to new hires in 2014.
Interest Income
Interest income represents interest earned
on our cash balances maintained at financial institutions.
Amortization of Debt Discounts
We issued various debts with stocks or warrants,
for which total proceeds were allocated to individual instruments based on the relative fair values of each instrument at the time
of issuance. The value of the stocks or warrants was recorded as discount on the debt and amortized over the term of the respective
debt using the effective interest method.
For the years ended December 31, 2014 and
2013, amortizations of debt discounts for the remaining debt and related warrants were $42,000 and $128,000, respectively.
Income Tax Expense
Income tax expenses of $0 were recorded
in 2014 and 2013 resulting in zero effective tax rates. The effective tax rate differs from the statutory rate primarily due
to the net operating loss carry-forwards offset by a 100% valuation allowance resulting in a tax provision equal to our expected
current benefit for the year.
The Company accounts
for income taxes under the provisions of Accounting Standards Codification ("ASC") 740 - Income Taxes. ASC 740 requires
the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements
and tax basis of assets and liabilities and the expected future tax benefit to be derived from tax loss and tax credit carry-forwards.
ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax
assets.
Critical Accounting Policies and Estimates
The consolidated financial statements are
prepared in accordance with U. S. GAAP, which require us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate
our estimates, including those related to the valuation of securities owned and deferred tax assets. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results could differ from those estimates. We believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Investment banking revenue includes underwriting
and private placement agency fees earned through the Company’s participation in public offerings and private placements of
equity and convertible debt securities and fees earned as financial advisor in mergers and acquisitions and similar transactions.
Underwriting revenue is earned in securities offerings in which the Company acts as an underwriter and includes management fees,
underwriting fees and selling concessions. Fee revenue relating to underwriting commitments is recorded when all significant items
relating to the underwriting cycle have been completed and the amount of the underwriting revenue has been determined.
Syndicate expenses related to securities
offerings in which the Company acts as underwriter or agent are deferred until the related revenue is recognized or we determine
that it is more likely than not that the securities offerings will not ultimately be completed. Underwriting revenue is recorded
net of related expenses. As co-manager for registered equity underwriting transactions, management must estimate the Company’s
share of transaction related expenses incurred by the lead manager in order to recognize revenue. Transaction-related expenses
are deducted from the underwriting fee and therefore reduce the revenue that is recognized as co-manager. Such amounts are adjusted
to reflect actual expenses in the period in which the Company receives the final settlement, typically 90 days following the closing
of the transaction.
Merger and acquisition fees and other advisory
service revenue are generally earned and recognized only upon successful completion of the engagement. Unreimbursed expenses associated
with private placement and advisory transactions are recorded as expenses as incurred.
Commission revenues and related clearing
expenses are recorded on a trade-date basis as security transactions occur. Principal transactions in regular-way trades are recorded
on the trade date, as if they had settled. Profit and loss arising from all securities transactions entered into for the account
and risk of our Company are recorded on a trade-date basis.
Fair Value of
Financial Instruments
Substantially all of the Company’s
financial instruments are recorded at fair value or contract amounts that approximate fair value. The carrying amounts of the Company’s
financial instruments, which include cash and cash equivalents, securities owned, restricted cash, due from clearing broker, accounts
receivable, accounts payable, commissions and bonus payable, accrued expenses and other, securities sold, not yet purchased, deferred
revenue, and capital lease obligations, 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
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, and warrants, the Company uses the Black-Scholes option pricing model, which is affected by its 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 stock-based compensation expense because a valuation allowance was maintained for all net
deferred tax assets.
Fair Value Accounting of Equity-Based Compensation
The Company used the Market Approach to
arrive at an estimated fair value of the Company’s common stock used in the Black-Scholes option pricing model to determine
the fair value of the option grants made during the years ended December 31, 2014 and 2013.
The Market Approach (for determining
the fair market value of the Company’s common stock) is based on the economic principle of competition (i.e., in a free
market, forces of demand and supply will direct the values of businesses to a particular balance). Valuation under the Market
Approach entails both the application of appropriate market-based multiples selected from guideline public companies (GPCs)
to parameters such as level of earnings, cash flow, revenues, invested capital or other financial factors (financial metrics)
that represent the subject company's future financial performance and from cash transactions related to the sale of
securities of the Company. This method is based on the idea of determination of the price at which the company will be exchanged in
the public market, and is particularly useful for valuing companies that are currently profitable and expected to continue
making profits in the foreseeable future.
Under the Market Approach, the Company used
the following methods:
| • | Observable inputs from
the trading of its common stock on OTCQX; |
| • | Guidelines Public Companies’
Trading Multiples Method (“GPC”); |
| • | Back Solve approach
(derived from the Company’s actual security transactions). |
As of December 31, 2014 and 2013, the fair
market value of the Company’s common stock was $1.46 and $0.90 per share, respectively.
Deferred Tax Valuation Allowance
The Company accounts for income taxes in
accordance with the provision of ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities
at tax rates expected to be in effect when these balances reverse. Future tax benefits attributable to temporary differences are
recognized to the extent that the realization of such benefits is more likely than not. The Company has concluded that it is not
more likely than not that it will be able to realize the benefit of its deferred tax assets as of December 31, 2014 and 2013, based
on the scheduling of deferred tax liabilities and projected taxable income. The amount of the deferred tax assets actually realized,
however, could vary if there are differences in the timing or amount of future reversals of existing deferred tax liabilities or
changes in the actual amounts of future taxable income. Should the Company determine that it will be able to realize all or part
of the deferred tax asset in the future, an adjustment to the deferred tax asset will be recorded in the period such determination
is made.
Liquidity/Going Concern
The Company incurred substantial losses
in 2014 and 2013 of $1,628,000 and $3,992,000, respectively. As of December 31, 2014, the Company had an accumulated deficit of
$150,537,000 and a shareholders’ deficit of $102,000. These facts raise substantial doubt as to the Company’s ability
to continue as a going concern.
The consolidated financial
statements have been prepared assuming the Company will continue on a going concern basis which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business and do not include any adjustments that might result
from uncertainty about the Company’s ability to continue as a going concern.
Management’s plan to alleviate the
going-concern uncertainty includes, but is not limited to, the issuance of equity and debt instruments for working capital. The
Company’s continued existence is also dependent upon its ability to increase revenues generated from operations which will
enable the Company to achieve a profitable level of operations.
If anticipated
operating results are not achieved, management has the intent, and believes it has the ability, to further delay or reduce expenditures.
In such case, the further reduction in operating expenses might need to be substantial. Failure to generate sufficient cash flows
from operations, raise additional capital, or reduce certain discretionary spending would have a material adverse effect on the
Company’s ability to achieve its intended business objectives. The Company can give no assurance that it will be successful
in its plans and can give no assurance that additional financing will be available on terms advantageous to the existing terms
or that additional financing will be available at all. Should the Company not be successful in obtaining the necessary financing
to fund its operations, the Company would need to curtail certain or all of its operational activities and/or contemplate the
sale of its assets if necessary.
Contractual Obligations
The following is a table summarizing our
significant contractual obligations as of December 31, 2014, consisting of long term debt and non-cancellable payments under office,
operating leases and capital leases with initial or remaining terms in excess of one year.
| | |
Notes Payable | | |
Leases | | |
| |
| | |
Unrelated | | |
Related | | |
Office | | |
Operating | | |
Capital | | |
Total | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| 2015 | |
$ | 770,000 | | |
$ | 2,316,600 | | |
$ | 1,343,760 | | |
$ | 635,700 | | |
$ | 129,885 | | |
$ | 5,195,945 | |
| 2016 | |
| 50,000 | | |
| 35,000 | | |
| 1,353,354 | | |
| 37,200 | | |
| 100,499 | | |
| 1,576,053 | |
| 2017 | |
| - | | |
| 464,000 | | |
| 1,421,854 | | |
| 37,200 | | |
| 47,902 | | |
| 1,970,956 | |
| 2018 | |
| - | | |
| - | | |
| 1,437,268 | | |
| - | | |
| - | | |
| 1,437,268 | |
| 2019 | |
| - | | |
| - | | |
| 1,447,599 | | |
| - | | |
| - | | |
| 1,447,599 | |
| Thereafter | |
| - | | |
| - | | |
| 742,063 | | |
| - | | |
| - | | |
| 742,063 | |
| Total Contractual Obligations | |
| 820,000 | | |
| 2,815,600 | | |
| 7,745,898 | | |
| 710,100 | | |
| 278,286 | | |
| 12,369,884 | |
| Debt Discount | |
| (10,380 | ) | |
| (20,534 | ) | |
| - | | |
| - | | |
| - | | |
| (30,914 | ) |
| Interest | |
| - | | |
| - | | |
| - | | |
| - | | |
| (8,567 | ) | |
| (8,567 | ) |
| Net Contractual Obligations | |
$ | 809,620 | | |
$ | 2,795,066 | | |
$ | 7,745,898 | | |
$ | 710,100 | | |
$ | 269,719 | | |
$ | 12,330,403 | |
Off-Balance Sheet Arrangements
We were not a party to any off-balance
sheet arrangements during the two years ended December 31, 2014. In particular, we do not have any interest in so-called limited
purpose entities, which include special purpose entities and structured finance entities.
Notes Payable –Related Party
Unsecured Promissory Notes
Of the $2,065,600 Unsecured Promissory Notes,
$840,000 was originally loaned from the Co Chairman of the Board of Directors, Ronald L. Chez. On September 29, 2013, the principal,
together with $201,600 accrued interest were consolidated into an Unsecured Promissory Note maturing on March 29, 2014. The new
note bears interest at nine percent (9%) per annum payable monthly and five percent (5%) per annum payable at maturity. On March
27, 2014, the terms of the $1,041,600 Unsecured Promissory Note were modified for the note to mature on December 31, 2014 at the
same interest rates plus warrants to purchase 111,190 shares of the Company’s common stock at $2.40 per share. On December
30, 2014, this note was further modified to mature on August 31, 2015 under the same terms.
The Company accounted for this transaction as
a modification of debt, whereby a gain or loss was calculated as the difference between the fair value of the modified debt and
net carrying value of the old debt. The fair value of the modified debt was determined as the sum of the face value of the debt
and fair value of the warrants using the Black-Scholes fair value model. For the year ended December 31, 2014, a loss of approximately
$262,000 was recorded on the transaction, representing the fair value of the warrants.
For the years ended December 31, 2014 and 2013,
interest expenses incurred on this Unsecured Promissory Note were $146,000 and $146,000, respectively. Total interests of $73,000
and $21,000 remain outstanding as of December 31, 2014 and 2013, respectively, and are included in accrued expenses and other in
the condensed consolidated statements of financial condition.
Unsecured Convertible Promissory Notes
On November 1, 2013, the Company’s Chief
Executive Officer loaned $30,000 to the Company in an unsecured convertible promissory note maturing on April 1, 2014. The note
bears interest rate at five percent (5%) per annum payable at maturity. At any time following the date of issue and prior to repayment,
the outstanding principal and accrued interest are convertible to common shares of the Company at $1.80 per share. On March 30,
2014, the maturity date was extended to December 31, 2014 under the same terms. On December 30, 2014, the maturity date was extended
to August 31, 2015 under the same terms.
On January 15, 2014, a common shareholder who
is also an employee loaned $35,000 to the Company in an unsecured convertible promissory note maturing on January 15, 2016. The
note bears interest rate at five percent (5%) per annum payable at maturity. At any time following the date of issue and prior
to repayment, the outstanding principal and accrued interest are convertible to common shares of the Company at $1.80 per share.
Secured Demand Notes
On June 30, 2014, MC entered
into two three-year secured demand notes with the Company’s Chief Executive Officer and a director of the Company, Dennis
G. Schmal, in the amount of $100,000 and $364,000, respectively. The notes bear interest at 8% per annum, payable quarterly. The
notes comply with FINRA’s prescribed regulations and are accounted for as equity subordination in accordance with SEC Rule
15c3-1(d). The notes are subordinated to the claims of present and future creditors of MC and cannot be repaid, if such repayment
will cause MC to fail to meet its minimum net capital requirements in accordance with SEC Rule 15c3-1.
The notes and their corresponding
liabilities are included notes receivable and notes payable to related parties, respectively, in the consolidated statements of
financial condition.
For the years ended December 31, 2014 and 2013, interest expenses
incurred on these secured demand notes were $19,000 and $0, respectively. Total interests of $9,000 remain outstanding as of December
31, 2014 and are included in accrued expenses and other in the consolidated statements of financial condition.
Temporary Subordinated Borrowings
On December 30, 2014, MC
borrowed $495,000 from the Co-Chairman of the Company’s 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 through December 31, 2014 were
$2,970 and included in cost of underwriting capital in the consolidated statements of operations. The loan and related fees were
paid in full on February 3, 2015.
