SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K/A
(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, 2008
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
CURHAN FORD GROUP, INC.
(Exact
Name of Registrant as Specified in its Charter)
Delaware
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|
11-2936371
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(IRS
Employer
Identification
No.)
|
600
California Street, 9th Floor
San
Francisco, CA 94108
(Address
of principal executive offices)(Zip Code)
(415)
248-5600
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o 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 o 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 o
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. ▪o
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) ▪o
|
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 12,684,106 shares of common stock of the
Registrant issued and outstanding as of June 30, 2008, the last business day of
the registrant’s most recently completed second fiscal quarter, excluding
1,239,822 shares of common stock held by affiliates of the Registrant was
$14,534,241. This amount is based on the closing price of the common stock on
NASDAQ of $1.27 per share on June 30, 2008.
The
number of shares of Registrant’s common stock outstanding as of March 25, 2009
was 12,733,296
TABLE
OF CONTENTS
PART I
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Item 1.
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Business
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1
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Item 1A.
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Risk
Factors
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10
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Item 1B.
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Unresolved
Staff Comments
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20
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Item 2.
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Properties
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20
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Item 3.
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Legal
Proceedings
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21
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Item 4.
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Submission
of Matters to a Vote of Stockholders
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25
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PART II
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Item 5.
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Market
for Registrant’s Common Stock and Related Stockholder
Matters
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25
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Item 6.
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Selected
Financial Data
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27
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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28
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Item 7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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43
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Item 8.
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Financial
Statements and Supplementary Data
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44
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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78
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Item 9A.
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Controls
and Procedures
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78
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Item 9B.
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Other
Information
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78
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PART III
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Item
10.
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Directors
and Executive Officers of the Registrant
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80
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Item 11.
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Executive Compensation
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83
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Item 12.
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Security Ownership
of Certain Beneficial Owners and Management
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86
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Item 13.
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Certain
Relationships and Related Transactions
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89
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Item 14.
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Principal Accounting Fees And Services
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89
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PART IV
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Item 15.
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Exhibits
and Financial Statement Schedules
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90
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This
Annual Report on Form 10-K and the information incorporated by reference in this
Form 10-K include forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Some of the forward-looking statements can be
identified by the use of forward-looking words such as “believes,” “expects,”
“may,” “will,” “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.
Explanatory
Note
This
Amendment No. 1 on Form 10-K/A (this “Amendment”) amends the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2008, originally
filed on March 31, 2009 (the “Original Filing”). The Company is filing this
Amendment to include the information required by Items 10, 11, 12, 13 and 14 to
Part III because the Company’s proxy statement will not be filed within 120 days
of the end of the Company’s fiscal year ended December 31, 2008. In addition, in
connection with the filing of this Amendment and pursuant to the rules of the
Securities and Exchange Commission, the Company is including with this Amendment
certain currently dated certifications.
Except as
described above, no other changes have been made to the Original Filing. This
Amendment continues to speak as of the date of the Original Filing or as of
December 31, 2008 as required by the context, and the registrant has not updated
the disclosures contained in the Original Filing to reflect any events which
occurred at a date subsequent to the filing of the Original Filing. The filing
of this Form 10-K/A is not a representation that any statements contained in
items of Form 10-K other than Part III Items 10 through 14 are true or complete
as of any date subsequent to the date of the Original Filing.
PART
I
Item
1. Business
Overview
We are a
financial services holding company that provides equity research, capital
markets services, corporate and venture services, investment banking, asset
management and primary research through our operating subsidiaries, Merriman
Curhan Ford & Co., MCF Asset Management, LLC and Panel Intelligence,
LLC.
Merriman
Curhan Ford & Co. is an investment bank and securities broker-dealer focused
on fast-growing companies and institutional investors. Our mission is to become
a leader in the researching, advising, financing, trading and investing
in fast-growing companies under $2 billion in market capitalization. We
provide equity research, brokerage and trading services primarily to
institutions, as well as investment banking and advisory services to corporate
clients. We are attempting to gain market share by originating differentiated
research for our institutional investor clients and providing specialized and
integrated services for our fast-growing corporate clients.
Panel
Intelligence, LLC was acquired in April 2007. It offers custom and
published primary research to industry clients and investment professionals
through online panel discussions, quantitative surveys and an extensive research
library. Panel Intelligence, LLC provides greater access, compliance, insights
and productivity to clients in the health care, CleanTech and financial
industries. In January 2009, the majority of the assets of Panel Intelligence,
LLC were sold to an investor group that included certain members of its
management team. For financial reporting purposes we have listed the operations
of the business as part of discontinued operations.
MCF Asset
Management, LLC manages absolute return investment products for institutional
and high-net worth clients. We are the sub-advisor for the MCF Focus fund. In an
effort to refocus the holding company back to its core investment banking/
broker-dealers services, management has decided to begin the process of
liquidating the funds under management and returning investments to the
investors in the fourth quarter of 2008. As a result of such, we have eliminated
positions at MCF Asset Management, LLC, reducing our expenses beginning in
2008. This has been included in the reductions in force disclosed
under Management Discussion and Analysis. As of December 31, 2008,
assets under management across our three fund products had been partially
liquidated to $11 million from $56 million in 2007.
We are
headquartered in San Francisco, with additional offices in New York, NY and
Cambridge, MA. As of December 31, 2008, we had 128 employees. Merriman Curhan
Ford & Co. is registered with the Securities and Exchange Commission as a
broker-dealer and is a member of Financial Industry Regulatory Authority
(“FINRA”) and the Securities Investors Protection Corporation. MCF Asset
Management, LLC is registered with the Securities and Exchange
Commission.
Going
Concern
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern for the foreseeable future and will
be able to realize its assets and discharge its liabilities in the normal course
of operations.
During
the year ended December 31, 2008, the Company incurred a net loss of $30,274,000
and used $24,945,000 in net cash from operating activities. At
December 31, 2008, the Company had cash and cash equivalents of $6,358,000,
marketable securities of $4,623,000 and receivables from clearing broker of
$1,753,000. The Company had liabilities of
$11,150,000. The Company’s ability to generate profits is highly
dependent on stock market trading volumes and the general economic environment.
As a result, the ability of the Company to meet its forward obligations and the
ability to continue as a going concern may be in question.
The
Company is in the process of implementing a plan to increase its operating
flexibility and extend its cash reserves. The plan primarily consists of four
steps which are more fully described below:
1. Reduce
operating costs
2. Shed
non-essential operations
3. Negotiate
a settlement of pending litigations
4. Raise
additional capital
During
2008 and early 2009, the Company implemented significant expense control and
cost reduction programs focused on reducing cash losses and increasing
operational flexibility in which it has eliminated more than $10 million in
annual operating expenses. The primary contributor to these savings has been the
elimination of more than 50% of the Company’s workforce, as well as salary
reductions. The CEO, the Head of Institutional Securities and the Head of
Professional Services voluntarily eliminated their salaries. They
will be remunerated based on month-to-month profitability. The Board
of Directors has, as of early 2009, also voluntarily eliminated its
compensation. The Company believes that it has been able to execute
these reductions with limited impact to its ability to generate and execute new
business in the current market environment. With these measures largely
complete, the company believes that it has increased its ability to meet its
obligations during 2009 and beyond.
As a part
of the four-step plan mentioned above, in January of 2009, the Company shed
non-essential operations or those requiring substantial cash
infusions. First, the Company sold Panel Intelligence, LLC on January
30, 2009. This subsidiary required a cash injection of $1,131,000 during 2008
and was projected to reach breakeven only in late 2009. Also in January 2009,
the Company sold its operations known as Institutional Cash Distributors to a
group of its employees. While this business was profitable, management was able
to reach a deal that substantially increases the near-term flow of capital.
Finally, the Company is in the process of shutting down MCF Asset Management,
another subsidiary which had been costing the Company considerable capital
during 2008. The result of these actions has been to reduce operating loses and
increase available cash.
The
Company has entered into a process of mediation to reach a settlement with a
majority of the civil litigants resulting from the alleged fraud by its former
customer William Del Biaggio III and its terminated employee Scott
Cacchione. The Company is focused on reducing its potential liability
in these legal proceedings and the resources required to fight the allegations.
In addition, it is also aiming to free up valuable management resources needed
to face challenging market and economic conditions. At present, there
is no indication that these negotiations will be successful and whether it will
serve the Company’s aims and should a settlement result, it is not yet
estimable.
The
Company is assessing interest of potential investors in providing additional
capital to the business. While the Company does not have a definitive agreement
from any investor, preliminary discussions have yielded some interest subject to
the completion of the three steps outlined above. There are no
assurances that the Company will be successful in completing its plans outlined
above and ultimately in raising additional capital.
The
Company’s ability to meet its going concern obligations is highly dependent on
market and economic conditions. Even if it is successful in executing
its four-step plan, it will not be capable of sustaining losses such as those
incurred in 2008. However, it is worth noting that 2008 was an
unprecedented year both in terms of stock market volatility and general economic
challenges. Furthermore, the large number of civil litigations and resulting SEC
investigation was a significant drain on corporate resources. The Company
believes that its reduced cost structure and shedding of non core business has
increased its operating runway. However, if operating conditions worsen in 2009
or if the company receives adverse judgments in its pending litigations, it may
not have the resources to meet its financial obligations as a going
concern.
These
financial statements do not reflect adjustments in the carrying values of assets
and liabilities, the reported revenues and expenses, and the balance sheet
classifications used that would be necessary if the going concern assumption
were not appropriate. These adjustments could be
material.
Principal
Services
We
currently have two business segments: the investment bank / broker-dealer and
asset management. Our investment bank / broker-dealer segment provides three
service offerings: investment banking, brokerage and equity research. Our asset
management segment manages investment products for investors. In January 2009
we sold the majority of the assets and liabilities of our primary research
subsidiary, Panel Intelligence, LLC, or Panel, which was our third business
segment. The results from this segment are presented as discontinued operations,
which was a third business segment.
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 that are focused 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 points in their
growth cycle. As of December 31, 2008, we had 16 professionals in our
investment banking group.
Corporate Finance. Our
corporate finance practice advises on and structures capital raising solutions
for our corporate clients through public and private offerings of primarily
equity and convertible debt securities. Our focus is to provide fast-growing
companies with the capital necessary to drive 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,
private investments in public equity, or PIPEs, and private placements. Our
equity capital markets team executes underwritten securities offerings, assists
clients with investor relations advice and introduces companies seeking to raise
capital to investors that we believe will be supportive, long-term investors.