On October 23, 2014, MC
borrowed $300,000 from the Co-Chairman of the Company’s 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 $7,800 and were included
in cost of underwriting capital in the consolidated statements of operations. The loan and related fees were paid in full on November
5, 2014.
Equity Lending Note
On August 31, 2012, the Company’s Chief
Executive Officer loaned $175,000 to the Company in a three year secured equity lending note (the “Equity Lending Note”)
at an interest rate of eight percent (8%) per annum payable quarterly in arrears. This note is secured by a security interest in
and right of setoff against all of the Company’s right, title and interest in and 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. Additional consideration
in the form of 69,444 warrants to purchase common shares of the Company at $18.90 per share was issued to the lender. The warrants
expire on August 31, 2015.
This transaction was accounted for as an issuance
of debt with warrants and the proceeds were allocated to the 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 Equity
Lending Note was $13,000 which was recorded as a discount on the debt and applied against the Equity Lending Note. The note collateral
has a carrying value of $175,000 and is included in other assets in the consolidated statement of financial condition as of December
31, 2014.
Secured Promissory Notes
On August 31, 2012, the Company’s Co-Chairman
of the Board of Directors loaned $250,000 to the Company in a three year secured promissory note (the “August 2012 Secured
Promissory Note”) at an interest rate of eight percent (8%) per annum payable quarterly in arrears. This note is secured
by a security interest in and right of setoff against all of the Company’s right, title and interest in and 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.
Additional consideration in the form of 99,206 warrants to purchase common shares of the Company at $0.63 per share was issued
to the lender. The warrants expire on August 31, 2015.
This transaction was accounted for as an issuance
of debt with warrants and the proceeds were allocated to the 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 August
2012 Secured Promissory Note was $19,000 which was recorded as a discount on the debt and applied against the August 2012 Secured
Promissory Note.
On September 27, 2012, the Company’s Co-Chairman
of the Board of Directors loaned $125,000 to the Company in a three year secured promissory note (the “September 2012 Secured
Promissory Note”) at an interest rate of eight percent (8%) per annum payable quarterly in arrears. This note is secured
by a security interest in and right of setoff against all of the Company’s right, title and interest in and 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.
Additional consideration in the form of 236,250 warrants to purchase common shares of the Company at $0.63 per share was issued
to the lender. The warrants expire on September 27, 2015.
This transaction was accounted for as an issuance
of debt with warrants and the proceeds were allocated to the 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 September
2012 Secured Promissory Note was $45,000 which was recorded as a discount on the debt and applied against the September 2014 Secured
Promissory Note.
On December 13, 2012, the Co-Chairman of the
Board of Directors loaned $200,000 to the Company in a secured promissory note (the “December 2012 Secured Promissory Note”)
maturing on September 13, 2013 and bearing interest rates at eight percent (8%) per annum payable at maturity. The December 2012
Secured Promissory Note was extended a few times maturing on August 31, 2015. Effective on September 26, 2013, interest rate increased
to ten percent (10%) per annum payable at maturity. Additional consideration included 625,000 warrants to purchase the Company
common stock at $2.40 per share.
On September 12, 2013 the Co-Chairman of the
Board of Directors loaned $166,028 to the Company in a secured promissory note maturing on February 7, 2014, bearing interest
rates at ten percent (10%) per annum payable at maturity. Principal amount and accrued interest were paid in full on January 23,
2014.
Software Platform Purchase
In December 2013, the Company purchased a software platform
called Digital Capital Network (“DCN”), an online capital marketplace, from an entity owned by a member of the Board
of Directors, Robert K. Ward. The purchase price consisted of $160,000 cash and 88,164 shares
of the Company’s common stock valued at $1.80 per share at the time of issuance. The Company also entered into a licensing
agreement to pay the entity owned by Robert K. Ward $18,000 a month.
For the years ended December 31, 2014 and
2013, cash payments made to the entity owned by Robert K. Ward were $218,000 and $184,400, respectively.
Other Related Party Transactions
On June 17, 2014, MC
sold 1 share of common stock each to the Company’s Chief Executive Officer and Chairman of the Audit Committee for $96.00
per share.
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’ Deficit |
| · | 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
To the Audit Committee of the
Board of Directors and Shareholders
of Merriman Holdings, Inc.
We have audited the accompanying consolidated
statements of financial condition of Merriman Holdings, Inc. (the “Company”) as of December 31, 2014 and 2013, and
the related consolidated statements of operations, statements of shareholders’ deficit and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these consolidated financial statements based on our audit.
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 consolidated 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 controls over financial reporting. Our
audit included consideration of internal controls 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 controls
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 consolidated 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 consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Merriman Holdings, Inc. as of
December 31, 2014 and 2013, and the results of its operations and cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company has recurring losses, negative cash flows from operations and an accumulated deficit as of December
31, 2014 and 2013. These conditions raise substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Marcum LLP
Marcum LLP
New York, New York
March 31, 2015
MERRIMAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | |
Year Ended December 31, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Revenues | |
| | | |
| | |
| Commissions | |
$ | 5,319,002 | | |
$ | 4,201,980 | |
| Principal transactions | |
| 547,702 | | |
| (215,347 | ) |
| Investment banking | |
| 7,993,533 | | |
| 3,887,147 | |
| Advisory and other | |
| 2,067,959 | | |
| 2,086,127 | |
| | |
| | | |
| | |
| Total revenues | |
| 15,928,196 | | |
| 9,959,907 | |
| | |
| | | |
| | |
| Operating expenses | |
| | | |
| | |
| Compensation and benefits | |
| 12,412,536 | | |
| 8,024,014 | |
| Brokerage and clearing fees | |
| 442,590 | | |
| 440,098 | |
| Professional services | |
| 501,821 | | |
| 383,989 | |
| Occupancy and equipment | |
| 1,102,984 | | |
| 1,385,377 | |
| Communications and technology | |
| 813,830 | | |
| 727,286 | |
| Depreciation and amortization | |
| 217,044 | | |
| 82,664 | |
| Travel and entertainment | |
| 290,767 | | |
| 231,122 | |
| Legal services and litigation settlement expense | |
| 51,207 | | |
| 520,200 | |
| Cost of underwriting capital | |
| 10,770 | | |
| 49,600 | |
| Other | |
| 1,016,335 | | |
| 1,345,572 | |
| | |
| | | |
| | |
| Total operating expenses | |
| 16,859,884 | | |
| 13,189,922 | |
| | |
| | | |
| | |
| Operating loss | |
| (931,688 | ) | |
| (3,230,015 | ) |
| | |
| | | |
| | |
| Interest expense | |
| (383,002 | ) | |
| (340,381 | ) |
| Amortization of debt discount | |
| (41,914 | ) | |
| (128,326 | ) |
| Loss on early extinguishment of debt | |
| (271,322 | ) | |
| (293,347 | ) |
| | |
| | | |
| | |
| Net loss before income taxes | |
| (1,627,926 | ) | |
| (3,992,069 | ) |
| | |
| | | |
| | |
| Income tax expense | |
| - | | |
| - | |
| | |
| | | |
| | |
| Net loss | |
$ | (1,627,926 | ) | |
$ | (3,992,069 | ) |
| | |
| | | |
| | |
| Basic and diluted net loss per share | |
| | | |
| | |
| | |
| | | |
| | |
| Net loss | |
$ | (0.37 | ) | |
$ | (1.32 | ) |
| | |
| | | |
| | |
| Weighted average number of common shares | |
| | | |
| | |
| Basic and diluted | |
| 4,421,472 | | |
| 3,034,916 | |
The accompanying notes are an integral part of these
consolidated financial statements.
MERRIMAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION
| | |
As of December 31, | |
| | |
2014 | | |
2013 | |
| ASSETS | |
| | | |
| | |
| Cash and cash equivalents | |
$ | 1,668,019 | | |
$ | 1,044,110 | |
| Securities owned | |
| | | |
| | |
| Marketable, at fair value | |
| 210,267 | | |
| 1,176,347 | |
| Not readily marketable, at estimated fair value | |
| 1,473,459 | | |
| 671,801 | |
| Restricted cash | |
| 250,000 | | |
| 891,828 | |
| Due from clearing broker | |
| 36,407 | | |
| 97,811 | |
| Accounts receivable, net | |
| 469,991 | | |
| 532,431 | |
| Prepaid expenses and other assets | |
| 265,057 | | |
| 181,219 | |
| Secured demand notes | |
| 639,000 | | |
| 175,000 | |
| Capitalized software, net | |
| 418,333 | | |
| 318,696 | |
| Equipment and fixtures, net | |
| 286,811 | | |
| 341,258 | |
| | |
| | | |
| | |
| Total assets | |
$ | 5,717,344 | | |
$ | 5,430,501 | |
| | |
| | | |
| | |
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | |
| | | |
| | |
| Liabilities | |
| | | |
| | |
| Accounts payable | |
$ | 251,629 | | |
$ | 317,272 | |
| Commissions and bonus payable | |
| 298,547 | | |
| 418,075 | |
| Accrued expenses and other | |
| 768,051 | | |
| 814,946 | |
| Deferred rent | |
| 542,275 | | |
| 428,540 | |
| Deferred revenue | |
| 84,088 | | |
| 70,378 | |
| Capital lease obligation | |
| 269,719 | | |
| 360,795 | |
| Notes payable, net of debt discount | |
| 809,620 | | |
| 1,226,521 | |
| Notes payable to related parties, net of debt discount | |
| 2,795,065 | | |
| 1,940,601 | |
| | |
| | | |
| | |
| Total liabilities | |
| 5,818,994 | | |
| 5,577,128 | |
| | |
| | | |
| | |
| Commitments and contingencies | |
| - | | |
| - | |
| | |
| | | |
| | |
| Shareholders’ deficit | |
| | | |
| | |
| 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, 2014 and | |
| | | |
| | |
| December 31, 2013; 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, 2014 and | |
| | | |
| | |
| December 31, 2013; 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, 2014 and | |
| | | |
| | |
| December 31, 2013; aggregate liquidation preference of $0 | |
| | | |
| | |
| Convertible preferred stock, Series D–$0.0001 par value; 24,000,000 shares authorized; | |
| | | |
| | |
| 23,720,916 shares issued and 0 shares outstanding as of December 31, 2014 and | |
| | | |
| | |
| December 31, 2013; aggregate liquidation preference of $0 prior to conversion, | |
| | | |
| | |
| and pari passu with common stock on conversion | |
| | | |
| | |
| Convertible Preferred stock, Series E–$0.0001 par value; 7,300,000 shares authorized; | |
| | | |
| | |
| 6,825,433 shares issued and 0 shares outstanding as of December 31, 2014 and | |
| | | |
| | |
| December 31, 2013; aggregate liquidation preference of $0 prior to conversion, | |
| | | |
| | |
| and pari passu with common stock on conversion | |
| - | | |
| - | |
| Common stock, $0.0001 par value; 300,000,000 shares authorized; | |
| | | |
| | |
| 4,519,614 and 4,141,838 shares issued and 4,518,633 and 4,140,857 shares | |
| | | |
| | |
| outstanding as of December 31, 2014 and December 31, 2013, respectively | |
| 452 | | |
| 414 | |
| Additional paid-in capital | |
| 150,660,289 | | |
| 148,987,424 | |
| Treasury stock, at cost, 981 shares | |
| (225,613 | ) | |
| (225,613 | ) |
| Accumulated deficit | |
| (150,536,778 | ) | |
| (148,908,852 | ) |
| | |
| | | |
| | |
| Total shareholders’ deficit | |
| (101,650 | ) | |
| (146,627 | ) |
| | |
| | | |
| | |
| Total liabilities and shareholders’ deficit | |
$ | 5,717,344 | | |
$ | 5,430,501 | |
The accompanying notes are an integral part of these
consolidated financial statements.