Additionally, we draw upon our contacts throughout the financial and corporate
world, expanding the options available for 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 acquisitions transactions.
Institutional
Brokerage Services
We
provide institutional sales, sales trading and trading services to more than 490
institutional accounts in the United States. We execute securities transactions
for money managers, mutual funds, hedge funds, insurance companies, pension and
profit-sharing plans. Institutional investors normally purchase and sell
securities in large quantities, which require the distribution and trading
expertise we provide.
We
provide integrated research and trading solutions centered on helping our
institutional clients to invest profitably, to grow their portfolios and
ultimately their businesses. We understand the importance of building long-term
relationships with our clients who we believe look to us for the professional
resources and relevant expertise to provide answers for their specific
situations. We believe it is important for us to be involved with 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 clients execute trades rapidly, efficiently and
accurately.
Institutional Sales. Our
sales professionals focus on communicating investment ideas to our clients and
executing trades in securities of companies in our target growth sectors. By
actively trading in these securities, we endeavor to couple the capital market
information flow with the fundamental information flow provided by our analysts.
We believe that this combined information flow is the underpinning of getting
our clients favorable execution of investment strategies. Sales professionals
work closely with our research analysts to provide up-to-date information to our
institutional clients. We interface actively with our clients and plan to be
involved with our clients over the long term.
Sales Trading. Our sales
traders are experienced in the industry and possess in-depth knowledge of both
the markets for fast-growing company securities and the institutional traders
who buy and sell them.
Trading. Our trading
professionals facilitate liquidity discovery in equity securities. We make
markets in securities traded on NASDAQ, stock exchanges and ECNs, and
service the trading desks of institutions in the United States. Our trading
professionals have direct access to the major stock exchanges, including the New
York Stock Exchange and the American Stock Exchange. As of December 31, 2008, we
were a market maker in 148 securities.
The
customer base of our institutional brokerage business includes mutual funds,
hedge funds, and private investment firms. We believe this group of clients and
potential clients to number over 4,000. We grow our business by adding new
customers and increasing the penetration of existing institutional customers
that use our equity research and trading services in their investment
process.
Proprietary Trading. We will
from time to time take significant positions in fast-growing companies that we
feel are undervalued in the marketplace. We believe that our window into these
opportunities, due to the types of companies we research, offers us a
significant competitive advantage.
Corporate & Executive
Services. We offer brokerage services to corporations including corporate
cash management and stock repurchase programs through our Corporate &
Executive Services group. We also serve the needs of company executives with
restricted stock transactions, cashless exercise of options, hedging and
diversification strategies, and liquidity strategies.
Venture Services. The Venture
Services team provides sales distribution for capital raises for private
companies via the introduction to venture capital and private equity investors.
Our venture services include distribution and liquidity programs, portfolio
company advisory services, research dissemination and best-execution
trading.
OTCQX Advisory. Merriman
Curhan Ford & Co. began offering services to sponsor companies on the
International and Domestic OTCQX markets in 2007. In 2008, we solidified our
position as the leading investment bank sponsor in this market. We enable
non-U.S. and domestic companies to obtain greater exposure to U.S. institutional
investors without the expense and regulatory burdens of listing on traditional
U.S. exchanges. The International and Domestic OTCQX market tiers do not require
full SEC registration and are not subject to the 2002 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. Merriman Curhan
Ford & Co. was the first investment bank to achieve DAD and PAL designations
and currently is the sponsor of 12 out of 52 issuers listed on
OTCQX.
Institutional Marketing
Services (IMS) is a new program launched in late 2008 by Merriman Curhan
Ford & Co. to help companies develop better liquidity in their stock
and expand their institutional ownership. Designed as a customized suite of
services for a select group of high-quality, high-growth companies with small
market capitalizations, IMS applies a full range of Merriman’s institutional
capabilities to help clients achieve their objectives in the capital
markets.
Capital Access Group. We
raise capital for institutional hedge funds, venture capital and private equity
clients for a fee through our Capital Access Group. We believe fee-based capital
raising is an underserved area of the institutional brokerage
industry.
Institutional Cash Distributors
(ICD). ICD is a broker of money market funds serving the short-term
investing needs of corporate finance departments at companies throughout the
United States and Europe. Companies using ICD’s services receive access to over
40 fund families through ICD’s one-stop process that includes one application,
one wire and one statement that consolidates reporting regardless of the number
of funds utilized. As of December 31, 2008, ICD clients have invested over $42
billion in money market funds from which ICD earns brokerage fees. ICD is a
division of Merriman Curhan Ford & Co. In January, 2009, we sold
the primary assets related to the ICD operations to a group of investors which
included some of our employees. However, until the new company is able to form
its own broker-dealer which is anticipated to be in 2009, the business will
continue operating under Merriman Curhan Ford & Co.
Equity
Research
A key
part of our strategy is to originate specialized and in-depth research. Our
analysts cover a universe of approximately 100 companies in our focus industry
sectors. We leverage the ideas generated by our research teams, using them to
attract and retain institutional brokerage clients.
Supported
by the firm’s institutional sales and trading capabilities, our analysts deliver
timely recommendations to clients on innovative investment opportunities. In an
effort to make money for our investor clients, our analysts are driven to find
undiscovered opportunities in fast-growing companies that are not widely held
and that we believe are undervalued. Given the contrarian and undiscovered
nature of many of our research ideas, we, as a firm, specialize in serving
sophisticated, aggressive institutional investors. As of February 27, 2009,
approximately 90% of the companies covered by our research professionals had
market capitalizations of $1 billion or less.
Our
research focuses on bottom-up, fundamental analysis of fast-growing companies in
selected growth sectors. Our analysts’ expertise in these categories of
companies, along with their intensive industry knowledge and contacts, provides
us with the ability to deliver timely, accurate, and value-added information to
our clients.
Our
objective is to build long lasting relationships with our clients by providing
investment recommendations that directly equate to enhanced performance of their
portfolios. Further, given our approach and focus on quality service, we believe
our research analysts are in a unique position to maintain close, ongoing
communication with our institutional clients.
The
industry sectors covered by our 7 equity research analysts include:
CleanTech
· Energy
Storage and Efficiency
· Next-Generation
Energy
· Smart-Grid
Technologies
Health
Care
· Biotechnology/Life
Sciences
· Oncology
and Inflammatory Diseases
Tech/Telecom
· Emerging
Data Center & Enterprise Technologies
Consumer /Internet/Media
· Branded
Consumer
· China
Consumer
· Internet
Applications, Software and Services
·
Media & Entertainment
After
initiating coverage on a company, our analysts seek to effectively communicate
new developments to our institutional sales and trading professionals as well as
our institutional investors. We produce full-length research reports, notes and
earnings estimates on the companies we cover. We also produce comprehensive
industry sector reports. In addition, our analysts distribute written updates on
these issuers both internally and to our clients through the use of daily
morning meeting notes, real-time electronic mail and other forms of immediate
communication. Our clients can also receive analyst comments through electronic
media, and our sales force receives intra-day updates at meetings and through
regular announcements of developments. All of the above is also available
through a password protected searchable database of our daily and historical
research archives, found on our website at www.merrimanco.com.
Our
equity research group annually hosts several conferences targeting fast-growing
companies and investors, including our Investor Summit and various industry
sector conferences. We use these events to showcase innovative and fast-growing
companies to institutional investors focused on investing in these growth
sectors.
Asset
Management
MCF Asset
Management, LLC creates investment products for both institutional and high-net
worth clients. Through the corporate and professional resources of Merriman
Curhan Ford Group, Inc., we had developed an institutional-standard investment
management platform.
The year
2008 was highly unfavorable for equity investments. The Dow Jones Industrial
Average declined from about 14,000 in October 2007 to near 7,000 at the end of
February 2009. The resulting market volatility and negative investor sentiment
has made it very challenging to attract new assets to our funds. It is much less
cost-effective to manage small amounts of funds while competing with larger
firms in the current environment. Consequently, in order to reduce our cost
structure, management decided to liquidate the funds under management by MCF
Asset Management in late 2008. We expect to exit this business in
2009.
Primary
Research
Panel
offers an online primary research platform that provided health care and
CleanTech industry clients and investment professionals with deeper insights and
better efficiency for investment decisions, product development and marketing.
By leveraging its proprietary methodology and vast network of health care and
CleanTech experts, we believe we can quickly provide independent market data and
information to clients.
Our
primary research product and service offerings arise from the intelligent
application of our core technology and research platform. Our staff guides
clients in the development of highly targeted customized quantitative and/or
qualitative research instruments designed to address business issues important
to the client. In addition, we have developed proprietary research products
which we market to multiple clients. These reports provide timely, consistent
and cross-comparable data on a regular basis to subscribing
clients.
In
January 2009 we sold the majority of the assets and liabilities of our primary
research subsidiary, Panel Intelligence, LLC to a group of investors which
included key management of Panel. This separation will help lower our
expenses.
Competition
Merriman
Curhan Ford is engaged in the highly competitive financial services and
investment industries. We compete with other Wall Street 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.
This
trend by competitors to reduce services creates an opportunity for us as many
highly qualified individuals have lost their jobs, expanding the pool of
experienced employees to hire. However, the economic environment in 2008 has
also exacerbated the negative secular trends in the traditional investment
banking/brokerage business. Many of our buy-side clients have merged, gone out
of business or have sharply reduced their commission flow. The reduction in
these clients also has also lowered the number of potential buyers for our
investment banking product.
Many
remaining competitors have greater personnel and financial resources than we do.
Larger competitors may have a greater number and variety of distribution outlets
for their products. Some competitors have much more extensive investment banking
activities than we do and therefore, may possess a relative advantage with
regard to access to deal flow and capital.
For a
further discussion of the competitive factors affecting our business, see “Item
1A. Risk Factors—The markets for securities brokerage and investment banking
services are highly competitive.”
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
telecommunications systems, the processing of securities transactions, and
corporate communications. With the exception of payroll processing, which is
performed by an outside service bureau, and customer account processing, which
is performed by our clearing broker, most data processing functions are
performed internally. We believe that future growth will require implementation
of new and enhanced communications and information systems and training of our
personnel to operate such systems. Despite the challenges that we are
experiencing, we are implementing such enhancements.
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 also 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 consultants and attorneys 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 customer’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 condition.
Reputation risk is the
potential that negative publicity regarding our practices, whether factually
correct or not, will cause a decline in our customer base, costly litigation, or
revenue reductions.