MERRIMAN HOLDINGS,
INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
DEFICIT
| | |
Preferred
Stock | | |
Common
Stock | | |
Treasury
Stock | | |
Paid-in | | |
Accumulated | | |
| |
| | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance
at January 1, 2013 | |
| 23,305,378 | | |
$ | 2,331 | | |
| 180,838 | | |
$ | 543 | | |
| 981 | | |
$ | (225,613 | ) | |
$ | 144,673,121 | | |
$ | (144,916,783 | ) | |
$ | (466,401 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net loss | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (3,992,069 | ) | |
| (3,992,069 | ) |
| Conversion
of Series D Convertible | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Preferred
Stock to common stock | |
| (17,001,579 | ) | |
| (1,701 | ) | |
| 193,404 | | |
| 580 | | |
| - | | |
| - | | |
| 1,121 | | |
| - | | |
| - | |
| Conversion
of Series E Convertible | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Preferred
Stock to common stock | |
| (6,303,799 | ) | |
| (630 | ) | |
| 210,126 | | |
| 630 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| Issuance
of restricted common stock and warrants for cash | |
| - | | |
| - | | |
| 2,124,862 | | |
| 6,375 | | |
| - | | |
| - | | |
| 1,996,001 | | |
| - | | |
| 2,002,376 | |
| Issuance
of restricted common stock for other assets | |
| - | | |
| - | | |
| 88,164 | | |
| 264 | | |
| | | |
| | | |
| 158,431 | | |
| | | |
| 158,695 | |
| Issuance
of restricted common stock and warrants | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| in
connection with debt conversion | |
| - | | |
| - | | |
| 1,344,444 | | |
| 4,034 | | |
| - | | |
| - | | |
| 1,499,314 | | |
| - | | |
| 1,503,348 | |
| Adjust common
stock par value due to reverse stock split | |
| | | |
| |
|
|
|
| | |
| (12,012 | ) | |
| | | |
| | | |
| 12,012 | | |
| | | |
| - | |
| Stock-based
compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 647,424 | | |
| - | | |
| 647,424 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance at December
31, 2013 | |
| - | | |
$ | - | | |
| 4,141,838 | | |
$ | 414 | | |
| 981 | | |
$ | (225,613 | ) | |
$ | 148,987,424 | | |
$ | (148,908,852 | ) | |
$ | (146,627 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net loss | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (1,627,926 | ) | |
| (1,627,926 | ) |
| Issuance
of restricted common stock and warrants for cash | |
| |
|
|
|
| | |
| 377,776 | | |
| 38 | | |
| | | |
| | | |
| 677,606 | | |
| | | |
| 677,644 | |
| Issuance
of warrants in connection with letter of credit guaranty | |
| |
|
|
|
| | |
| | | |
| | | |
| | | |
| | | |
| 45,934 | | |
| | | |
| 45,934 | |
| Issuance
of warrants in connection with loan extension | |
| |
|
|
|
| | |
| | | |
| | | |
| | | |
| | | |
| 12,323 | | |
| | | |
| 12,323 | |
| Issuance
of warrants in connection with debt modification | |
| |
|
|
|
| | |
| | | |
| | | |
| | | |
| | | |
| 271,322 | | |
| | | |
| 271,322 | |
| Stock-based
compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 665,680 | | |
| - | | |
| 665,680 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance
at December 31, 2014 | |
| - | | |
$ | - | | |
| 4,519,614 | | |
$ | 452 | | |
| 981 | | |
$ | (225,613 | ) | |
$ | 150,660,289 | | |
$ | (150,536,778 | ) | |
$ | (101,650 | ) |
The accompanying notes are an integral
part of these consolidated financial statements.
MERRIMAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | |
Year Ended December 31, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Cash flows from operating activities: | |
| | | |
| | |
| Net loss | |
$ | (1,627,926 | ) | |
$ | (3,992,069 | ) |
| Adjustments to reconcile net loss to net cash | |
| | | |
| | |
| provided by (used in) operating activities: | |
| | | |
| | |
| Depreciation and amortization | |
| 83,819 | | |
| 11,619 | |
| Amortization of capital leases | |
| 133,225 | | |
| 71,405 | |
| Stock-based compensation | |
| 665,680 | | |
| 647,424 | |
| Amortization of debt issuance costs | |
| 41,914 | | |
| 128,325 | |
| Loss on early extinguishment of debt | |
| 271,322 | | |
| 293,347 | |
| Provision for uncollectible accounts receivable | |
| 209,750 | | |
| 277,308 | |
| Securities received for services | |
| (1,844,805 | ) | |
| (728,662 | ) |
| Unrealized loss on securities owned | |
| 554,585 | | |
| 429,332 | |
| Changes in operating assets and liabilities: | |
| | | |
| | |
| Securities owned | |
| 1,454,642 | | |
| (111,172 | ) |
| Restricted cash | |
| 641,828 | | |
| (211,800 | ) |
| Due from clearing broker | |
| 61,404 | | |
| 29,890 | |
| Accounts receivable | |
| (147,309 | ) | |
| (276,133 | ) |
| Prepaid expenses and other assets | |
| (37,903 | ) | |
| 148,700 | |
| Accounts payable | |
| (65,644 | ) | |
| 45,860 | |
| Commissions payable | |
| (119,528 | ) | |
| 14,097 | |
| Accrued expenses and other | |
| 80,550 | | |
| 387,084 | |
| | |
| | | |
| | |
| Net cash provided by (used in) operating activities | |
| 355,604 | | |
| (2,835,805 | ) |
| | |
| | | |
| | |
| Cash flows from investing activities: | |
| | | |
| | |
| Purchase of software platform | |
| (145,980 | ) | |
| (160,000 | ) |
| Purchase of equipment and fixtures | |
| (116,254 | ) | |
| (6,600 | ) |
| | |
| | | |
| | |
| Net cash used in investing activities | |
| (262,234 | ) | |
| (166,600 | ) |
| | |
| | | |
| | |
| Cash flows from financing activities: | |
| | | |
| | |
| Issuance of restricted common stock | |
| 677,643 | | |
| 2,002,376 | |
| Proceeds from issuance of secured promissory note | |
| 100,000 | | |
| 166,028 | |
| Proceeds from issuance of secured convertible promissory note | |
| - | | |
| 600,000 | |
| Proceeds from issuance of unsecured convertible promissory note | |
| 85,000 | | |
| 150,000 | |
| Proceeds from issuance of temporary subordinated borrowings | |
| 795,000 | | |
| 1,600,000 | |
| Payment of temporary subordinated borrowings | |
| (300,000 | ) | |
| (1,600,000 | ) |
| Payment of notes payable | |
| (736,028 | ) | |
| (150,000 | ) |
| Principal payments of capital leases | |
| (91,076 | ) | |
| (38,879 | ) |
| | |
| | | |
| | |
| Net cash provided by financing activities | |
| 530,539 | | |
| 2,729,525 | |
| | |
| | | |
| | |
| Increase (decrease) in cash and cash equivalents | |
| 623,909 | | |
| (272,880 | ) |
| | |
| | | |
| | |
| Cash and cash equivalents at beginning of the year | |
| 1,044,110 | | |
| 1,316,990 | |
| | |
| | | |
| | |
| Cash and cash equivalents at end of the year | |
$ | 1,668,019 | | |
$ | 1,044,110 | |
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, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Supplementary disclosure of cash flow information: | |
| | | |
| | |
| Cash paid during the year: | |
| | | |
| | |
| Cost of underwriting capital | |
$ | 10,770 | | |
$ | 80,800 | |
| Interest expense | |
$ | 305,673 | | |
$ | 449,263 | |
| | |
| | | |
| | |
| Non-cash financing activities: | |
| | | |
| | |
| Warrants issued in connection with issuance of debt | |
$ | 12,323 | | |
$ | - | |
| Debt conversion | |
$ | - | | |
$ | (1,210,000 | ) |
| Issuance of restricted common stock and warrants | |
| | | |
| | |
| in connection with debt conversion | |
$ | - | | |
$ | 1,210,000 | |
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
(the Company) is a financial services holding company that provides capital markets advisory and research, corporate and investment
banking services through its wholly-owned operating subsidiary, Merriman Capital, Inc. (hereafter MC). MC is an investment bank
and securities broker-dealer whose clients are fast growing public and private companies and the entrepreneurs who manage those
companies. MC facilitates efficient capital formation through a proprietary digital network (DCN). MC is registered with the Securities
and Exchange Commission (SEC) as a broker-dealer and is a member of the Financial Industry Regulatory Authority (FINRA) and Securities
Investor Protection Corporation (SIPC).
The Company is a Delaware corporation incorporated
on May 6, 1987. The Company’s common stock is listed on the OTCQX where it currently trades under the symbol “MERR.”
The Company’s corporate office is located in San Francisco, CA with an additional office in New York, NY.
COR Clearing LLC became
the Company’s clearing broker effective March 16, 2015.
2. Liquidity/Going Concern
The Company incurred substantial losses
in 2014 and 2013, having net losses of $1,628,000 and $3,992,000, respectively. As of December 31, 2014, the Company had an accumulated
deficit of $150,537,000 and a shareholders’ deficit of $102,000. These facts raise substantial doubt as to the Company’s
ability to continue as a going concern.
The consolidated financial
statements have been prepared assuming the Company will continue on a going concern basis which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business and do not include any adjustments that might result
from uncertainty about the Company’s ability to continue as a going concern.
Management’s plan to alleviate the
going-concern uncertainty includes, but is not limited to, the issuance of equity and debt instruments for working capital. The
Company’s continued existence is also dependent upon its ability to increase revenues generated from operations which will
enable the Company to achieve a profitable level of operations.
If anticipated
operating results are not achieved, management has the intent, and believes it has the ability, to further delay or reduce expenditures.
In such case, the further reduction in operating expenses might need to be substantial. Failure to generate sufficient cash flows
from operations, raise additional capital, or reduce certain discretionary spending would have a material adverse effect on the
Company’s ability to achieve its intended business objectives. The Company can give no assurance that it will be successful
in its plans and can give no assurance that additional financing will be available on terms advantageous to the existing terms
or that additional financing will be available at all. Should the Company not be successful in obtaining the necessary financing
to fund its operations, the Company would need to curtail certain or all of its operational activities and/or contemplate the
sale of its assets if necessary.
MERRIMAN HOLDINGS,
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting
Policies
Principles of Consolidation
As of December 31, 2014 and 2013, the Company
has two 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.
Segment Reporting
Currently, the Company’s business
results are categorized into three operating segments: MC, Financial Entrepreneurial Platform (FEP) and Capital Market Advisory
Services (CMAG). FEP is an investment banking division assisting corporate issuers in raising capital through a network of independent
investment bankers. CMAG is its capital market advisory services assisting clients to obtain listing on OTCQX, a tier of Pink Sheets.
The Company's reportable segments are strategic
business units that offer products and services which are compatible with its core business strategy. 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 FEP segment includes capital raising services through a network of
independent investment bankers and CMAG includes assisting corporate issuers in listing on OTCQX, the premier OTC Market tier,
along with other services that facilitate the access to institutional capital markets.
The Company recognizes revenues earned by
FEP 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 FEP. Revenues earned by FEP are recognized consistent with the Company’s
revenue recognition policies as disclosed herein.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States 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. Significant estimates include stock-based compensation, allowance for the deferred tax asset and the Company’s
Level 3 securities.
Subsequent Events
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.
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. There were no changes to reported net loss.
Reverse Stock Split
The Company announced a reverse stock split
which became effective on July 14, 2014. The ratio of the reverse stock split is 1-for-30 shares of the Company's issued and outstanding
common stock. Accordingly, each 30 shares of common stock have been converted into one share of common stock. The consolidated
financial statements have been restated to reflect the reverse stock split for all periods presented herein.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers all highly liquid
investments purchased with original maturities of ninety days or less to be cash equivalents.
Restricted Cash
Restricted cash as
of December 31, 2014 included cash on deposit with the Company’s clearing organization.
Due From/To Clearing Broker
The Company clears all of its brokerage
transactions through a clearing broker 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.
COR Clearing LLC became
the Company’s clearing broker effective March 16, 2015.
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” and “Non-marketable.” 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, commission 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
3. Summary of Significant Accounting Policies (continued)
Fair Value Measurement—Definition and Hierarchy
(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 6.
Accounts Receivable, Allowance for Doubtful Accounts
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.
At December 31, 2014 and 2013, the allowance
for doubtful accounts was $132,750 and $0, respectively.
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. Maintenance and repairs are charged to expenses as incurred; costs
of major additions and betterments that extend the useful lives of the assets are capitalized. When assets are retired or otherwise
disposed of, the costs and related accumulated depreciation or amortization are removed from the accounts and any gain or loss
on disposal is recognized.
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
3. Summary of Significant Accounting Policies (continued)
Commission and Principal Transaction Revenues
Commission revenues
include revenues 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 exchange-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 revenues and related clearing expenses are recorded on
a trade-date basis as security transactions occur.
Principal transactions
in regular-way trades (i.e., trades settled through normal channels in three business days) are recorded on the trade date, as
if they had settled. Profits and losses arising from all securities transactions entered into for the account and at the risk of
the Company are recorded on a trade-date basis.
Investment Banking Revenues
Investment banking revenues include 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 revenues are earned in securities offerings in which the Company acts as an underwriter and includes management fees,
underwriting fees and selling concessions. Fee revenues relating to underwriting commitments are recorded when all significant
items relating to the underwriting cycle have been completed and the amount of the underwriting revenues has been determined.