We have a
risk management program that 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 as necessary policies, procedures and risk limits;
· 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, or
SRO, memberships, we are subject to overlapping layers of regulation that cover
all aspects of our securities business. Such regulations cover matters including
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 customers. As a result, many aspects of the
broker-dealer customer relationship are subject to regulation including, in some
instances, “suitability” determinations as to certain customer transactions,
limitations on the amounts that may be charged to customers, timing of
proprietary trading in relation to customers’ trades and disclosures to
customers.
As a
broker-dealer registered with the Securities and Exchange Commission, or SEC,
and as a member firm of Financial Industry Regulatory Authority, or FINRA, we
are subject to the net capital requirements of the SEC and FINRA. These capital
requirements specify minimum levels of capital, computed in accordance with
regulatory requirements that each firm is 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),
plus qualifying subordinated borrowings, less the value of all of a
broker-dealer’s assets that are not readily convertible into cash (such as
furniture, prepaid expenses and unsecured receivables), and further reduced by
certain percentages (commonly called “haircuts”) of the market value of a
broker-dealer’s positions in securities and other financial instruments. The
amount of net capital in excess of the regulatory minimum is referred to as
“excess net capital.”
The SEC’s
capital rules also (i) require that 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-dealer’s 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-dealer’s
excess net capital, (ii) prohibit a broker-dealer from withdrawing or otherwise
distributing equity capital or making related party loans if, after such
distribution or loan, the broker-dealer would have net capital of less than
$300,000 or if the aggregate indebtedness of the broker-dealer’s consolidated
entities would exceed 1,000% of the broker-dealer’s net capital in certain other
circumstances, and (iii) provide that the SEC may, by order, prohibit
withdrawals of capital from a broker-dealer for a period of up to 20 business
days, if the withdrawals would exceed, in any 30-day period, 30% of the
broker-dealer’s excess net capital and if the SEC believes such withdrawals
would be detrimental to the financial integrity of the firm or would unduly
jeopardize the broker-dealer’s ability to pay its customer 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 also could restrict our ability to withdraw capital from our
broker-dealer, which in turn could limit our ability to pay interest, repay debt
and redeem or repurchase shares of our outstanding capital stock.
We
believe that at all times we have been in compliance with the applicable minimum
net capital rules of the SEC and FINRA.
The
failure of a U.S. broker-dealer to maintain its minimum required net capital
would require it to cease executing customer 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-dealers. Certain “Material Associated
Persons” (as defined in the Risk Assessment Rules) of the broker-dealers and the
activities conducted by such Material Associated Persons may also be subject to
regulation by the SEC. In addition, the possibility exists that, on the basis of
the information it obtains under the Risk Assessment Rules, the SEC could seek
authority over our unregulated subsidiary either directly or through its
existing authority over our regulated subsidiary.
In the
event of non-compliance by us or one of our subsidiaries 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 United
States, state or foreign governmental regulatory authorities and SROs or changes
in the interpretation or enforcement of existing laws and rules may adversely
affect our manner of operation and our 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
Curhan Ford Group, Inc. is domiciled in the United States and most of our
revenue is attributed to United States and Canadian customers. In 2007, through
our broker-dealer subsidiary, we began advising both international and domestic
companies on listing on OTCQX, a prime tier of Pink Sheets. We have several
international clients, most of which are Australian companies listed on the
Australian Securities Exchange.
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 Securities and Exchange Commission. 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, our industry and 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 maintain a positive cash flow and profitability.
Our
ability to maintain 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 development of our
investment banking and securities brokerage business, and we may be unable to
maintain profitability if we fails 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;
· manage
expanding operations; and
· attract
and retain qualified personnel.
We cannot
be certain that we will be able to sustain or increase a positive cash flow and
profitability on a quarterly or annual basis in the future. Our inability to
maintain 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
Because
we are a developing company, 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 and any additional
financing that may be needed for this purpose 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, or obtain the funds necessary to finance this development.
It is more likely than not that our estimates will prove to be inaccurate
because actual events more often than not differ from anticipated events.
Furthermore, in the event that financing is needed in addition to the amount
that is required for this development, we cannot assure you that such financing
will be available on acceptable terms, if at all.
There
are substantial legal proceedings against us involving claims for significant
damages.
The
actions of a former customer, William Del Biaggio III, and a former employee,
Scott Cacchione, have given rise to many legal actions against us as described
in the Legal Proceedings section below. If we are found to be liable for the
claims asserted in any or all of these legal actions, our cash position may
suffer such that we are unable to continue our operations. Even if we ultimately
prevail in all of these lawsuits, we may incur significant legal fees and
diversion of management’s time and attention from our core businesses, and our
business and financial condition may be adversely affected. We are attempting to
negotiate a settlement with some of the litigants, but there is no assurance of
any favorable outcome.
Our
exposure to legal liability is 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.
Unrelated
to the actions of Del Biaggio and Cacchione, we face significant legal risks in
our businesses and, in recent years, the volume of claims and amount of damages
sought in litigation and regulatory proceedings against financial institutions
have been increasing. These risks include potential liability under securities
or other laws for materially false or misleading statements made in connection
with securities offerings and other transactions, potential liability for
“fairness opinions” and other advice we provide to participants in strategic
transactions and disputes over the terms and conditions of complex trading
arrangements. We are also subject to claims arising from disputes with employees
for alleged discrimination or harassment, among other things. These risks often
may be difficult to assess or quantify and their existence and magnitude often
remain unknown for substantial periods of time.
Our role
as advisor to our clients on important underwriting or mergers and acquisitions
transactions involves complex analysis and the exercise of professional
judgment, including rendering “fairness opinions” in connection with mergers and
other transactions. Therefore, our activities may subject us to the risk of
significant legal liabilities to our clients and 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
that company. Such litigation is expensive and diverts management’s attention
and resources. We can not assure you that we will not be subject to such
litigation. If we are subject to such litigation, even if we ultimately prevail,
our business and financial condition may be adversely affected.
We
may not be able to continue operating our business as a going
concern
The
Company incurred significant losses in 2008. Even if we are successful in
executing our plans, we will not be capable of sustaining losses such as those
incurred in 2008. The Company’s ability to meet its going concern obligations is
highly dependent on market and economic conditions. If operating conditions
worsen in 2009 or if the Company receives adverse judgments in its pending
litigations, we may not have the resources to meet our financial obligations as
a going concern. If the Company is not able to continue in business as a going
concern, the entire investment of our common stockholders may be at risk, and
there can be no assurance that any proceeds stockholders would receive in
liquidation would be equal to their investment in the Company, or even that
stockholders would receive any proceeds in consideration of their common
stock.
Limitations
on our access to capital and our ability to comply with net capital requirements
could impair ability to conduct our business
Liquidity,
or ready access to funds, is essential to financial services firms. Failures of
financial institutions have often been attributable in large part to
insufficient liquidity. Liquidity is of importance to our trading business and
perceived liquidity issues may affect our clients and counterparties’
willingness to engage in brokerage transactions with us. Our liquidity could be
impaired due to circumstances that we may be unable to control, such as a
general market disruption or an operational problem that affects our trading
clients, third parties or us. Further, our ability to sell assets may be
impaired if other market participants are seeking to sell similar assets at the
same time.
Merriman
Curhan Ford & Co., 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, Merriman Curhan Ford & Co. is
subject to laws that authorize regulatory bodies to block or reduce the flow of
funds from it to Merriman Curhan Ford Group, Inc. As a holding company, Merriman
Curhan Ford Group, Inc. depends on distributions and other payments from its
subsidiaries to fund all payments on its obligations. As a result, regulatory
actions could impede access to funds that Merriman Curhan Ford Group, Inc. needs
to make payments on obligations, including debt obligations.
Our
financial results may fluctuate substantially from period to period, which may
impair our stock price.
We have
experienced, and expect to experience in the future, significant periodic
variations in our revenue and results of operations. These variations may be
attributed in part to the fact that our investment banking revenue is typically
earned upon the successful completion of a transaction, the timing of which is
uncertain and beyond our control. In most cases we receive little or no payment
for investment banking engagements that do not result in the successful
completion of a transaction. As a result, our business is highly dependent on
market conditions as well as the decisions and actions of our clients and
interested third parties. For example, a client’s acquisition transaction may be
delayed or terminated because of a failure to agree upon final terms with the
counterparty, failure to obtain necessary regulatory consents or board or
shareholder approvals, failure to secure necessary financing, adverse market
conditions or unexpected financial or other problems in the client’s or
counterparty’s business. If the parties fail to complete a transaction on which
we are advising or an offering in which we are participating, we will earn
little or no revenue from the transaction. This risk may be intensified by our
focus on growth companies in the CleanTech, Consumer/Internet/Media, Health Care
and Tech/Telecom sectors, as the market for securities of these companies has
experienced significant variations in the number and size of equity offerings.
Recently, there have been very few initial public offerings. More companies
initiating the process of an initial public offering are simultaneously
exploring merger and acquisition opportunities. If we are not engaged as a
strategic advisor in any such dual-tracked process, our investment banking
revenue would be adversely affected in the event that an initial public offering
is not consummated.
As a
result, we are unlikely to achieve steady and predictable earnings on a
quarterly basis, which could in turn adversely affect our stock
price.
Our
ability to retain our professionals and recruit additional professionals is
critical to the success of our business, and our failure to do so may materially
adversely affect our reputation, business and results of
operations.
Our
ability to obtain and successfully execute our business depends upon the
personal reputation, judgment, business generation capabilities and project
execution skills of our senior professionals, particularly D. Jonathan Merriman,
our Chief Executive Officer, and the other members of our Executive Committee.
Our senior professionals’ personal reputations and relationships with our
clients are a critical element in obtaining and executing client engagements. We
encounters intense competition for qualified employees from other companies in
the investment banking industry as well as from businesses outside the
investment banking industry, such as investment advisory firms, hedge funds,
private equity funds and venture capital funds. From time to time, we have
experienced losses of investment banking, brokerage, research and other
professionals and losses of our key personnel may occur in the future. The
departure or other loss of Mr. Merriman, other member of our Executive
Committee or any other senior professional who manages substantial client
relationships and possesses substantial experience and expertise, could impair
our ability to secure or successfully complete engagements, protect our market
share or retain assets under management, 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 is 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 2008, the potential pool was determined by a
number of components including revenue production, key operating milestones and
profitability. There is a potential that we could pay individuals for revenue
production despite the business having negative cash flows and/or net losses in
order to ensure retention of key employees.