Syndicate expenses related to securities
offerings in which the Company acts as underwriter or agent are deferred until the related revenues are recognized or we determine
that it is more likely than not that the securities offerings will ultimately not be completed. Underwriting revenues are recorded
net of related expenses. As co-manager for registered equity underwriting transactions, management must estimate the Company’s
share of transaction related expenses incurred by the lead manager in order to recognize revenue. Transaction-related expenses
are deducted from the underwriting fees and therefore reduce the revenues that are 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.
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 revenues 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.
Other Revenues and Deferred Revenues
Other revenues consist
primarily of revenues generated from capital market advisory services. The Company provides capital market advisory services in
the form of assistance to its clients in listing on OTCQX, the premier OTC Market tier, along with other services that facilitate
their access to institutional capital markets. Since 2013, the Company has repositioned its service offerings and fee structure
for OTCQX. Capital market advisory service 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.
Deferred revenues mainly represent 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.
In addition, other
nominal amounts, which do not conform to the types described above, are also recorded as other revenues.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. 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 granted 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 condensed 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 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.
Fair Value Accounting of Equity-Based Compensation
The Company used the Market Approach to
arrive at an estimated fair value of the Company’s common stock used in the Black-Scholes option pricing model to determine
the fair value of the option grants made during the years ended December 31, 2014 and 2013.
The Market Approach (for
determining the fair market value of the Company’s common stock) is based on the economic principle of competition
(i.e., in a free market, forces of demand and supply will direct the values of businesses to a particular balance). Valuation
under the Market Approach entails both the application of appropriate market-based multiples selected from guideline public
companies (GPCs) to parameters such as level of earnings, cash flow, revenues, invested capital or other financial factors
(financial metrics) that represent the subject company's future financial performance and from cash transactions related to
the sale of securities of the Company. This method is based on the idea of determination of the price at which the company will be
exchanged in the public market, and is particularly useful for valuing companies that are currently profitable and expected
to continue making profits in the foreseeable future.
Under the Market Approach, the Company used
the following methods:
| • | Observable inputs from
the trading of its common stock on OTCQX; |
| • | Guidelines Public Companies’
Trading Multiples Method (“GPC”); |
| • | Back Solve approach
(derived from the Company’s actual security transactions). |
As of December 31, 2014 and 2013, the fair
market value of the Company’s common stock was $1.46 and $0.90 per share, respectively.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
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 accounts
for income taxes under the provisions of Accounting Standards Codification ("ASC") 740 - Income Taxes. ASC 740 requires
the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements
and tax basis of assets and liabilities and the expected future tax benefit to be derived from tax loss and tax credit carry-forwards.
ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax
assets.
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.
Earnings (Loss) Per Share
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. Interests for convertible
debt are also not considered since including them in the calculation of diluted loss per share would be anti-dilutive.
The table below represents a list of potentially
dilutive securities outstanding as of:
| | |
December 31, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Series D convertible preferred stock warrants | |
| - | | |
| 112,927 | |
| Series E convertible preferred stock warrants | |
| 113,741 | | |
| 113,741 | |
| Stock options | |
| 865,704 | | |
| 425,029 | |
| Warrants issued in connection with secured promissory notes | |
| 13,495 | | |
| 13,495 | |
| Warrants issued in connection with recapitalization | |
| 1,164,530 | | |
| 1,164,530 | |
| Other outstanding warrants | |
| 274,236 | | |
| 33,661 | |
| Potentially dilutive securities oustanding | |
| 2,431,706 | | |
| 1,863,383 | |
MERRIMAN HOLDINGS,
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Adoption of New Accounting Pronouncements
In August 2014, the FASB issued a new accounting
standard which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as
a going concern for each annual and interim reporting period. If substantial doubt exists, additional disclosure is required. This
new standard will be effective for the Company for annual and interim periods beginning after December 15, 2016. Early adoption
is permitted. The Company expects to adopt this new standard for the fiscal year ending December 31, 2016 and the Company will
continue to assess the impact on its consolidated financial statements.
The FASB has issued ASU No. 2014-12 Compensation
– Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance
Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting,
and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance
target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation
cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent
the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in
this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier
adoption is permitted. The Company is currently evaluating the effect of the ASU on its financial position, results of operations
and cash flows.
The FASB has issued ASU No. 2014-09, Revenue
from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605
- Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should
be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially
applying the ASU recognized at the date of initial application. The Company is currently evaluating the effect of the ASU on its
financial position, results of operations and cash flows.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Issuance of Debt
Notes Payable as of December 31, 2014 and
2013 comprise of the following:
| | |
December 31, 2014 | |
| | |
| | |
| | |
| |
| | |
Notes Payable | | |
Notes Payable
Related Party | | |
Total | |
| | |
| | |
| | |
| |
| Unsecured promissory notes | |
$ | 170,000 | | |
$ | 2,065,600 | | |
$ | 2,235,600 | |
| | |
| | | |
| | | |
| | |
| Secured promissory notes | |
| 650,000 | | |
| 750,000 | | |
| 1,400,000 | |
| Debt discount | |
| (10,380 | ) | |
| (20,535 | ) | |
| (30,915 | ) |
| | |
| 639,620 | | |
| 729,465 | | |
| 1,369,085 | |
| | |
| | | |
| | | |
| | |
| Total | |
$ | 809,620 | | |
$ | 2,795,065 | | |
$ | 3,604,685 | |
| | |
December 31, 2013 | |
| | |
| | |
| | |
| |
| | |
Notes Payable | | |
Notes Payable
Related Party | | |
Total | |
| | |
| | |
| | |
| |
| Unsecured promissory notes | |
$ | 120,000 | | |
$ | 1,246,600 | | |
$ | 1,366,600 | |
| Debt discount | |
| - | | |
| (7,613 | ) | |
| (7,613 | ) |
| | |
| 120,000 | | |
| 1,238,987 | | |
| 1,358,987 | |
| | |
| | | |
| | | |
| | |
| Secured promissory notes | |
| 1,120,000 | | |
| 741,028 | | |
| 1,861,028 | |
| Debt discount | |
| (13,479 | ) | |
| (39,414 | ) | |
| (52,893 | ) |
| | |
| 1,106,521 | | |
| 701,614 | | |
| 1,808,135 | |
| | |
| | | |
| | | |
| | |
| Total | |
$ | 1,226,521 | | |
$ | 1,940,601 | | |
$ | 3,167,122 | |
Notes Payable – Unrelated Party
Unsecured Convertible Promissory Notes
On December 12, 2013, a common shareholder loaned
$120,000 to the Company in an unsecured convertible promissory note maturing on December 12, 2015. The note bears interest rate
at five percent (5%) per annum payable at maturity. At any time following the date of issue and prior to repayment, the outstanding
principal and accrued interest are convertible to common shares of the Company at $1.80 per share.
On January 10, 2014, a common shareholder loaned
$50,000 to the Company in the form of an unsecured convertible promissory notes maturing on January 10, 2016. The note bears interest
rates at five percent (5%) per annum payable at maturity. At any time following the date of issue and prior to repayment, the
outstanding principal and accrued interest are convertible to common shares of the Company at $1.80 per share.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes Payable – Unrelated Party (continued)
Secured Promissory Notes
On October 30, 2014, a common shareholder loaned
$100,000 to the Company in a one year secured promissory note maturing on November 1, 2015. The October 2014 Secured Promissory
Note bears interest rate at twelve percent (12%) per annum payable at maturity. Additional consideration in the form of 10,000
warrants to purchase common shares of the Company at $2.50 per share was issued to the lender. The warrants expire on October 30,
2017.
This transaction was accounted for as an issuance
of debt with warrants and the proceeds were allocated to the 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 October
2014 Secured Promissory Note was $12,000 which was recorded as a discount on the debt and applied against the October 2014 Secured
Promissory Note.
On April 7, 2011, a common shareholder loaned
$500,000 to the Company in a three year secured promissory note maturing on April 7, 2014. The April 7, 2011 Secured Promissory
Note bears interest rate at ten percent (10%) per annum payable in arrears on a quarterly basis. Additional consideration in the
form of 43,000 warrants to purchase common shares of the Company at $68.595 per share was issued to the lender. The warrants expired
on April 7, 2014.
This transaction was accounted for as an issuance
of debt with warrants and the proceeds were allocated to the 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 April
7, 2011 Secured Promissory Note was $77,000 which was recorded as a discount on the debt and applied against the April 7, 2011
Secured Promissory Note. The discount was fully amortized as of April 7, 2014.
On April 7, 2014, the April 7, 2011 Secured
Promissory Note was extended to mature on April 7, 2015 at an interest rate of 13.5% per annum, payable in arrears on a quarterly
basis. On March 24, 2015, the April 7, 2011 Secured Promissory Note was further extended to mature on April 7, 2016 at the same
interest rate and terms.
On April 21, 2011, a common shareholder loaned
$50,000 to the Company in a three year secured promissory note maturing on April 21, 2014. The April 21, 2011 Secured Promissory
Note bears interest rate at ten percent (10%) per annum payable in arrears on a monthly basis. Additional consideration in the
form of 4,300 warrants to purchase common shares of the Company at $68.595 per share was issued to the lender. The warrants expired
on April 21, 2014.
This transaction was accounted for as an issuance
of debt with warrants and the proceeds were allocated to the 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 April
21, 2011 Secured Promissory Note was $7,000 which was recorded as a discount on the debt and applied against the April 21, 2011
Secured Promissory Note. The discount was fully amortized as of April 21, 2014.
On April 21, 2014, the April 21, 2011 Secured
Promissory Note was extended to mature on August 31, 2015 at the same interest rate and terms.
On December 13, 2012, an unrelated party loaned
$300,000 to the Company in a six month secured promissory note at an interest rate of eight percent (8%) per annum payable at
maturity. The note was extended a few times. Principal amount and accrued interest were paid in full on April 17, 2014.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes Payable –Related Party
Unsecured Promissory Notes
Of the $2,065,600 Unsecured Promissory Notes,
$840,000 was originally loaned from the Co Chairman of the Board of Directors, Ronald L. Chez. On September 29, 2013, the principal,
together with $201,600 accrued interest were consolidated into an Unsecured Promissory Note maturing on March 29, 2014. The new
note bears interest at nine percent (9%) per annum payable monthly and five percent (5%) per annum payable at maturity. On March
27, 2014, the terms of the $1,041,600 Unsecured Promissory Note were modified for the note to mature on December 31, 2014 at the
same interest rates plus warrants to purchase 111,190 shares of the Company’s common stock at $2.40 per share. On December
30, 2014, this note was further modified to mature on August 31, 2015 under the same terms.
The Company accounted for this transaction as
a modification of debt, whereby a gain or loss was calculated as the difference between the fair value of the modified debt and
net carrying value of the old debt. The fair value of the modified debt was determined as the sum of the face value of the debt
and fair value of the warrants using the Black-Scholes fair value model. For the year ended December 31, 2014, a loss of approximately
$262,000 was recorded on the transaction, representing the fair value of the warrants.
For the years ended December 31, 2014 and 2013,
interest expenses incurred on this Unsecured Promissory Note were $146,000 and $146,000, respectively. Total interests of $73,000
and $21,000 remain outstanding as of December 31, 2014 and 2013, respectively, and are included in accrued expenses and other in
the condensed consolidated statements of financial condition.
Unsecured Convertible Promissory Notes
On November 1, 2013, the Company’s Chief
Executive Officer loaned $30,000 to the Company in an unsecured convertible promissory note maturing on April 1, 2014. The note
bears interest rate at five percent (5%) per annum payable at maturity. At any time following the date of issue and prior to repayment,
the outstanding principal and accrued interest are convertible to common shares of the Company at $1.80 per share. On March 30,
2014, the maturity date was extended to December 31, 2014 under the same terms. On December 30, 2014, the maturity date was extended
to August 31, 2015 under the same terms.
On January 15, 2014, a common shareholder who
is also an employee loaned $35,000 to the Company in an unsecured convertible promissory note maturing on January 15, 2016. The
note bears interest rate at five percent (5%) per annum payable at maturity. At any time following the date of issue and prior
to repayment, the outstanding principal and accrued interest are convertible to common shares of the Company at $1.80 per share.
Secured Demand Notes
On June 30, 2014, MC entered
into two three-year secured demand notes with the Company’s Chief Executive Officer and a director of the Company, Dennis
G. Schmal, in the amount of $100,000 and $364,000, respectively. The notes bear interest at 8% per annum, payable quarterly. The
notes comply with FINRA’s prescribed regulations and are accounted for as equity subordination in accordance with SEC Rule
15c3-1(d). The notes are subordinated to the claims of present and future creditors of MC and cannot be repaid, if such repayment
will cause MC to fail to meet its minimum net capital requirements in accordance with SEC Rule 15c3-1.
The notes and their corresponding
liabilities are included notes receivable and notes payable to related parties, respectively, in the consolidated statements of
financial condition.
For the years ended December 31, 2014 and 2013,
interest expenses incurred on these secured demand notes were $19,000 and $0, respectively. Total interests of $9,000 remain outstanding
as of December 31, 2014 and are included in accrued expenses and other in the consolidated statements of financial condition.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Issuance of Debt (continued)
Temporary Subordinated Borrowings
On December 30, 2014, MC
borrowed $495,000 from the Co-Chairman of the Company’s 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 through December 31, 2014 were
$2,970 and included in cost of underwriting capital in the consolidated statements of operations. The loan and related fees were
paid in full on February 3, 2015.
On October 23, 2014, MC
borrowed $300,000 from the Co-Chairman of the Company’s 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 $7,800 and were included in
cost of underwriting capital in the consolidated statements of operations. The loan and related fees were paid in full on November
5, 2014.
Equity Lending Note
On August 31, 2012, the Company’s Chief
Executive Officer loaned $175,000 to the Company in a three year secured equity lending note (the “Equity Lending Note”)
at an interest rate of eight percent (8%) per annum payable quarterly in arrears. This note is secured by a security interest in
and right of setoff against all of the Company’s right, title and interest in and 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. Additional consideration
in the form of 69,444 warrants to purchase common shares of the Company at $18.90 per share was issued to the lender. The warrants
expire on August 31, 2015.
This transaction was accounted for as an issuance
of debt with warrants and the proceeds were allocated to the 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 Equity
Lending Note was $13,000 which was recorded as a discount on the debt and applied against the Equity Lending Note. The note collateral
has a carrying value of $175,000 and is included in other assets in the consolidated statement of financial condition as of December
31, 2014.
Secured Promissory Notes
On August 31, 2012, the Company’s Co-Chairman
of the Board of Directors loaned $250,000 to the Company in a three year secured promissory note (the “August 2012 Secured
Promissory Note”) at an interest rate of eight percent (8%) per annum payable quarterly in arrears. This note is secured
by a security interest in and right of setoff against all of the Company’s right, title and interest in and 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.
Additional consideration in the form of 99,206 warrants to purchase common shares of the Company at $0.63 per share was issued
to the lender. The warrants expire on August 31, 2015.
This transaction was accounted for as an issuance
of debt with warrants and the proceeds were allocated to the 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 August
2012 Secured Promissory Note was $19,000 which was recorded as a discount on the debt and applied against the August 2012 Secured
Promissory Note.
On September 27, 2012, the Company’s Co-Chairman
of the Board of Directors loaned $125,000 to the Company in a three year secured promissory note (the “September 2012 Secured
Promissory Note”) at an interest rate of eight percent (8%) per annum payable quarterly in arrears. This note is secured
by a security interest in and right of setoff against all of the Company’s right, title and interest in and 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.
Additional consideration in the form of 236,250 warrants to purchase common shares of the Company at $0.63 per share was issued
to the lender. The warrants expire on September 27, 2015.
This transaction was accounted for as an issuance
of debt with warrants and the proceeds were allocated to the 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 September
2012 Secured Promissory Note was $45,000 which was recorded as a discount on the debt and applied against the September 2014 Secured
Promissory Note.
On December 13, 2012, the Co-Chairman of the
Board of Directors loaned $200,000 to the Company in a secured promissory note (the “December 2012 Secured Promissory Note”)
maturing on September 13, 2013 and bearing interest rates at eight percent (8%) per annum payable at maturity. The December 2012
Secured Promissory Note was extended a few times maturing on August 31, 2015. Effective on September 26, 2013, interest rate increased
to ten percent (10%) per annum payable at maturity. Additional consideration included 625,000 warrants to purchase the Company
common stock at $2.40 per share.
On September 12, 2013 the Co-Chairman of the
Board of Directors loaned $166,028 to the Company in a secured promissory note maturing on February 7, 2014, bearing interest rates
at ten percent (10%) per annum payable at maturity. Principal amount and accrued interest were paid in full on January 23, 2014.
The Company’s minimum
debt payments are $3,086,600 in 2015, $85,000 in 2016 and $464,000 in 2017.
5. Shareholders’ Equity
Issuance of Common Stock Warrants for Letter of Credit Guaranty
On June 26, 2014 and August 28, 2014, the
Company issued to its Co-Chairman of the Board of Directors, Ronald L. Chez, warrants to purchase 16,042 and 15,901 shares of its
common stock at $2.40 and $1.998 per shares, respectively. The warrants expire on the fifth anniversary of the original issue dates
and were issued in consideration of Mr. Chez’ guaranty of the Company’s letter of credit supporting its San Francisco
lease.
The warrants were valued at $46,000 using
the Black-Scholes fair value model. The warrant value is amortized over the remaining term of the lease and included in other assets
in the condensed consolidated statements of financial condition.
Sale of Common Stock
On March 12, 2014, the Company issued
27,777 shares of common stock at $1.80 per share and 6,944 warrants for total proceeds of $50,000. The total proceeds of $50,000
is accounted for as an issuance of common stock with warrants and was allocated to the individual instruments based on the relative
fair value of each instrument at the time of issuance. Based on such allocation method, the values allocated to common stock
and warrants were $40,000 and $10,000, respectively.
In April 2014, the
Company issued 347,217 shares of common stock at $1.80 per share and 86,803 warrants for total proceeds of $625,000. The total
proceeds of $625,000 is accounted for as an issuance of common stock with warrants and was allocated to the individual instruments
based on the relative fair value of each instrument at the time of issuance. Based on such allocation method, the values allocated
to common stock and warrants were $504,000 and $121,000, respectively.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Shareholders’ Equity (continued)
Sale of Common Stock (continued)
On November16, 2013 and December 15,
2013, the Company issued an aggregate of 22,222 shares of common stock at $1.80 per share and 5,555 warrants for total proceeds
of $40,000. The total proceeds of $40,000 is accounted for as an issuance of common stock with warrants and was allocated to the
individual instruments based on the relative fair value of each instrument at the time of issuance. Based on such allocation
method, the values allocated to common stock and warrants were $32,000 and $8,000, respectively.
On September 16, 2013, the Company entered
into a definitive agreement (the “Stock Purchase Agreement”) for the sale and issuance of 77,777 common shares at $1.80
per share, resulting in total proceeds to the Company of $140,000. For every 120 common shares purchased, the investors received
a warrant to purchase one share of common stock at $2.40 per share, for a term of five years. A total of 19,444 warrants were issued.
The total proceeds of $140,000 is accounted for as an issuance of common stock with warrants and was allocated to the individual
instruments based on the relative fair value of each instrument at the time of issuance. Based on such allocation method,
the values allocated to common stock and warrants were $113,000 and $27,000, respectively.
On March 28, 2013 and April 26, 2013, the
Company entered into a definitive agreement (the “Stock Purchase Agreement”) for the sale and issuance of 2,024,860
common shares at $0.90 per share, resulting in total proceeds to the Company of $1,822,375. For every 120 common shares purchased,
the investors received a warrant to purchase one share of common stock at $1.2 per share, for a term of five years. A total of
506,214 warrants were issued. The total proceeds of $1,822,375 is accounted for as an issuance of common stock with warrants and
was allocated to the individual instruments based on the relative fair value of each instrument at the time of issuance. Based
on such allocation method, the values allocated to common stock and warrants were $1,466,000 and $356,000, respectively.
Conversion of Series D and E Convertible Preferred Stock
to Common Stock
In connection with the sale of common stock
described above, the Investors Rights Agreement dated September 9, 2009 by and among the Company and investors in its Series D
Convertible Preferred Stock was terminated and a new Voting Agreement dated March 28, 2013 was entered into.
On March 28, 2013, all outstanding shares
of Series D and Series E Convertible Preferred Stock of the Company were converted into shares of common stock. Each share of Series
D Convertible Preferred Stock was converted into 0.34127 share of common stock. Each share of Series E Convertible Preferred Stock
was converted into one share of common stock. At the time of the conversion, all dividends accumulated but not declared on the
Series D and series E Convertible Preferred Stock were canceled.
On March 28, 2013, 17,001,579 shares of
Series D Convertible Preferred Stock and 6,303,799 shares of Series E Convertible Preferred Stock were converted into 193,404 and
210,126 shares of common stock, respectively.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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. As of December 31, 2014 and 2013, the fair value of this type of securities included in securities owned
in the consolidated statements of financial condition was approximately $210,000 and $1,176,000, respectively.
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. As of December 31, 2014
and 2013, the fair value of this type of securities included in securities owned in the consolidated statements of financial condition
was $282,000 and $79,000, respectively.
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
observable inputs such as interest rate, expected term and market price of the underlying stock, in addition to unobservable inputs
such as stock volatility. Generally, a change in stock volatility results in a directionally similar change in fair value. As these
require significant management assumptions, they are classified as Level 3 securities.
As of December 31, 2014 and 2013, the fair
value of this type of securities included in securities owned in the consolidated statements of financial condition was approximately
$1,191,000 and $569,000, respectively.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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. Valuation inputs used in the Black-Scholes model include observable
inputs such as interest rate; stock expected term and market price of the underlying stock, in addition to unobservable inputs
such as stock volatility. Generally, a change in stock volatility results in a directionally similar change in fair value. The
use of the valuation techniques requires significant management assumptions and therefore UPOs are classified as Level 3 securities.
As of December 31, 2014 and 2013, the fair
value of this type of securities included in securities owned in the consolidated statements of financial condition was approximately
$0 and $24,000, respectively.
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.
As of December 31 2014 and 2013, the fair
value of this type of securities included in securities owned in the consolidated statements of financial condition was deemed
de-minimis.
Securities Sold, Not Yet Purchased
Securities sold, not
yet purchased are comprised primarily of exchange-traded equity securities that the Company sold short based on expectations of
future market movements and conditions. They are generally valued based on quoted prices from the exchange. To the extent these
securities are actively traded, valuation adjustments are not applied and they are categorized in Level 1 liability of the fair
value hierarchy.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Fair Value of Assets and Liabilities (continued)
Summary
The following table summarizes quantitative
information about the significant unobservable inputs used in the fair value measurement of the Company’s Level 3 financial
instruments:
| | |
Valuation Technique | |
Unobservable Input | |
Range | | |
Weighted Average | |
| Financial instruments and other inventory positions owned: | |
| |
| |
| | | |
| | |
| Corporate equities | |
Put option discount using Black-Scholes option pricing model | |
Stock volatility | |
| 209 | % | |
| 209 | % |
| Stock warrants | |
Black-Scholes option pricing model | |
Stock volatility | |
| 55 - 368% | | |
| 161 | % |
Assets and liabilities measured at fair
value on a recurring basis are summarized below:
| | |
Assets at Fair Value at December 31, 2014 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| Assets: | |
| | | |
| | | |
| | | |
| | |
| Corporate equities | |
$ | 210,267 | | |
$ | - | | |
$ | 282,058 | | |
$ | 492,325 | |
| Stock warrants | |
| - | | |
| - | | |
| 1,191,401 | | |
| 1,191,401 | |
| | |
| | | |
| | | |
| | | |
| | |
| Total securities owned | |
$ | 210,267 | | |
$ | - | | |
$ | 1,473,459 | | |
$ | 1,683,726 | |
| | |
Assets at Fair Value at December 31, 2013 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| Assets: | |
| | | |
| | | |
| | | |
| | |
| Corporate equities | |
$ | 1,176,347 | | |
$ | - | | |
$ | 78,756 | | |
$ | 1,255,103 | |
| Stock warrants | |
| - | | |
| - | | |
| 568,755 | | |
| 568,755 | |
| Underwriters' purchase option | |
| - | | |
| - | | |
| 24,056 | | |
| 24,056 | |
| Preferred stock | |
| - | | |
| - | | |
| 234 | | |
| 234 | |
| | |
| | | |
| | | |
| | | |
| | |
| Total securities owned | |
$ | 1,176,347 | | |
$ | - | | |
$ | 671,801 | | |
$ | 1,848,148 | |
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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 years ended December 31, 2014 and 2013.