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 clients in order to win their trading business. As we are committed to
maintaining our comprehensive research coverage in our target sectors to support
our brokerage business, we may be required to make substantial investments in
our research capabilities. If we are unable to compete effectively with our
competitors in these areas, brokerage revenue may decline and our business,
financial condition and results of operations may be adversely
affected.
Changes
in laws and regulations governing brokerage and research activities could also
adversely affect our brokerage business.
In July
2006, the SEC published interpretive guidance regarding the scope of permitted
brokerage and research services in connection with “soft dollar” practices
(i.e., arrangements under which an investment adviser directs client brokerage
transactions to a broker in exchange for research products or services in
addition to brokerage services) and solicited further public comment regarding
soft dollar practices involving third-party providers of research. The July 2006
SEC interpretive guidance may affect our brokerage business and laws or
regulations may prompt brokerage customers to revisit or alter the manner in
which they pay for research or brokerage services. The industry has put in place
commission sharing arrangements under which an institutional client will execute
trades with a limited number of brokers and instruct those brokers to allocate a
portion of the commissions generated directly to other broker-dealers or to
independent research providers in exchange for research and other permissible
products and services. As such arrangements are entered into by our clients with
us and/or other brokerage firms, it may further increase the competitive
pressures within the brokerage business and/or reduce the value our clients
place on high quality research.
In 2005
the SEC promulgated Regulation NMS, which made dramatic changes to the
National Market System, and one of the most significant of those changes, the
“Order Protection Rule” recently became effective. Under the Order Protection
Rule, commonly known as the “trade-through rule,” broker-dealers that trade at a
price higher than the inside offer (or lower than the inside bid) of a market
center’s best quotation will be required to “take out”, or execute against, that
market’s quotation. We cannot fully predict the effect that the implementation
of the Order Protection Rule may have on our brokerage
business.
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 trading
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. 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, investment banking and asset management 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. Competitive factors with respect
to our asset management activities include the amount of firm capital we can
invest in new products and our ability to increase assets under management,
including our ability to attract capital for new investment funds. We believe we
may experience competitive pressures in these and other areas in the future as
some of our competitors seek to obtain market share by competing on the basis of
price.
We are a
relatively small investment bank with approximately 128 employees as of December
31, 2008 and revenue less than $40 million in 2008. 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 and more established relationships
with clients than we have. These larger and better capitalized competitors may
be better able to respond to changes in the brokerage, investment banking and
asset management 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 have the ability to offer a wider
range of products than we do, which may enhance 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 and in the recent
past and may incur losses in the future.
The
Company recorded net losses of $30,274,000 for the year ended December 31, 2008
and $8,220,000 for the year ended December 31, 2006. 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.
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.
A
significant portion of our brokerage revenue is generated from a relatively
small number of institutional clients.
A
significant portion of our brokerage revenue is generated from a relatively
small number of institutional clients. For example, in 2008 we generated 37% of
our brokerage revenue, or approximately 25% of our total revenue, from our ten
largest brokerage clients. Similarly, in 2007 we generated 26% of our brokerage
revenue, or approximately 9% of our total revenue, from our ten largest
brokerage clients. If any of our key clients departs or reduces its business
with us and we fail to attract new clients that are capable of generating
significant trading volumes, our business and results of operations will 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 that owe us money, securities or other
assets will not perform their obligations. These parties may default on their
obligations to us 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. As a
clearing member firm, we finance our customer positions and could be held
responsible for the defaults or misconduct of our customers. 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, trading activities
or asset management 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
businesses are 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 communications
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 an impairment to
our liquidity, financial loss, a disruption of our businesses, liability 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 effect 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, communications, transportation or other services used by us or third
parties with which we conduct business, whether due to fire, other natural
disaster, power or communications 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 close 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.
Strategic
investments or acquisitions and joint ventures may result in additional risks
and uncertainties in our business.
We may
grow our business through both internal expansion and through strategic
investments, acquisitions or joint ventures. To the extent we make strategic
investments or acquisitions or enter into joint ventures, we face numerous risks
and uncertainties combining or integrating businesses, including integrating
relationships with customers, business partners and internal data processing
systems. In the case of joint ventures, we are subject to additional risks and
uncertainties in that we may be dependent upon, and subject to liability, losses
or reputation damage relating to systems, controls and personnel that are not
under our control. In addition, conflicts or disagreements between us and our
joint venture partners may negatively impact our businesses.
Future
acquisitions or joint ventures by us could entail a number of risks, including
problems with the effective integration of operations, the inability to maintain
key pre-acquisition business relationships and integrate new relationships, the
inability to retain key employees, increased operating costs, exposure to
unanticipated liabilities, risks of misconduct by employees not subject to our
control, difficulties in realizing projected efficiencies, synergies and cost
savings, and exposure to new or unknown liabilities.
Any
future growth of our business may require significant resources and/or result in
significant unanticipated losses, costs or liabilities. In addition, expansions,
acquisitions or joint ventures may require significant managerial attention,
which may be diverted from our other operations.
Evaluation
of our prospects may be more difficult in light of our limited operating
history.
We have a
limited operating history upon which to evaluate our business and prospects. As
a relatively young enterprise, we are subject to the risks and uncertainties
that face a company during its formative development. Some of these risks and
uncertainties relate to our ability to attract and retain 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.
We
are subject to an IRS audit.
The
United States Internal Revenue Service is auditing our 2006 corporate tax
return. The IRS audit may result in additional tax payments by us together with
interest and penalties, the amount of which may be material, but will not be
known until the IRS audit is finalized. Any such payments could have a material
adverse effect on our financial condition and results of
operations.
Risks
Related to Our Industry
Risks
associated with volatility and losses in the financial markets.
The U.S.
financial markets in 2008 suffered unprecedented volatility and
losses. Several mortgage-related financial institutions and large,
reputable investment banks were not able to continue operating their
businesses.
As a
company, we cannot identify sources of cash that would ensure our ability to
continue as a going concern beyond December 31, 2009 under present economic and
financial market conditions. Should these conditions improve from
2008 levels in the short-term, and should we be successful in negotiating a
settlement with litigants who are plaintiffs in legal actions against us, we may
secure sources of cash ensuring our ability to continue as a going concern, but
we cannot be assured of such an outcome.
The legal
proceedings against us and the investigations of our actions, policies and
procedures have resulted in a significant cash drain in the form of legal
expenses. The cash drain has impaired our cash reserves which could
otherwise have been used as investments in our business or in normal
operations.
Employee
misconduct could harm us and is difficult to detect and deter.
In
addition to our experience with our former employee Scott Cacchione, there have
been a number of highly publicized cases involving fraud or other misconduct by
employees in the financial services industry in recent years, and we run the
risk that employee misconduct could occur at our company. For example,
misconduct by employees could involve the improper use or disclosure of
confidential information, which could result in regulatory sanctions and serious
reputation or financial harm to us. It is not always possible to deter employee
misconduct and 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 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, 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 subject 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, appropriately 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
A
significant percentage of our outstanding common stock is owned or controlled by
our senior professionals 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 10% of our outstanding common stock including exercise of
their options and warrants. These stockholders, if they act together, will be
able to exercise substantial influence over all matters requiring approval by
our stockholders, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing a change in control of us and might
affect the market price of our common stock.
Provisions
of the organizational documents may discourage an acquisition of
us.
Our
Articles of Incorporation authorize our Board of Directors to issue up to an
additional 37,450,000 shares of preferred stock, without approval from our
stockholders. Of these, 6,150,000 have already been authorized by our Board of
Directors and may be issued by management. The balance would require
authorization by our Board. There are no plans to issue preferred
stock.
If you
hold our common stock, this means that our Board of Directors has the right,
without your approval as a common stockholder, to fix the relative rights and
preferences of the preferred stock. This would affect your rights as a common
stockholder regarding, among other things, dividends and liquidation. We could
also use the preferred stock to deter or delay a change in control of our
company that may be opposed by our management even if the transaction might be
favorable to you as a common stockholder.
In
addition, the Delaware General Corporation Law contains provisions that may
enable our management to retain control and resist our takeover. 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 stockholders.
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:
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variations
in quarterly operating results;
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announcements
of significant contracts, milestones, acquisitions;
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relationships
with other companies;
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ability
to obtain needed capital commitments;
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additions
or departures of key personnel;
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sales
of common stock, conversion of securities convertible into common stock,
exercise of options and warrants to purchase common stock or termination
of stock transfer restrictions;
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general
economic conditions, including conditions in the securities brokerage and
investment banking markets;
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changes
in financial estimates by securities analysts; and
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fluctuation
in stock market price and volume.
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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.
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
stockholder 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 stockholder approval.
We have a
significant number of outstanding stock options and warrants. During 2008,
shares issuable upon the exercise of these options and warrants, at prices
ranging currently from approximately $0.50 to $49.00 per share, represent
approximately 7% of our total outstanding stock on a fully diluted basis using
the treasury stock method. In October 2008, our senior management and
certain employees gave back approximately 3 million shares of stock options in
order to expand the number of shares that can be granted to employees without
diluting our shareholders.
The
exercise of the outstanding options and warrants would dilute the then-existing
stockholders’ 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.
Your
ability to sell your shares may be restricted because there is a limited trading
market for our common stock.
Although
our common stock is currently traded on the Nasdaq Stock Market, 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 in the foreseeable future.
We intend
to retain any future earnings to fund the operation and expansion of our
business and, therefore, we do not anticipate paying cash dividends in the
foreseeable future. Accordingly, our shareholders must rely on sales of their
shares of common stock after price appreciation, which may never occur, as the
only way 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, 2008, all of our properties are leased. Our principal executive
offices are located in San Francisco, California. We lease two additional
offices to support our various business activities. These offices are located in
New York, NY and Cambridge, MA. We believe the facilities we are now using are
adequate and suitable for business requirements.
In
January, 2009, we sold the assets related to Panel Intelligence, the subsidiary
which occupied the Cambridge, MA facilities. As part of the sale, we
subleased the office space to the new acquiring entity.
Item
3. Legal Proceedings
The
Company responded to a Grand Jury subpoena from the U.S. Attorney’s Office for
the Northern District of California for documents relating to the activities of
a former retail broker of the Company, David Scott Cacchione, and one of his
customers, William Del Biaggio III. Cacchione’s activities under
investigation relate primarily to the apparent misuse of various client accounts
as collateral for loans to Del Biaggio. Cacchione purportedly signed
“account control agreements” in which he purported to act on behalf of the
Company to authorize the use of various client accounts as security for loans to
the customer from various third-party lenders.