| | |
| | |
| | |
Underwriters' | | |
| | |
| |
| | |
Corporate | | |
Stock | | |
Purchase | | |
Preferred | | |
| |
| | |
Equities | | |
Warrants | | |
Options | | |
Stock | | |
Total | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance at January 1, 2013 | |
$ | 241,767 | | |
$ | 468,848 | | |
$ | 17,634 | | |
$ | 63 | | |
$ | 728,312 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Purchases or receipt (a) | |
| - | | |
| 400,336 | | |
| - | | |
| - | | |
| 400,336 | |
| Sales or exercises | |
| - | | |
| (40,426 | ) | |
| - | | |
| - | | |
| (40,426 | ) |
| Transfers into level 3 | |
| 74,280 | | |
| - | | |
| - | | |
| - | | |
| 74,280 | |
| Transfers out of level 3 | |
| (188,793 | ) | |
| - | | |
| - | | |
| - | | |
| (188,793 | ) |
| Gains (losses): | |
| | | |
| | | |
| | | |
| | | |
| | |
| Realized | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| Unrealized | |
| (48,498 | ) | |
| (260,003 | ) | |
| 6,422 | | |
| 171 | | |
| (301,908 | ) |
| Balance at December 31, 2013 | |
| 78,756 | | |
| 568,755 | | |
| 24,056 | | |
| 234 | | |
| 671,801 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Purchases or receipt (a) | |
| 283,715 | | |
| 1,132,526 | | |
| - | | |
| - | | |
| 1,416,241 | |
| Sales or exercises | |
| (25,328 | ) | |
| (77 | ) | |
| - | | |
| - | | |
| (25,405 | ) |
| Transfers out of level 3 | |
| (91,758 | ) | |
| - | | |
| - | | |
| - | | |
| (91,758 | ) |
| Gains (losses): | |
| | | |
| | | |
| | | |
| | | |
| | |
| Realized | |
| (60,205 | ) | |
| - | | |
| - | | |
| - | | |
| (60,205 | ) |
| Unrealized | |
| 96,878 | | |
| (509,803 | ) | |
| (24,056 | ) | |
| (234 | ) | |
| (437,215 | ) |
| Balance at December 31, 2014 | |
$ | 282,058 | | |
$ | 1,191,401 | | |
$ | - | | |
$ | - | | |
$ | 1,473,459 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Change in unrealized gains | |
| | | |
| | | |
| | | |
| | | |
| | |
| (losses) relating to instruments still held | |
| | | |
| | | |
| | | |
| | | |
| | |
| at December 31, 2014 | |
$ | 60,651 | | |
$ | (509,803 | ) | |
$ | (24,056 | ) | |
$ | (234 | ) | |
$ | (473,442 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Change in unrealized gains | |
| | | |
| | | |
| | | |
| | | |
| | |
| (losses) relating to instruments still held | |
| | | |
| | | |
| | | |
| | | |
| | |
| at December 31, 2013 | |
$ | (48,498 | ) | |
$ | (260,002 | ) | |
$ | 6,422 | | |
$ | 171 | | |
$ | (301,907 | ) |
| |
(a) |
Includes purchases of securities and securities received for services |
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.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Capital Leases
During the third quarter of 2013, the Company
entered into certain leases for a portion of its property and equipment with various financing institutions and equipment providers
for periods ranging from three to four years.
The following is an analysis of the leased
assets included in equipment and fixtures at December 31, 2014 and 2013.
| | |
December 31, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Property and equipment | |
$ | 399,675 | | |
$ | 399,675 | |
| Less: accumulated depreciation | |
| (204,270 | ) | |
| (71,045 | ) |
| Capital lease assets, net | |
$ | 195,405 | | |
$ | 328,630 | |
Capital lease liabilities to financial institutions
and equipment providers are due in monthly installments totaling $10,000, including fixed interest rates varying from 8.00% to
9.00%. Maturity of the capital leases vary from May 2016 to May 2017. As of December 31, 2014 and 2013, the outstanding capital
lease liabilities were and $270,000 and $361,000, respectively.
Interests related to these capital leases
charged to interest expenses totaled $26,000 and $17,000, for the years ended December 31, 2014 and 2013, respectively.
The following is a schedule by years of
future minimum payments required under the capital leases together with their present value as of December 31, 2014:
| | |
Amount | |
| | |
| |
| 2015 | |
$ | 129,885 | |
| 2016 | |
| 100,499 | |
| 2017 | |
| 47,902 | |
| Total minimum lease payments | |
| 278,286 | |
| Less: amount representing interest | |
| (8,567 | ) |
| Net commitments | |
$ | 269,719 | |
8. Equipment and Fixtures
Equipment and fixtures consisted of the
following:
| | |
December 31, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Computer equipment | |
$ | 435,442 | | |
$ | 549,655 | |
| Furniture and equipment | |
| 546,153 | | |
| 533,026 | |
| Leasehold improvements | |
| 774,833 | | |
| 761,763 | |
| | |
| | | |
| | |
| | |
| 1,756,428 | | |
| 1,844,444 | |
| Less accumulated depreciation | |
| (1,469,617 | ) | |
| (1,503,186 | ) |
| | |
| | | |
| | |
| | |
$ | 286,811 | | |
$ | 341,258 | |
Depreciation and amortization expenses for
the year ending December 31, 2014 were approximately $217,000 consisting of $84,000 of depreciation and amortization of equipment
and fixtures and $133,000 of amortization of capital leases. Depreciation and amortization expenses for the year ending December
31, 2013 were approximately $83,000 consisting of $12,000 of depreciation and amortization of equipment and fixtures and $71,000
of amortization of capital leases.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Stock-Based Compensation Expense
Stock Options
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.
As of December 31, 2014 and 2013, there
were 778,189 and 225,852 shares authorized for issuance under the Option Plans, and 2,918 shares authorized for issuance outside
of the Option Plans. There were no shares available for future option grants outside of the Option Plans.
On March 23, 2012, the Company’s Board
of Directors approved the 2012 Stock Incentive Plan (the 2012 Plan). Originally, 152,988 shares of the Company’s common stock
were reserved for issuance under the 2012 Plan. On June 3, 2013 shares reserved for issuance under the 2012 Plan were increased
to 706,325.
Option grants were made during the years
ended December 31, 2014 and 2013 under the 2012 Plan.
The following table is a summary of the
Company’s stock option activity for the years ended December 31, 2014 and 2013:
| | |
2014 | | |
2013 | |
| | |
| | |
Weighted- | | |
| | |
Weighted- | |
| | |
| | |
Average | | |
| | |
Average | |
| | |
| | |
Exercise | | |
| | |
Exercise | |
| | |
Shares | | |
Price | | |
Shares | | |
Price | |
| | |
| | |
| | |
| | |
| |
| Outstanding at beginning of year | |
| 426,549 | | |
$ | 7.74 | | |
| 100,184 | | |
$ | 22.80 | |
| Granted | |
| 472,927 | | |
$ | 1.80 | | |
| 332,833 | | |
$ | 3.60 | |
| Exercised | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
| Cancelled | |
| (33,772 | ) | |
$ | (2.80 | ) | |
| (6,468 | ) | |
$ | (19.20 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Outstanding at end of year | |
| 865,704 | | |
$ | 4.68 | | |
| 426,549 | | |
$ | 7.74 | |
| | |
| | | |
| | | |
| | | |
| | |
| Exercisable at end of year | |
| 383,241 | | |
$ | 6.43 | | |
| 130,427 | | |
$ | 13.20 | |
| | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| Vested and expected to vest as of December 31, 2014 | |
| 680,121 | | |
| | | |
| | | |
| | |
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Stock-Based Compensation Expense (continued)
The following table summarizes information
with respect to stock options outstanding at December 31, 2014, based on the Company’s stock price on December 31,
2014 of $1.47 per share:
| | |
Options Outstanding at December 31, 2014 | | |
Vested Options at December 31, 2014 | |
| | |
| | |
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 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| $0.00 - $104.997 | |
| 401,266 | | |
| 9.67 | | |
$ | 1.54 | | |
$ | 283,951 | | |
| 160,000 | | |
$ | 1.50 | | |
$ | 120,000 | |
| $105.00 - $209.997 | |
| 372,823 | | |
| 8.52 | | |
| 3.67 | | |
| - | | |
| 155,535 | | |
| 3.61 | | |
| - | |
| $210.00 - $314.997 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| $315.00 - $419.997 | |
| 20,000 | | |
| 7.60 | | |
| 12.30 | | |
| - | | |
| 14,996 | | |
| 12.30 | | |
| - | |
| $420.00 - $839.997 | |
| 66,495 | | |
| 7.26 | | |
| 17.72 | | |
| - | | |
| 47,601 | | |
| 17.72 | | |
| - | |
| $840.00 - $1,469.997 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| $1,470.00 - $2,534.997 | |
| 5,120 | | |
| 4.92 | | |
| 124.51 | | |
| - | | |
| 5,109 | | |
| 124.57 | | |
| - | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| 865,704 | | |
| 8.91 | | |
$ | 4.68 | | |
$ | 283,951 | | |
| 383,241 | | |
$ | 6.43 | | |
$ | 120,000 | |
| | |
Options Outstanding at December 31, 2013 | | |
Vested Options at December 31, 2013 | |
| | |
| | |
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 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| $0.00 - $104.997 | |
| 425,456 | | |
| 9.14 | | |
$ | 7.20 | | |
$ | - | | |
| 129,340 | | |
$ | 10.80 | | |
$ | - | |
| $105.00 - $209.997 | |
| 288 | | |
| 5.80 | | |
$ | 136.80 | | |
| - | | |
| 282 | | |
$ | 135.60 | | |
| - | |
| $210.00 - $314.997 | |
| 167 | | |
| 4.94 | | |
$ | 299.10 | | |
| - | | |
| 167 | | |
$ | 299.10 | | |
| - | |
| $315.00 - $419.997 | |
| 619 | | |
| 5.72 | | |
$ | 329.70 | | |
| - | | |
| 619 | | |
$ | 329.70 | | |
| - | |
| $420.00 - $839.997 | |
| - | | |
| - | | |
$ | - | | |
| - | | |
| - | | |
$ | - | | |
| - | |
| $840.00 - $1,469.997 | |
| 17 | | |
| 2.63 | | |
$ | 1,029.00 | | |
| - | | |
| 17 | | |
$ | 1,029.00 | | |
| - | |
| $1,470.00 - $2,534.997 | |
| 2 | | |
| 1.17 | | |
$ | 2,234.40 | | |
| - | | |
| 2 | | |
$ | 2,234.40 | | |
| - | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| 426,549 | | |
| 9.14 | | |
$ | 7.80 | | |
$ | - | | |
| 130,427 | | |
$ | 13.20 | | |
$ | - | |
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. 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 2014 and
2013:
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Expected Volatility | |
| 211.26 | % | |
| 179.10 | % |
| Average expected term (years) | |
| 3.74 | | |
| 4.07 | |
| Risk-free interest rate | |
| 1.25 | % | |
| 0.61 | % |
| Dividend yield | |
| - | | |
| - | |
Consistent with ASC 718, Stock Compensation,
the expected stock price volatility for the Company’s stock options was determined by the historical volatilities for industry
peers and an average of those volatilities. The Company found this metric to be reliable and determined that it reflects 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 2014 and 2013 was $1.47 and $0.90, respectively. Compensation expense for
stock options during the years ended December 31, 2014 and 2013 was $666,000 and $628,000, respectively. As of December 31,
2014, total unrecognized compensation expenses related to unvested stock options were $294,000. This amount is expected to be recognized
as expense over a weighted-average period of 2.92 years.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. 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, 2014 and 2013 was $0 and $19,000, respectively.
The following table is a summary of the
Company’s restricted stock activity, based on the Company’s stock price on December 31, 2014 of $1.47 per share:
| | |
| | |
Weighted- | | |
| |
| | |
Restricted | | |
Average | | |
Aggregate | |
| | |
Stock | | |
Grant Date | | |
Intrinsic | |
| | |
Outstanding | | |
Fair Value | | |
Value | |
| | |
| | |
| | |
| |
| Balance as of January 1, 2013 | |
| 8,588 | | |
$ | 17.40 | | |
$ | 15,460 | |
| Granted | |
| - | | |
$ | - | | |
| | |
| Vested | |
| (153 | ) | |
$ | (81.60 | ) | |
| | |
| Canceled | |
| (8,333 | ) | |
$ | (15.30 | ) | |
| | |
| | |
| | | |
| | | |
| | |
| Balance as of December 31, 2013 | |
| 102 | | |
$ | 81.60 | | |
$ | 368 | |
| Granted | |
| - | | |
$ | - | | |
| | |
| Vested | |
| (102 | ) | |
$ | (81.60 | ) | |
| | |
| Canceled | |
| - | | |
$ | - | | |
| | |
| | |
| | | |
| | | |
| | |
| Balance as of December 31, 2014 | |
| - | | |
$ | - | | |
$ | - | |
| | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | |
| Vested and expected to vest as of December 31, 2014 | |
| - | | |
| | | |
| | |
The total fair value of restricted stock
that vested during the years ended December 31, 2014 and 2013 was de minimis. Cancelled shares were from one recipient who voluntarily
cancelled the grants prior to vesting.