Cacchione
appears to have improperly provided client account statements to third-party
lenders or to Del Biaggio for the purpose of representing to the lenders that
the accounts belonged to Del Biaggio. The retail client account statements
were altered so that the accounts appear to belong to Del Biaggio when in fact
some of the accounts belonged to other Merriman Curhan Ford & Co. retail
clients. Del Biaggio is no longer a customer of the Company and recently
pleaded guilty to securities fraud in the United States District
Court, Northern District of California.
Cacchione
was terminated. The Company’s internal investigation found no evidence
that any of Cacchione’s supervisors or any member of management was aware of
these activities until they were uncovered. The Company cooperated fully
with the Grand Jury inquiry and produced the documents called for by the
subpoena.
The
Company was also subject to a formal investigation commenced by the Securities
and Exchange Commission (“SEC”). The SEC investigation appeared to relate
in part to the subject matter of the Grand Jury inquiry, i.e., Cacchione’s
misuse of client accounts as collateral for loans to the customer. It also
appeared to relate to other possible violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder by Cacchione in the
handling of his client accounts. The SEC investigation further appeared to
relate to the Company’s trading activities in the stock of various issuers in
possible violation of Rule 10b-5 as well as to a failure to adequately supervise
its personnel with a view toward preventing violations of the federal securities
laws. The Company cooperated fully with the SEC in its
investigation. The SEC has not indicated that it has concluded its
investigation.
The
investigation relating to client accounts appears to involve only Cacchione’s
retail accounts. The Company’s high-net-worth client retail brokerage
business accounted for less than 2% of the Company’s revenue in 2008. The
Company is phasing out this business and will concentrate on strengthening its
core investment banking and institutional brokerage businesses. The
Company is also re-examining its compliance policies and procedures as well as
the alignment of the supervisory and compliance related functions of various
members of management.
Several
lawsuits have been filed against Merriman Curhan Ford & Co. in connection
with the alleged actions of Del Biaggio, and Cacchione. The total amount
of damages sought under such lawsuits is over $43 million. The Company
anticipates at least two additional lawsuits will be filed against Merriman
Curhan Ford & Co. by a lender to Del Biaggio on similar facts to the
lawsuits described below, with claims believed to be approximately $12 million.
The Company denies any involvement and will defend itself and attempt to
ensure that the most favorable outcome of these lawsuits for itself and its
shareholders.
In
addition, the Company received demand letters after December 31, 2008 from
individuals claiming to have suffered damages as a result of Cacchione’s
actions. The Company believes it has meritorious defenses to all the
demands received to date and intends to contest them vigorously. The Company
believes they are unlikely to result in adverse outcomes. Should they
result in adverse outcomes, it does not believe that the outcomes will have a
material effect on its financial position, financial results or cash
flows.
Due to
the early stages of these legal matters, we cannot estimate the amount of
damages if they are resolved unfavorably and accordingly, we have not provided
an accrual for these lawsuits. If the Company were to be found liable in all of
these lawsuits and the plaintiffs were to be awarded the damages they seek, it
would have a severe impact on the Company's financial condition and the Company
might not be able to continue in business. Even if the Company ultimately
prevails in all of these lawsuits, it may incur significant legal fees which may
have a severe impact on the Company's financial condition.
The
Company entered into a process of mediation to reach a settlement with a
majority of the civil litigants resulting from the alleged fraud by its former
customer William Del Biaggio III and its former employee Scott
Cacchione. The Company is focused on reducing its potential liability
in these legal proceedings and the resources required to fight the allegations.
In addition, it is also aiming to free up valuable management resources needed
to face challenging market and economic conditions. At present, there
is no indication that these negotiations will be successful, whether a
settlement will serve the Company’s aims and should a settlement result, the
amount involved is not yet estimable. Should the Company’s settlement
negotiations ultimately prove unsuccessful, the Company believes it has
meritorious defenses and intends to contest these claims
vigorously.
Cacchione’s
activities have given rise to a number of lawsuits against the Company.
They are as follows:
DGB
Investments, Inc. v. Merriman Curhan Ford & Co.
In May
2008, Merriman Curhan Ford & Co. was served with a complaint filed by DGB
Investments, Inc. which loaned money to William Del Biaggio III, the former
client of the Company, against Del Biaggio, David Scott Cacchione, a former
retail broker of Merriman Curhan Ford & Co., and the Company. Plaintiff
alleges that Del Biaggio defaulted on a multi-million dollar loan obtained from
Plaintiff. The Company had suspended and, effective June 4, 2008,
terminated Cacchione’s employment. The complaint further alleges
that Cacchione, while still employed with Merriman Curhan Ford & Co., signed
an account control agreement purporting to pledge a retail client stock account
as collateral for the Del Biaggio loan. On the basis of these allegations,
Plaintiff asserts various claims against the Company and others. Plaintiff
seeks $3 million in damages. We believe that we have meritorious defenses
and intend to contest this claim vigorously. We successfully opposed
Plaintiff's petition for pre-judgment writ of attachment.
Heritage
Bank of Commerce v. Merriman Curhan Ford & Co.
In May
2008, Merriman Curhan Ford & Co. was served with a complaint filed by
Heritage Bank of Commerce, which loaned money to Del Biaggio, against Del
Biaggio and the Company. Plaintiff alleges that Del Biaggio defaulted on a
multi-million dollar loan obtained from Plaintiff. The complaint further
alleges that Cacchione, while still employed with Merriman Curhan Ford &
Co., signed an account control agreement purporting to pledge various retail
client stock accounts as collateral for the Del Biaggio loan. On the basis of
these allegations, Plaintiff asserts various claims against the Company and
others. Plaintiff seeks $ 4 million in damages. We believe that we
have meritorious defenses and intend to contest this claim
vigorously. We successfully opposed Plaintiff's petition for
pre-judgment writ of attachment.
Modern
Bank, N.A. v. Merriman Curhan Ford & Co.
In June
2008, Merriman Curhan Ford & Co. was served with a complaint filed by Modern
Bank, N.A., which loaned money to Del Biaggio, against Del Biaggio, the Company,
and Cacchione, the same former retail broker of the Company named in the
lawsuits above. Plaintiff alleges that Del Biaggio defaulted on a
multi-million dollar loan obtained from Plaintiff. The complaint further
alleges that Cacchione, while still employed with Merriman Curhan Ford &
Co., signed an account control agreement purporting to pledge a retail client
stock account as collateral for the Del Biaggio loan. On the basis of these
allegations, Plaintiff asserts various claims against the Company and
others. Plaintiff seeks $10 million in damages. We believe that we
have meritorious defenses and intend to contest this claim
vigorously. We successfully opposed Plaintiff's petition for
pre-judgment writ of attachment.
Security
Pacific Bank v. Merriman Curhan Ford & Co.
In June
2008, Merriman Curhan Ford & Co. was served with a complaint filed by
Security Pacific Bank, which loaned money to Del Biaggio, against Del Biaggio,
the Company, and Cacchione named in the lawsuits above. Plaintiff alleges
that Del Biaggio defaulted on a multi-million dollar loan obtained from
Plaintiff. The complaint further alleges that Cacchione, while still
employed with Merriman Curhan Ford & Co., signed an account control
agreement purporting to pledge retail client stock accounts as collateral for
the Del Biaggio loan. On the basis of these allegations, Plaintiff asserts
various claims against the Company and others. Plaintiff seeks $5 million
in damages. We believe that we have meritorious defenses and intend to
contest this claim vigorously. We successfully opposed Plaintiff's
petition for pre-judgment writ of attachment.
AEG
Facilities, Inc. v. Merriman Curhan Ford & Co.
In June
2008, Merriman Curhan Ford & Co. was served with a complaint filed by AEG
Facilities, Inc. which loaned money to Del Biaggio, against Del Biaggio, the
Company, and the same former retail broker of the Company named in the lawsuits
above. Plaintiff alleges that Del Biaggio defaulted on a multi-million
dollar loan obtained from Plaintiff. The complaint further alleges that
Cacchione, while still employed with Merriman Curhan Ford & Co., signed an
account control agreement purporting to pledge various retail client stock
accounts as collateral for the Del Biaggio loan. On the basis of these
allegations, Plaintiff asserts various claims against the Company and
others. Plaintiff seeks $7 million in damages. We believe that we
have meritorious defenses and intend to contest this claim
vigorously.
Valley
Community Bank v. Merriman Curhan Ford & Co.
In June
2008, Merriman Curhan Ford & Co. was served with a complaint filed by Valley
Community Bank, which loaned money to Del Biaggio, against Del Biaggio, the
Company, and the same former retail broker of the Company named in the lawsuits
above. Plaintiff alleges that Del Biaggio defaulted on a multi-million
dollar loan obtained from Plaintiff. The complaint further alleges that
Cacchione, while still employed with Merriman Curhan Ford & Co., signed
account control agreements purporting to pledge various retail client stock
accounts as collateral for the Del Biaggio loan. On the basis of these
allegations, Plaintiff asserts various claims against the Company and
others. Plaintiff seeks over $4 million in damages. We believe that
we have meritorious defenses and intend to contest this claim
vigorously.
The
Company anticipates at least one additional lawsuit will be filed against it by
a lender to Del Biaggio, on similar facts to the lawsuits described above, with
a claim believed to be approximately $10 million.
United
American Bank v. Merriman Curhan Ford & Co.
In July
2008, Merriman Curhan Ford & Co. was served with a complaint filed by United
American Bank, which loaned money to Del Biaggio alleging that the Company
entered into an account control agreement for an account that Del Biaggio
had previously pledged to another lender. The account pledged was in
the name of Del Biaggio. Plaintiff has brought claims for, among other
things, fraud arising out of the failure to disclose the alleged previous
pledge. Plaintiff alleges damages in the amount of $1.75 million. We
believe that we have meritorious defenses and intend to contest this claim
vigorously.
David
Hengehold v. Merriman Curhan Ford & Co.
In June
2008, Merriman Curhan Ford & Co. was served with a complaint filed by David
Hengehold. Plaintiff alleges, among other things, fraud based on a former
employee of the Company having induced plaintiff into making loans to an entity
associated with Del Biaggio. This plaintiff is a former client of the
Company. This matter does not involve account control agreements.
Plaintiff in this lawsuit alleges damages of over $500,000. We believe
that we have meritorious defenses and intend to contest this claim
vigorously.
Don Arata, et al. v. Merriman Curhan
Ford & Co.