10. 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 years ended December 31, 2014 and 2013.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes
The income tax provision consists
of the following:
| | |
For
the Year Ended December 31, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Current | |
| | | |
| | |
| Federal | |
$ | - | | |
$ | - | |
| State | |
| - | | |
| - | |
| Deferred | |
| | | |
| | |
| Federal | |
| (442,000 | ) | |
| (1,021,000 | ) |
| State | |
| (76,000 | ) | |
| (249,000 | ) |
| Total | |
| (518,000 | ) | |
| (1,270,000 | ) |
| Change in valuation allowance | |
| 518,000 | | |
| 1,270,000 | |
| | |
| | | |
| | |
| Income tax provision | |
$ | - | | |
$ | - | |
The provision for income taxes using the
statutory federal tax rate as compared to the Company’s effective tax rate is summarized as follows:
| | |
For
the Year Ended December 31, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Federal statutory income tax rate (benefit) | |
| -34.0 | % | |
| -34.0 | % |
| State income taxes, net of federal benefit | |
| -4.7 | % | |
| -6.2 | % |
| Stock-based compensation | |
| 0.0 | % | |
| 5.5 | % |
| Loss on early extinguishment of debt | |
| 5.7 | % | |
| 2.5 | % |
| Other permanent differences | |
| 1.2 | % | |
| 0.4 | % |
| Change in valuation allowance | |
| 31.8 | % | |
| 31.8 | % |
| | |
| | | |
| | |
| Effective tax rate | |
| 0.0 | % | |
| 0.0 | % |
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes (continued)
The Company’s
deferred tax assets consisted of the effects of temporary differences attributable to the following:
| | |
December 31, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Current | |
| | | |
| | |
| Accruals | |
$ | 91,000 | | |
$ | - | |
| Allowance for doubtful accounts | |
| 56,000 | | |
| - | |
| Total current deferred tax assets | |
| 147,000 | | |
| - | |
| | |
| | | |
| | |
| Non-current | |
| | | |
| | |
| Net operating loss carry-forwards | |
| 33,389,000 | | |
| 33,673,000 | |
| Unrealized loss | |
| 4,911,000 | | |
| 4,677,000 | |
| Stock-based compensation | |
| 1,110,000 | | |
| 829,000 | |
| Other | |
| 698,000 | | |
| 558,000 | |
| Total non-current deferred tax assets | |
| 40,108,000 | | |
| 39,737,000 | |
| | |
| | | |
| | |
| Total deferred tax assets | |
| 40,255,000 | | |
| 39,737,000 | |
| Valuation allowance | |
| (40,255,000 | ) | |
| (39,737,000 | ) |
| | |
| | | |
| | |
| Net deferred tax assets | |
$ | - | | |
$ | - | |
As of December 31,
2014 and 2013, the Company had approximately $86.1 and $86.7 million of U.S. federal net operating loss carryovers available to
offset future taxable income, respectively. As of December 31, 2014 and 2013, the Company had approximately $64.6 and $65.8 million
of state net operating loss carryovers available to offset future taxable income, respectively. These net operating losses which,
if not utilized, begin expiring in the year 2028. In accordance with Section 382 of the Internal Revenue Code, deductibility
of the Company’s net operating loss carry over may be subject to an annual limitation in the event of a change of control.
In assessing the realization
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all
of the information available, management believes that significant uncertainty exists with respect to future realization of the
deferred tax assets and has therefore established a full valuation allowance. For the years ended December 31, 2014 and 2013,
the change in the valuation allowance was approximately $518,000 and $1,270,000, respectively.
The Company evaluated
the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions
that the company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax
return and the benefit recognized and measured pursuant to the interpretation are referred to as "unrecognized benefits." A
liability is recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for an unrecognized
tax benefit because it represents an enterprise's potential future obligation to the taxing authority for a tax position that was
not recognized as a result of applying the provisions of ASC 740.
Interest costs related
to unrecognized tax benefits are required to be calculated (if applicable) and would be classified as "Interest expense, net"
in the statements of operation. Penalties would be recognized as a component of "General and administrative expenses."
No interest or penalties
were recorded during the years ended December 31, 2014 and 2013. As of December 31, 2014 and 2013, no liability for unrecognized
tax benefits was required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits
in the next year.
The Company files
U.S. federal and state income tax returns. These tax returns are subject to examination by tax authorities for years beginning
in December 31, 2011.
MERRIMAN HOLDINGS,
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Segment Reporting
The accounting policies of the segments
are consistent with those described in the Significant Accounting Policies in Note 3. 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 FEP or CMAG. 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.
Consolidation items and eliminations include
the effects of eliminating transactions between operating segments, and certain non-allocated amounts. Consolidation items and
elimination 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 consolidation 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, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Revenues | |
| | | |
| | |
| MC | |
$ | 9,295,546 | | |
$ | 5,947,245 | |
| FEP | |
| 4,754,473 | | |
| 2,017,708 | |
| CMAG | |
| 1,878,177 | | |
| 1,996,119 | |
| Total segment revenues | |
| 15,928,196 | | |
| 9,961,072 | |
| Consolidation items and elimination | |
| - | | |
| (1,165 | ) |
| Consolidated revenues | |
$ | 15,928,196 | | |
$ | 9,959,907 | |
| | |
| | | |
| | |
| Segment profit (loss) | |
| | | |
| | |
| MC | |
$ | (3,202,988 | ) | |
$ | (4,738,706 | ) |
| FEP | |
| 811,371 | | |
| 440,750 | |
| CMAG | |
| 1,206,238 | | |
| 1,363,571 | |
| Total segment loss | |
| (1,185,379 | ) | |
| (2,934,385 | ) |
| Consolidation items and elimination | |
| (442,547 | ) | |
| (1,057,684 | ) |
| Consolidated net loss before income taxes | |
$ | (1,627,926 | ) | |
$ | (3,992,069 | ) |
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 our
significant contractual obligations as of December 31, 2014, consisting of non-cancellable payments under office and operating
leases with initial or remaining terms in excess of one year.
| | |
Office Leases | | |
Operating Leases | | |
Total | |
| | |
| | |
| | |
| |
| 2015 | |
$ | 1,343,760 | | |
$ | 635,700 | | |
$ | 1,979,460 | |
| 2016 | |
| 1,353,354 | | |
| 37,200 | | |
| 1,390,554 | |
| 2017 | |
| 1,421,854 | | |
| 37,200 | | |
| 1,459,054 | |
| 2018 | |
| 1,437,268 | | |
| - | | |
| 1,437,268 | |
| 2019 | |
| 1,447,599 | | |
| - | | |
| 1,447,599 | |
| Thereafter | |
| 742,063 | | |
| - | | |
| 742,063 | |
| Total Contractual Obligations | |
$ | 7,745,898 | | |
$ | 710,100 | | |
$ | 8,455,998 | |
The Company’s
San Francisco corporate office lease expired on December 31, 2013. On August 22, 2013, the Company entered into an office lease
for its San Francisco corporate office commencing in January 2014 and expiring in April 2020. The Company leases its New York office
under a non-cancelable operating lease that expires in and July 2020.
For the years ended
December 31, 2014 and 2013, rent expenses were approximately $770,000 and $1,035,000, net of $524,000 and $511,000 sublease rent
received, respectively. The operating leases in the table above include non-cancelable contracts for operating services, such as
market data services.
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, 2014 and 2013, 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, 2014 and 2013, 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.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Commitments and Contingencies (continued)
Concentrations and Credit Risk
Substantially all
of the Company’s cash and cash equivalents are held at two major U.S. financial institutions. 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,
2014 and 2013, the Company held concentrated positions in one and three securities with total fair value of $206,000 and $1,092,000,
respectively. The prices of these securities are highly volatile.
As of December 31, 2014 and 2013, the Company
did not hold concentrated positions in accounts receivable with any one client which exceeded 10% of total accounts receivable.
For the year ended
December 31, 2014, one sales professional accounted for more than 10% of total revenue (approximately $3,230,000) and no customer
accounted for more than 10% of total revenue. For the year ended December 31, 2013, one sales professional accounted for more than
10% of total revenue (approximately $2,490,000) and no customer accounted for more than 10% of total revenue.
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.
Legal Proceedings
From time to time, the Company is involved
in ordinary routine litigation incidental to our business. Currently, there are no litigations against the Company.
Certain conditions may exist as of the date
the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when
one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company,
or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings
or un-asserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially
material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature
of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are
generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed. There can be no assurance
that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations
or cash flows.
For the years ended December 31, 2014 and
2013, the Company incurred legal services and litigation settlement of $51,000 and $520,000, respectively. Of the $520,000 amount
incurred in 2013, $390,000 was for settlement of certain litigations. There was no litigation settlement in 2014.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Financial Instruments, Off-Balance
Sheet Arrangements and Indemnification
Financial Instruments
The Company’s broker-dealer entity
trades securities that are primarily traded in United States markets. As of December 31, 2014 and 2013, 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, 2014. In particular, the Company does not have any interest in so-called
limited purpose entities, which include special purpose entities and structured finance entities.
Indemnification
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.
15. Regulatory Requirements
MC is a broker-dealer
subject to Rule 15c3-1 of the SEC, which specifies uniform minimum net capital requirements, as defined, for its registrants. As
of December 31, 2014, MC had regulatory net capital, as defined, of $901,000, which exceeded the amount required by $651,000.
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.
As of February 28,
2015, MC was in net capital deficiency of approximately $40,000. MC filed the deficiency notification under SEA Rule 17a-11(c)(2)
with the SEC and FINRA on March 24, 2015. The net capital deficiency was cured on the same day. MC is in the process of obtaining
additional funding in order to ensure continuous net capital compliance.
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
16. Related Party Transactions
Notes Payable –Related Party
Unsecured Promissory Notes
Of the $2,065,600 Unsecured Promissory Notes,
$840,000 was originally loaned from the Co Chairman of the Board of Directors, Ronald L. Chez. On September 29, 2013, the principal,
together with $201,600 accrued interest were consolidated into an Unsecured Promissory Note maturing on March 29, 2014. The new
note bears interest at nine percent (9%) per annum payable monthly and five percent (5%) per annum payable at maturity. On March
27, 2014, the terms of the $1,041,600 Unsecured Promissory Note were modified for the note to mature on December 31, 2014 at the
same interest rates plus warrants to purchase 111,190 shares of the Company’s common stock at $2.40 per share. On December
30, 2014, this note was further modified to mature on August 31, 2015 under the same terms.
The Company accounted for this transaction as
a modification of debt, whereby a gain or loss was calculated as the difference between the fair value of the modified debt and
net carrying value of the old debt. The fair value of the modified debt was determined as the sum of the face value of the debt
and fair value of the warrants using the Black-Scholes fair value model. For the year ended December 31, 2014, a loss of approximately
$262,000 was recorded on the transaction, representing the fair value of the warrants.
For the years ended December 31, 2014 and 2013,
interest expenses incurred on this Unsecured Promissory Note were $146,000 and $146,000, respectively. Total interests of $73,000
and $21,000 remain outstanding as of December 31, 2014 and 2013, respectively, and are included in accrued expenses and other in
the condensed consolidated statements of financial condition.
Unsecured Convertible Promissory Notes
On November 1, 2013, the Company’s Chief
Executive Officer loaned $30,000 to the Company in an unsecured convertible promissory note maturing on April 1, 2014. The note
bears interest rate at five percent (5%) per annum payable at maturity. At any time following the date of issue and prior to repayment,
the outstanding principal and accrued interest are convertible to common shares of the Company at $1.80 per share. On March 30,
2014, the maturity date was extended to December 31, 2014 under the same terms. On December 30, 2014, the maturity date was extended
to August 31, 2015 under the same terms.
On January 15, 2014, a common shareholder who
is also an employee loaned $35,000 to the Company in an unsecured convertible promissory note maturing on January 15, 2016. The
note bears interest rate at five percent (5%) per annum payable at maturity. At any time following the date of issue and prior
to repayment, the outstanding principal and accrued interest are convertible to common shares of the Company at $1.80 per share.
Secured Demand Notes
On June 30, 2014, MC entered
into two three-year secured demand notes with the Company’s Chief Executive Officer and a director of the Company, Dennis
G. Schmal, in the amount of $100,000 and $364,000, respectively. The notes bear interest at 8% per annum, payable quarterly. The
notes comply with FINRA’s prescribed regulations and are accounted for as equity subordination in accordance with SEC Rule
15c3-1(d). The notes are subordinated to the claims of present and future creditors of MC and cannot be repaid, if such repayment
will cause MC to fail to meet its minimum net capital requirements in accordance with SEC Rule 15c3-1.