In July
2008, Merriman Curhan Ford & Co. and Merriman Curhan Ford Group, Inc. were
served with a complaint filed by several plaintiffs who made loans to Del
Biaggio and related entities. Plaintiffs allege, among other things, fraud
based on Cacchione having induced plaintiff into making loans to Del Biaggio and
certain related entities including Sand Hill Capital Partners III. This
matter does not involve account control agreements. Plaintiff in this lawsuit
alleges damages of $3,025,000. We believe that we have meritorious
defenses and intend to contest this claim vigorously.
The
Private Bank of the Peninsula v. Merriman Curhan Ford & Co.
In July
2008, Merriman Curhan Ford & Co. was served with a complaint filed by The
Private Bank of the Peninsula. Plaintiff alleges, among other things,
fraud based on Cacchione having induced plaintiff into making loans to Del
Biaggio. This matter does not involve account control agreements.
Plaintiff in this lawsuit alleges damages of $916,666.65. We believe that
we have meritorious defenses and intend to contest this claim
vigorously.
Paul
Davis, et al. v. Merriman Curhan Ford & Co.
In August
2008, Merriman Curhan Ford & Co. was served with a complaint filed by
several plaintiffs who made loans to Del Biaggio and related entities.
Plaintiffs allege, among other things, fraud based on Cacchione having induced
plaintiff into making loans to Del Biaggio and entities associated with
him. This matter does not involve account control agreements. Plaintiffs
in this lawsuit allege damages of $1.65 million. We believe that we have
meritorious defenses and intend to contest this claim
vigorously
Gary
T. Cook et. al. v. Merriman Curhan Ford & Co.
In
September 2008, Merriman Curhan Ford & Co. was served with a complaint filed
by several plaintiffs who made loans to Del Biaggio and related entities.
Plaintiffs allege, among other things, fraud based on Cacchione having induced
plaintiff into making loans to Del Biaggio and entities associated with
him. This matter does not involve account control agreements. Plaintiffs
in this lawsuit allege damages of $2.59 million. We believe that we have
meritorious defenses and intend to contest this claim vigorously.
Pacific
Capital Bank v. Merriman Curhan Ford & Co.
In
October 2008, Merriman Curhan Ford & Co. was served with a complaint filed
by Pacific Capital Bank. Plaintiff alleges, among other things, fraud
based on Cacchione having induced plaintiff into making loans to Del
Biaggio. This matter does not involve account control agreements.
Plaintiff in this lawsuit alleges damages of $1.84 million. We believe
that we have meritorious defenses and intend to contest this claim
vigorously.
Bachelor
v. Merriman Curhan Ford & Co.
In
December 2008, Merriman Curhan Ford & Co. and Merriman Curhan Ford Group,
Inc. were served with a complaint filed by several plaintiffs who made loans to
Del Biaggio and related entities. Plaintiffs allege, among other things,
fraud based on Cacchione having induced plaintiff into making loans to Del
Biaggio and certain related entities including Sand Hill Capital Partners
III. This matter does not involve account control agreements. Plaintiffs
in this lawsuit allege damages of $1.15 million. We believe that we have
meritorious defenses and intend to contest this claim vigorously.
Thomas
O'Shea v. Merriman Curhan Ford & Co.
Unrelated
to the Del Biaggio/Cacchione matters, in June 2006, our broker-dealer subsidiary
Merriman Curhan Ford & Co. was served with a claim in NASD Arbitration
by Thomas O’Shea. Mr. O’Shea is a former at-will employee of Merriman
Curhan Ford & Co. and worked in the investment banking department.
Mr. O’Shea resigned from Merriman Curhan Ford & Co. in July 2005.
Mr. O’Shea alleges breach of an implied employment contract, quantum meruit ,
and unjust enrichment based on his allegations that he was to be paid more for
his work. The matter proceeded to an arbitration hearing in October 2008 and an
award was made in favor of O’Shea. The matter was subsequently
settled for the amount of $880,000. As of December 31, 2008, the
Company reserved for the amount of the settlement.
Wesley
Rusch v. Merriman Curhan Ford & Co.
Unrelated
to the Del Biaggio/Cacchione matters, in October 2008, our broker-dealer
subsidiary Merriman Curhan Ford & Co. was served with a claim in FINRA
Arbitration by Wesley Rusch. Mr. Rusch is a former at-will employee of
Merriman Curhan Ford & Co. and worked in the compliance department. We
have not been presented with a demand for quantified damages. Mr. Rusch was
terminated by Merriman Curhan Ford & Co. in July 2007. Mr. Rusch
alleges theories of discrimination and lack of cause for
termination. We believe that we have meritorious defenses and
contested this claim vigorously at the arbitration before a FINRA arbitration
panel in March 2009. We have not yet received a decision from the
arbitration panel. However, in the event that we do not
prevail, based upon the facts as we know them to date, we do not believe that
the outcome will have a material effect on our financial position, financial
results or cash flows.
Joy
Ann Fell v. Merriman Curhan Ford & Co.
Unrelated to the Del Biaggio/Cacchione matters, in November 2008, Merriman
Curhan Ford & Co. received a demand letter from a former employee, Joy Ann
Fell. In January 2009, we received a claim filed by Ms. Fell in FINRA
arbitration. Ms. Fell worked in our investment banking department and was
terminated in October of 2008, as part of a reduction in force. Ms. Fell
alleges claims of breach of an implied employment contract, emotional distress
and work-place discrimination. The demand for money damages is
approximately $350,000. We believe that we have meritorious defenses and
intend to contest this claim vigorously. We have not yet responded to the
claim. An arbitration panel has not yet been selected, nor has a hearing
date been assigned.
Peter
Marcil v. Merriman Curhan Ford & Co.
Unrelated
to the Del Biaggio/Cacchione matters, in January 2009, our broker-dealer
subsidiary Merriman Curhan Ford & Co. was served with a claim in FINRA
Arbitration by Peter Marcil. Mr. Marcil is a former at-will employee of
Merriman Curhan Ford & Co. and worked in the investment banking
department. Mr. Marcil resigned from Merriman Curhan Ford & Co. in
March of 2007. Mr. Marcil alleges breach of an implied employment contract,
wrongful termination, and intentional infliction of emotional distress. Damages
are not specified in the arbitration claim. Merriman Curhan
Ford & Co. has not replied to the claim and an arbitration hearing date has
not been set. We believe that we have meritorious defenses and intend
to contest this claim vigorously. However, in the event that we do
not prevail, based upon the facts as we know them to date, we do not believe
that the outcome will have a material effect on our financial position,
financial results or cash flows.
Irving
Bronstein et. al. v. Merriman Curhan Ford & Co.
In
January 2009, Merriman Curhan Ford & Co. and David Jonathan Merriman were
served with a FINRA arbitration claim filed by Irving Bronstein and several
other plaintiffs who made loans to Mr. Del Biaggio and related entities.
Plaintiffs allege, among other things, fraud based on Mr. Cacchione having
induced plaintiff into making loans to Mr. Del Biaggio and certain related
entities including Sand Hill Capital Partners III. This matter does not
involve account control agreements. Plaintiffs in this lawsuit allege damages in
a range of $2.5 to $10 million. We believe that we have meritorious
defenses and intend to contest this claim vigorously.
Spare
Backup v. Merriman Curhan Ford & Co.
Unrelated
to the Del Biaggio/Cacchione matters, in April 2008, Merriman Curhan Ford &
Co. entered into an engagement to provide investment banking services to Spare
Backup, Inc. We were able to close a round of bridge financing in June
2008. As a result of closing the financing transaction, we were entitled
to reimbursement of our expenses, a convertible note with principal valued at
$161,100 and 370,370 shares of Spare Backup common stock. As of November
2008, these transaction fees had not been paid to us. We hired counsel to
seek payment of the fees and to proceed to arbitration, as is specified in the
engagement letter. In January 2009, we filed a petition to compel
arbitration in the San Francisco County Superior Court. In response to the
petition to compel arbitration, Spare Backup filed a complaint in the Riverside
County Superior Court, Indio Branch, for fraud and declaratory relief alleging
that we fraudulently induced it to execute the investment banking engagement
letter. We were successful in raising $1,300,000 in capital for Spare
Backup.
In
addition, we received a demand letter after the period covered by this report
from an individual claiming to have suffered damages as a result of Cacchione’s
actions. We believe that we have meritorious defenses to all the
demands received to date and intend to contest them vigorously. This case is in
its early stage. We believe it is unlikely to result in an adverse
outcome. However, in the event we do not prevail, we do not believe
that the outcome will have a material effect on our financial position,
financial results or cash flows.
Additionally,
from time to time, we are involved in ordinary routine litigation incidental to
our business.
We
believe that these cases are either unlikely to result in adverse rulings or are
in early stages and the amount of a likely adverse ruling cannot be estimated at
present.
Item
4. Submission of Matters to a Vote of Stockholders
No
matters were submitted to a vote of stockholders during the fourth quarter of
2008.
PART
II
Item
5. Market for Registrant’s Common Stock and Related Stockholder
Matters
Our
common stock has been quoted on The Nasdaq Stock Market, Inc. (“Nasdaq”) under
the symbol “MERR” since February 12, 2008. Prior to this time, our common stock
traded on the American Stock Exchange under the symbol “MEM.” 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
|
|
2008
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
1.02
|
|
|
$
|
0.40
|
|
Third
Quarter
|
|
|
1.57
|
|
|
|
0.93
|
|
Second
Quarter
|
|
|
4.10
|
|
|
|
1.19
|
|
First
Quarter
|
|
|
5.94
|
|
|
|
3.91
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
5.50
|
|
|
$
|
3.90
|
|
Third
Quarter
|
|
|
5.45
|
|
|
|
3.44
|
|
Second
Quarter
|
|
|
6.15
|
|
|
|
3.86
|
|
First
Quarter
|
|
|
5.79
|
|
|
|
3.95
|
|
The
closing sale price for the common stock on March 25, 2009 was $0.40. 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 676 stockholders of record as of
December 31, 2008. Because many shares are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of beneficial stockholders represented by these record
holders.
Our
policy is to reinvest earnings in order to fund future growth. Therefore, we
have not paid and currently do not plan to declare dividends on our common
stock.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table gives information about the Company’s common stock that may be
issued upon the exercise of options and warrants under all of our existing
equity compensation plans as of December 31, 2008.
Plan Category
|
|
Number of
Securities to
be Issued
Upon
Exercise of
Outstanding
Options and
Warrants
|
|
Weighted
Average
Exercise
Price of
Outstanding
Options and
Warrants
|
|
Number of
Securities
Remaining
Available For
Future
Issuance
Under Equity
Compensation
Plans
|
|
Equity
compensation plans approved by stockholders:
|
|
|
|
|
|
|
|
1999
Stock Option Plan
|
|
77,019
|
|
$
|
4.47
|
|
273,096
|
|
2000
Stock Option and Incentive Plan
|
|
174,154
|
|
$
|
5.23
|
|
398,396
|
|
2001
Stock Option and Incentive Plan
|
|
103,013
|
|
$
|
2.83
|
|
412,973
|
|
2003
Stock Option and Incentive Plan
|
|
798,752
|
|
$
|
4.76
|
|
3,211,948
|
|
2006
Directors’ Stock Option and Incentive Plan
|
|
—
|
|
$
|
—
|
|
103,907
|
|
2002
Employee Stock Purchase Plan
|
|
—
|
|
$
|
—
|
|
—
|
|
Equity
compensation not approved by stockholders
|
|
63,098
|
|
$
|
23.40
|
|
176,189
|
|
Equity
compensation not approved by stockholders includes shares in a Non-Qualified
option plan approved by the Board of Directors of NetAmerica.com Corporation
(now known as Merriman Curhan Ford Group, Inc.) in 1999 and a Non-Qualified
option plan approved by the Board of Directors in 2004 that is consistent with
the exchange guidelines at the time of listing.
Recent
Sale of Unregistered Securities
None.
Item
6. Selected Consolidated Financial Data
The
following selected consolidated financial data should be read in conjunction
with Item 7. “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and the consolidated financial statements and the notes
thereto included in Part II, Item 8 to this Annual Report on Form
10-K.
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Statement
of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
36,567,836
|
|
|
$
|
83,748,265
|
|
|
$
|
51,818,638
|
|
|
$
|
43,184,315
|
|
|
$
|
38,368,310
|
|
Operating
expenses
|
|
|
62,979,424
|
|
|
|
70,701,900
|
|
|
|
58,315,930
|
|
|
|
44,912,772
|
|
|
|
36,194,924
|
|
Operating
(loss) income
|
|
|
(26,411,588
|
)
|
|
|
13,046,365
|
|
|
|
(6,497,292
|
)
|
|
|
(1,728,457
|
)
|
|
|
2,173,386
|
|
Loss
on retirement of convertible notes payable (1)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,348,805
|
)
|
|
|
—
|
|
|
|
—
|
|
Interest
income
|
|
|
375,949
|
|
|
|
461,491
|
|
|
|
484,909
|
|
|
|
446,273
|
|
|
|
120,431
|
|
Interest
expense
|
|
|
(72,304
|
)
|
|
|
(134,868
|
)
|
|
|
(535,014
|
)
|
|
|
(76,103
|
)
|
|
|
(169,787
|
)
|
Income
tax benefit (expense)
|
|
|
1,635,214
|
|
|
|
(2,462,165
|
)
|
|
|
—
|
|
|
|
(142,425
|
)
|
|
|
(249,744
|
)
|
(Loss)
income from continuing operations
|
|
|
(24,472,729
|
)
|
|
|
10,910,823
|
|
|
|
(7,896,202
|
)
|
|
|
(1,500,712
|
)
|
|
|
1,874,286
|
|
Loss
from discontinued operations
|
|
|
(5,801,076
|
)
|
|
|
(1,587,788
|
)
|
|
|
(324,213
|
)
|
|
|
(13,731
|
)
|
|
|
—
|
|
Net
(loss) income
|
|
$
|
(30,273,805
|
)
|
|
$
|
9,323,035
|
|
|
$
|
(8,220,415
|
)
|
|
$
|
(1,514,443
|
)
|
|
$
|
1,874,286
|
|
Basic
(loss) income from continuing operations
|
|
$
|
(1.95
|
)
|
|
$
|
0.95
|
|
|
$
|
(0.79
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.21
|
|
Diluted
(loss) income from continuing operations
|
|
$
|
(1.95
|
)
|
|
$
|
0.86
|
|
|
$
|
(0.79
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.16
|
|
Statement
of financial condition data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,358,128
|
|
|
$
|
31,653,657
|
|
|
$
|
13,746,590
|
|
|
$
|
11,138,923
|
|
|
$
|
17,459,113
|
|
Marketable
securities owned
|
|
|
4,622,577
|
|
|
|
14,115,022
|
|
|
|
7,492,914
|
|
|
|
8,627,543
|
|
|
|
2,342,225
|
|
Total
assets
|
|
|
18,865,590
|
|
|
|
64,573,331
|
|
|
|
30,498,213
|
|
|
|
27,694,413
|
|
|
|
25,007,824
|
|
Capital
lease obligations
|
|
|
923,683
|
|
|
|
721,380
|
|
|
|
1,292,378
|
|
|
|
883,993
|
|
|
|
452,993
|
|
Notes
payable, net
|
|
|
—
|
|
|
|
238,989
|
|
|
|
325,650
|
|
|
|
408,513
|
|
|
|
1,487,728
|
|
Stockholders’
equity
|
|
$
|
7,715,201
|
|
|
$
|
34,806,048
|
|
|
$
|
16,215,020
|
|
|
$
|
18,403,001
|
|
|
$
|
16,733,850
|
|
(1)
|
In
December 2006, Merriman Curhan Ford Group, Inc. repaid the $7.5 million
variable rate secured convertible note, issued to Midsummer Investment,
Ltd, or Midsummer, in March 2006. Midsummer retained the stock warrant to
purchase 267,858 shares of our common stock. The loss on repayment of the
convertible note consists of the write-off of the unamortized discount
related to the stock warrant as well as the write-off the unamortized debt
issuance costs.
|
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
Curhan Ford Group, Inc. (formerly MCF Corporation) is a financial services
holding company that provides investment banking, capital markets services,
corporate and venture services, investment banking, asset management and primary
research through its operating subsidiaries, Merriman Curhan Ford & Co.,
Panel Intelligence, LLC (“Panel”) and MCF Asset Management, LLC.
Merriman
Curhan Ford & Co. is an investment bank and securities broker-dealer focused
on fast-growing companies and institutional investors. Our mission is to become
a leader in the researching, advising, financing, trading and investing
in fast-growing companies under $2 billion in market capitalization. We
provide equity research, brokerage and trading services primarily to
institutions, as well as investment banking and advisory services to corporate
clients. We are attempting to gain market share by originating differentiated
research for our institutional investor clients and providing specialized and
integrated services for our fast-growing corporate clients.
We
acquired Panel Intelligence, LLC (formerly MedPanel, Inc. or “Panel”) in April
2007. It offers custom and published primary research to industry
clients and investment professionals through online panel discussions,
quantitative surveys and an extensive research library. Panel Intelligence, LLC
provides greater access, compliance, insights and productivity to clients in the
health care, CleanTech and financial industries. In January 2009, the majority
of the assets of Panel Intelligence were sold to an investor group that included
certain members of its management team. We decided to sell the assets in order
to reduce our costs and to refocus on our core investment banking and
broker-dealer services. For financial reporting purposes we have
listed the operations of the business as “discontinued operations.”
MCF Asset
Management, LLC manages absolute return investment products for institutional
and high-net worth clients. We are the sub-advisor for the MCF Focus fund. In an
effort to refocus the holding company back to its core investment banking and
broker-dealers services and to reduce expenses, management decided to begin the
process of liquidating the funds under management and returning investments to
the investors. As of December 31, 2008, assets under management across our three
fund products, Navigator, Voyager, and Focus, had been liquidated to $11 million
from $56 million in 2007.
We were
formerly as Ratexchange Corporation, NetAmerica.com Corporation and Venture
World, Ltd., a Delaware corporation organized on May 6, 1987. Our common stock
was listed on the American Stock Exchange in July 2000 and was listed on Nasdaq
in February 2008, where it currently trades under the symbol “MERR.” Our
corporate office is located in San Francisco, California.
Prior to
2002, we were engaged in the creation of liquid marketplaces for bandwidth and
other telecommunications products, as well as providing trading strategies in
the futures and derivatives markets. This prior business experienced significant
net losses that resulted in an accumulated deficit of $87,731,000 as of December
31, 2001.
In
December 2001, we acquired Instream Securities, Inc. and later changed the name
of the entity to RTX Securities Corporation, then to Merriman Curhan Ford &
Co. We formed MCF Asset Management, LLC in January 2004, MCF Wealth Management,
LLC in January 2005, and acquired Panel Intelligence, LLC in April 2007 as
wholly owned subsidiaries. Panel Intelligence, LLC is accounted for as
discontinued operations in these consolidated financial statements for the years
ended December 31, 2008 and 2007 while MCF Wealth Management, LLC was accounted
for as such for the year ended December 31, 2006.
Going
Concern
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern for the foreseeable future and will
be able to realize its assets and discharge its liabilities in the normal course
of operations.
During
the year ended December 31, 2008, the Company incurred a net loss of $30,274,000
and used $24,945,000 in net cash from operating activities. At
December 31, 2008, the Company had cash and cash equivalents of $6,358,000,
marketable securities of $4,623,000 and receivables from clearing broker of
$1,753,000. The Company had liabilities of
$11,150,000. The Company’s ability to generate profits is highly
dependent on stock market trading volumes and the general economic environment.
As a result, the ability of the Company to meet its forward obligations and the
ability to continue as a going concern may be in question.
The
Company is in the process of implementing a plan to increase its operating
flexibility and extend its cash reserves. The plan primarily consists of four
steps which are more fully described below:
|
1.
|
Reduce
operating costs
|
|
2.
|
Shed
non-essential operations
|
|
3.
|
Negotiate
a settlement of pending litigations
|
|
4.
|
Raise
additional capital
|
During
2008 and early 2009, the Company implemented significant expense control and
cost reduction programs focused on reducing cash losses and increasing
operational flexibility in which it has eliminated more than $10 million in
annual operating expenses. The primary contributor to these savings has been the
elimination of more than 50% of the Company’s workforce, as well as salary
reductions. The CEO, the Head of Institutional Securities and the Head of
Professional Services voluntarily eliminated their salaries. They
will be remunerated based on month-to-month profitability. The Board
of Directors has, as of early 2009, also voluntarily eliminated its
compensation. The Company believes that it has been able to execute
these reductions with limited impact to its ability to generate and execute new
business in the current market environment. With these measures largely
complete, the company believes that it has increased its ability to meet its
obligations during 2009 and beyond.