The notes and their corresponding
liabilities are included notes receivable and notes payable to related parties, respectively, in the consolidated statements of
financial condition.
For the years ended December 31, 2014 and 2013,
interest expenses incurred on these secured demand notes were $19,000 and $0, respectively. Total interests of $9,000 remain outstanding
as of December 31, 2014 and are included in accrued expenses and other in the consolidated statements of financial condition.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Related Party Transactions (continued)
Notes Payable –Related Party (continued)
Temporary Subordinated Borrowings
On December 30, 2014, MC
borrowed $495,000 from the Co-Chairman of the Company’s 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 through December 31, 2014 were
$2,970 and included in cost of underwriting capital in the consolidated statements of operations. The loan and related fees were
paid in full on February 3, 2015.
On October 23, 2014, MC
borrowed $300,000 from the Co-Chairman of the Company’s 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 $7,800 and were included in
cost of underwriting capital in the consolidated statements of operations. The loan and related fees were paid in full on November
5, 2014.
Equity Lending Note
On August 31, 2012, the Company’s Chief
Executive Officer loaned $175,000 to the Company in a three year secured equity lending note (the “Equity Lending Note”)
at an interest rate of eight percent (8%) per annum payable quarterly in arrears. This note is secured by a security interest in
and right of setoff against all of the Company’s right, title and interest in and 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. Additional consideration
in the form of 69,444 warrants to purchase common shares of the Company at $18.90 per share was issued to the lender. The warrants
expire on August 31, 2015.
This transaction was accounted for as an issuance
of debt with warrants and the proceeds were allocated to the 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 Equity
Lending Note was $13,000 which was recorded as a discount on the debt and applied against the Equity Lending Note. The note collateral
has a carrying value of $175,000 and is included in other assets in the consolidated statement of financial condition as of December
31, 2014.
Secured Promissory Notes
On August 31, 2012, the Company’s Co-Chairman
of the Board of Directors loaned $250,000 to the Company in a three year secured promissory note (the “August 2012 Secured
Promissory Note”) at an interest rate of eight percent (8%) per annum payable quarterly in arrears. This note is secured
by a security interest in and right of setoff against all of the Company’s right, title and interest in and 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.
Additional consideration in the form of 99,206 warrants to purchase common shares of the Company at $0.63 per share was issued
to the lender. The warrants expire on August 31, 2015.
This transaction was accounted for as an issuance
of debt with warrants and the proceeds were allocated to the 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 August 2012 Secured Promissory Note was $19,000 which was recorded as a discount on the debt and applied against the
August 2012 Secured Promissory Note.
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Related Party Transactions
(continued)
Notes Payable –Related Party (continued)
Secured Promissory Notes (continued)
On September 27, 2012, the Company’s Co-Chairman
of the Board of Directors loaned $125,000 to the Company in a three year secured promissory note (the “September 2012 Secured
Promissory Note”) at an interest rate of eight percent (8%) per annum payable quarterly in arrears. This note is secured
by a security interest in and right of setoff against all of the Company’s right, title and interest in and 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.
Additional consideration in the form of 236,250 warrants to purchase common shares of the Company at $0.63 per share was issued
to the lender. The warrants expire on September 27, 2015.
This transaction was accounted for as an issuance
of debt with warrants and the proceeds were allocated to the 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 September
2012 Secured Promissory Note was $45,000 which was recorded as a discount on the debt and applied against the September 2014 Secured
Promissory Note.
On December 13, 2012, the Co-Chairman of the
Board of Directors loaned $200,000 to the Company in a secured promissory note (the “December 2012 Secured Promissory Note”)
maturing on September 13, 2013 and bearing interest rates at eight percent (8%) per annum payable at maturity. The December 2012
Secured Promissory Note was extended a few times maturing on August 31, 2015. Effective on September 26, 2013, interest rate increased
to ten percent (10%) per annum payable at maturity. Additional consideration included 625,000 warrants to purchase the Company
common stock at $2.40 per share.
On September 12, 2013 the Co-Chairman of the
Board of Directors loaned $166,028 to the Company in a secured promissory note maturing on February 7, 2014, bearing interest rates
at ten percent (10%) per annum payable at maturity. Principal amount and accrued interest were paid in full on January 23, 2014.
Software Platform Purchase
In December 2013, the Company purchased a software
platform called Digital Capital Network (“DCN”), an online capital marketplace, from an entity owned by a member of
the Board of Directors, Robert K. Ward. The purchase price consisted of $160,000 cash and 88,164
shares of the Company’s common stock valued at $1.80 per share at the time of issuance.
The Company also entered into a licensing agreement
to pay the entity owned by Robert K. Ward $18,000 a month.
For the years ended December 31, 2014 and 2013,
cash payments made to the entity owned by Robert K. Ward were $218,000 and $184,000, respectively.
Other Related Party Transactions
On June 17, 2014, MC sold
1 share of common stock each to the Company’s Chief Executive Officer and Chairman of the Audit Committee for $96 per share.
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.
17. 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.
As of February 28,
2015, MC was in net capital deficiency of approximately $40,000. MC filed the deficiency notification under SEA Rule 17a-11(c)(2)
with the SEC and FINRA on March 24, 2015. The net capital deficiency was cured on the same day. MC is in the process of obtaining
additional funding in order to ensure continuous net capital compliance.
COR Clearing LLC became
the Company’s clearing broker effective March 16, 2015.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
The financial statements included in this
report have been audited by Marcum LLP (“Marcum”), independent registered public accounting firms, as stated in their
audit reports appearing herein.
During the year ended December 31, 2014
and through the date of this Annual Report on Form 10-K, there were no disagreements with Marcum on any matter of accounting principles
or practice, financial statement disclosures, or auditing scope or procedures which, if not resolved to Marcum’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
Disclosure
Controls and Procedures – We carried out an evaluation, under the supervision and with the participation of our
management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation
of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based
upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures
are effective, as of December 31, 2014, in ensuring that material information that we are required to disclose in reports that
we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms.
Changes in
Internal Control over Financial Reporting – 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 year ended December 31,
2014, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Management’s
Annual Report on Internal Control over Financial Reporting – Our management is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive
and principal financial officers and effected by a company’s board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those
policies and procedures that:
| ● | pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
| ● | provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management
and directors; and |
| ● | provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements. |
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our management assessed the effectiveness
of our internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated
Framework in 1992. Based on our assessment, our management has concluded that, as of December 31, 2014, our internal control over
financial reporting is effective based on those criteria.
Item 9b. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information is incorporated by reference
to the Company’s definitive 2014 Proxy Statement.
Item 11. Executive Compensation
The information is incorporated by reference
to the Company’s definitive 2014 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners
and Management
The information is incorporated by reference
to the Company’s definitive 2014 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information is incorporated by reference
to the Company’s definitive 2014 Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information is incorporated by reference
to the Company’s definitive 2014 Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
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(a) |
1. |
The information required by this item is included in Item 8 of Part II of this Annual Report on Form 10-K. |
| |
2. |
Financial Statement Schedules |
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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| March 31, 2015 |
By: |
/s/ D. Jonathan Merriman |
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D. Jonathan Merriman, |
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Chief Executive Officer |
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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March 31, 2015 |
| 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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March 31, 2015 |
| Ronald L. Chez |
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| /s/ Patrick O’Brien |
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Director |
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March 31, 2015 |
| Patrick O’Brien |
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| /s/ William J. Febbo |
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Director |
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March 31, 2015 |
| William J. Febbo |
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| /s/ Dennis G. Schmal |
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Director |
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March 31, 2015 |
| Dennis G. Schmal |
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| /s/ Jeffrey M. Soinski |
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Director |
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March 31, 2015 |
| Jeffrey M. Soinski |
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| /s/ Robert K. Ward |
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Director |
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March 31, 2015 |
| Robert K. Ward |
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EXHIBIT INDEX
| Exhibit No. |
|
Description |
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|
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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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| 3.13 |
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Certificate of Amendment to the Certificate of Incorporation implementing one-for-thirty reverse stock split
effective July 14, 2014 (incorporated herein by reference to the Company’s Schedule 14A filed on April 30, 2014.
|
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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 |
|
Certificate of Amendment to the Certificate
of Incorporation changing name from MCF Corporation to Merriman Curhan Ford Group, 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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|
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| 3.6 |
|
Certificate of Amendment to the Certificate of Incorporation changing name from Merriman Curhan Ford Group, Inc. to Merriman Holdings, Inc. (incorporated herein by reference to the Company’s Schedule 14A filed on July 9, 2010. |
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3.7
|
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Certificate of Amendment to the Certificate
of Incorporation effecting an 0ne-forseven reverse stock split (incorporated herein by reference to the Company’s Schedule
14A filed on July 9, 2010. |
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|
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| 3.9 |
|
Amendment to Certificate of Designation further
amending provisions for Series D Preferred Stock (incorporated by Reference to Exhibit 3.9 of the Company’s Current Report
on Form 8-K filed on January 5, 2014). |
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| 3.10 |
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Certificate of Designation providing for Series E Preferred Stock (incorporated by Reference to Exhibit 3.10 of the Company’s Current Report on Form 8-K filed on January 5, 2014). |
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3.11 |
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Amendment to Certificate of Designation amending provisions for Series D and Series E Preferred Stock (incorporated by Reference to Exhibit 3.11 of the Company’s Current Report on Form 8-K filed on May 18, 2014). |
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|
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| 3.12 |
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Amendment to Certificate of Designation further
amending provisions for Series D and Series E Preferred Stock (incorporated by Reference to Exhibit 3.12 of the Company’s
Current Report on Form 8-K filed on August 3, 2014). |
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|
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| 10.49 |
|
Change of Control Agreements for D. Jonathan Merriman, William J. Febbo and Michael C. Doran dated November
17, 2014 (incorporated by reference to the Company’s Current Report on Form 8-K filed on November 21, 2014).
|
| Exhibit No. |
|
Description |
| |
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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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| 101 |
|
XBRL (eXtensible Business Reporting Language). The
following financial information from Merriman Holdings, Inc. on Form 10-K for the years ended December 31, 2014 and 2013,
filed with the SEC on March 31, 2015, formatted in XBRL includes: (1) Consolidated Statements of Operations, (2) Consolidated
Statements of Financial Condition,
(3) Consolidated Statements of Shareholders’ Deficit,
(4) Consolidated Statements of Cash Flows, and (5) Notes to Consolidated Financial Statements.
|
| + |
Represents management contract or compensatory plan or arrangement. |
EXHIBIT 21.1
List of Subsidiaries of Merriman Holdings,
Inc.
Merriman Capital, Inc., California (active)
Merriman Asset Management, Inc. (inactive)
EXHIBIT 23.1
Consent of Independent Registered Public
Accounting Firm
We consent to the incorporation
by reference in the Registration Statement of Merriman Holdings, Inc. on Forms S-3 (Nos. 333-96605, 333-106831,
333-118708, and 333-165031) and Forms S-8 (Nos. 333-41290, 333-43776, 333-105375, 333-109047, 333-137913, and 333-146302) of our
report dated March 31, 2015, which includes an explanatory paragraph as to the Company’s ability to continue as a going concern,
with respect to our audits of the consolidated financial statements of Merriman Holdings, Inc. as of December 31, 2014 and 2013
and for the years then ended which report is included in this Annual Report on Form 10-K of Merriman Holdings, Inc. for the year
ended December 31, 2014.
/s/ Marcum llp
Marcum llp
New York, New York
March 31, 2015
EXHIBIT 31.1
Certification of Principal Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, D. Jonathan Merriman, certify that:
| 1. |
I have reviewed this annual report on Form 10-K of Merriman Holdings, Inc.; |
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| 4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| |
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
| |
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| 5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| |
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; |
| |
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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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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|
| Date: March 31, 2015 |
|
EXHIBIT 31.2
Certification of Principal Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
I, William J. Febbo, certify that:
| 1. |
I have reviewed this annual report on Form 10-K of Merriman Holdings, Inc.; |
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| 4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| |
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
| |
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| 5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| |
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; |
| |
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| |
/s/ William J. Febbo |
| |
William J. Febbo |
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|
| |
Principal Financial Officer |
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| Date: March 31, 2015 |
|
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
In connection with the Annual Report of
Merriman Holdings, Inc. on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commission
on the date hereof (the “Report”), we, D. Jonathan Merriman and William J. Febbo, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002 that:
| |
(1) |
The Report fully complies with the requirements of Section 13a) or 15(d) of the Securities Exchange Act of 1934; and |
| |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| March 31, 2015 |
|
|
| |
|
/s/ D. Jonathan Merriman |
| |
D. Jonathan Merriman
Chief Executive Officer |
| |
|
/s/ William J. Febbo |
| |
William J. Febbo
Principal Financial Officer |
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