As a part
of the four-step plan mentioned above, in January of 2009, the Company shed
non-essential operations or those requiring substantial cash
infusions. First, the Company sold Panel Intelligence, LLC on January
30, 2009. This subsidiary required a cash injection of $1,131,000 during 2008
and was projected to reach breakeven only in late 2009. Also in January 2009,
the Company sold its operations known as Institutional Cash Distributors to a
group of its employees. While this business was profitable, management was able
to reach a deal that substantially increases the near-term flow of capital.
Finally, the Company is in the process of shutting down MCF Asset Management,
another subsidiary which had been costing the Company considerable capital
during 2008. The result of these actions has been to reduce operating loses and
increase available cash.
The
Company has entered into a process of mediation to reach a settlement with a
majority of the civil litigants resulting from the alleged fraud by its former
customer William Del Biaggio III and its terminated employee Scott
Cacchione. The Company is focused on reducing its potential liability
in these legal proceedings and the resources required to fight the allegations.
In addition, it is also aiming to free up valuable management resources needed
to face challenging market and economic conditions. At present, there
is no indication that these negotiations will be successful and whether it will
serve the Company’s aims and should a settlement result, it is not yet
estimable.
The
Company is assessing interest of potential investors in providing additional
capital to the business. While the Company does not have a definitive agreement
from any investor, preliminary discussions have yielded some interest subject to
the completion of the three steps outlined above. There are no
assurances that the Company will be successful in completing its plans outlined
above and ultimately in raising additional capital.
The
Company’s ability to meet its going concern obligations is highly dependent on
market and economic conditions. Even if it is successful in executing
its four-step plan, it will not be capable of sustaining losses such as those
incurred in 2008. However, it is worth noting that 2008 was an
unprecedented year both in terms of stock market volatility and general economic
challenges. Furthermore, the large number of civil litigations and resulting SEC
investigation was a significant drain on corporate resources. The Company
believes that its reduced cost structure and shedding of non core business has
increased its operating runway. However, if operating conditions worsen in 2009
or if the company receives adverse judgments in its pending litigations, it may
not have the resources to meet its financial obligations as a going
concern.
These
financial statements do not reflect adjustments in the carrying values of assets
and liabilities, the reported revenues and expenses, and the balance sheet
classifications used that would be necessary if the going concern assumption
were not appropriate. These adjustments could be
material.
Executive
Summary
Our
revenue decreased 56% during 2008 to $36,568,000, as virtually all product lines
were impacted by the industry slow down. Including discontinued operations, net
loss was $30,274,000, or ($2.41) per diluted share during 2008 which represents
a significant reversal from our $9,323,000 net income in 2007. The substantial
operating loss was primarily driven by the decline in top line revenues combined
with a rise in operating expenses. While we were able to remove significant cost
through the second half of 2008, these gains were offset by a substantial
increase in legal expenses resulting from the large number of claims facing the
firm. Our focus during 2008 was to manage the growing legal expenses while
surviving one of the worst financial markets in U.S. history. We
instituted aggressive plans to reduce our operating costs and focus our business
back to our core offerings. As a result, we reduced our workforce by over 50% as
of the end of February 2009, contributing to an annual savings of more than $10
million. In addition, management took steps to eliminate non-core businesses
such as Panel Intelligence and MCF Asset Management that had consumed a large
portion of our operating cash flow. Our focus in 2009 will be to build on our
core businesses, further develop our new businesses, including OTCQX and IMS
advisory, while capitalizing on the general devastation in the financial markets
that we serve.
Investment Banking - The
investment banking team had an unfavorable year with a decrease in revenue of
62% in 2008, as compared to 42% revenue growth in 2007. In 2008, we closed 20
corporate financing and strategic advisory transactions during the year with
average transaction fees of $273,000 as compared to 40 coporate financing and
strategic advisory transactions in 2007. As a percentage of total
revenue, Investment Banking’s contribution was 31% in 2008 compared to 36% in
2007. Our challenges in the business were widely experienced by our competition
as the new issue market was largely closed.
Principal Transactions –
Principal transactions produced a substantial loss of $9,040,218 during 2008 as
compared to our record gains of $20,116,000 experienced in 2007. The 2008 loss
was largely driven by a decline in the fair value of the Proprietary and
Investment accounts. Principal transactions revenue consists of four different
activities: customer principal trades, market making, trading for our
proprietary account, and realized and unrealized gains and losses in our
investment portfolio. As a broker-dealer, we account for all of our marketable
security positions on a trading basis and as a result, all security positions
are marked to fair market value each day. Returns from market making and
proprietary trading activities tend to be more volatile than acting as agent or
principal for customers.
We
will from time to time take significant positions in fast-growing companies that
we feel are undervalued in the market place. We believe that our window into
these opportunities, due to the types of companies we research, offers us a
significant competitive advantage. Over the past few years, we have generated
attractive returns on our capital by deploying this strategy.
Commissions - Commissions
revenue from brokering equity securities to institutional investors increased
slightly or by 6.3% to $33,679,000 in 2008 over the prior year. This business
continues to face increasing challenges including the proliferation of
electronic communications 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. We
believe that we can grow our institutional brokerage revenue by producing
differentiated equity research on relatively undiscovered, fast-growing
companies within our selected growth sectors and providing this research to
small and mid-sized traditional and alternative investment managers for whom
these companies comprise an important part of their investment
portfolios.
Institutional Cash Distributors
(ICD) - ICD is a broker of money market funds serving the short-term
investing needs of corporate finance departments at companies throughout the
United States and Europe. Companies using ICD’s services receive access to over
40 fund families through ICD’s one-stop process that includes one application,
one wire and one statement that consolidates reporting regardless of the number
of funds utilized. As of December 31, 2008, ICD clients have invested over $42
billion in money market funds from which ICD earns brokerage fees. ICD is a
division of Merriman Curhan Ford & Co. Our Institutional Cash
Distributors business continued to expand rapidly in 2008 with average assets
brokered nearly doubling over 2007. ICD revenue grew at a rate of 70% in 2007
and 77% in 2008. In January 2009, we sold our ICD assets to three of our
employees and will no longer benefit from these revenues when the sale is
completed, expected for the second quarter of 2009, when the buyers of the
assets will have formed their own broker-dealer.
Primary Research - We closed
the acquisition of MedPanel, Inc. in April 2007 and began offering custom and
published primary research to biotechnology, pharmaceutical and medical device
industry clients, as well as institutional investment companies for a
subscription fee. In January 2009, we sold the assets related to MedPanel, in
order to focus on our core investment banking and broker-dealer businesses and
to reduce expenses. The primary research assets have been classified
as discontinued operations. Certain Panel assets and liabilities have
been reclassified to assets and liabilities held for sale in the consolidated
statements of financial condition.
OTCQX Advisory. During 2007,
Merriman Curhan Ford & Co. began offering services to sponsor companies on
the Domestic and International OTCQX markets. This new service 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. Merriman Curhan Ford
& Co. was the first U.S. investment bank to achieve DAD and PAL
designations.
Employees - Our overall
headcount decreased by 36% to 128 during 2008, with further reductions to 89 as
of the end of February 2009, after the sale of Panel assets. For 2009, we remain
focused on finding the most qualified employee for each position to boost
revenue per employee. We expect that we will maintain headcount at below 100
people during 2009, though as always these hiring decisions may be impacted by
our actual financial results and the overall capital markets
environment.
Business Development - We
continued to invest in areas of our business 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, travel and other business
development activities. These activities resulted in higher operating expenses
in 2008.
While the
subprime mortgage crisis has not had any direct impact on our firm, the current
economic outlook for 2009 is obscured by credit anxieties, slowing growth,
expensive commodities and the decreasing purchasing power of the U.S. dollar
which may adversely impact our capital markets activities.
Business
Environment
The
equity markets were highly volatile to the downside in 2008, posting the
third-worst year in more than a century. Globally, the value of
financial assets including stocks, bonds and currencies fell by more than $50
trillion in 2008, the equivalent to a year of world GDP, according to the Asian
Development Bank. Investor psychology was badly shaken, and the
year’s poor results also placed stocks behind almost every other asset class in
terms of 10 year performance. The year was shaped by several landmark
events: the serial failure of brand name, “blue chip” institutions, such as Bear
Stearns, Lehman Brothers, AIG and Fannie Mae; record market volatility; the
cratering of home prices and foreclosure rates skyrocketing; and crude oil
trading to a high of $145 in July then dropping to $34 in
December. Confused and panicked investors sought shelter in
government debt obligations, driving the return in T bonds with 30 year
maturities to a 41% gain (Merrill Lynch Long-Term Index), an unprecedented price
move. The Federal Reserve cut its key interest rate 7 times in 2008,
from 4.25% at the start of the year, with the final cut pushing the rate to 0%
to .25%, a historic low. In the 4th quarter, some investors were
buying short term T bills at a 0% yield, the ultimate flight to safety
reflecting a historical extreme of pessimism.
The
S&P 500 lost 38.5% for the year, while the NASDAQ Composite fell
40.5%. The decline in the NASDAQ was the worst in its 38 year
history. The Russell 2000 index continued its 2007 decline, dropping
34%. High yield bonds as measured by the Merrill Lynch HY index fell
26% on a total return basis, reflecting further flight from risk.
Hedge
funds were badly hurt in 2008, with performance across “long-short” funds down
26% on average. The failure of these funds to live up to the billing
of thriving in rough markets led to massive redemptions, and many funds went out
of business in the 4th quarter of 2008. The hedge fund community is
an important component of our business, as they are one of the most active
purchasers of our investment banking and research product. Our securities
broker-dealer and investment banking activities are inextricably tied to the
capital markets through our customer base and its exposure to the stock market.
In addition, our business activities are focused in the CleanTech,
Consumer/Internet/Media, Health Care and Tech/Telecom sectors. By
their nature, these activities are highly competitive and are not only subject
to general market conditions, volatile trading markets and fluctuations in the
volume of market activity, but also to the conditions affecting the companies
and markets in our areas of focus.
The
economic environment, and the multiple negative events that were triggered by
it, have led to a financial services industry which is under unprecedented
pressure. Some of the problems were self created, as the development
of many types of derivatives led to unprecedented profits as well as
unprecedented risks. These derivative products also enabled mass
speculation in the housing market. With leverage ratios in some cases
exceeding 30 times at many of the “bulge bracket” brokerage firms there was no
room for error. Several such firms, much older, larger and better
capitalized than ours, went out of business in 2008 or have been merged
away. An estimated 175,000 jobs have been lost by the financial
sector worldwide, with many more expected in 2009. The investment
banking and M&A markets slowed precipitously in 2008, and these two areas
are the primary drivers of profitability for firms in our sector. The
diminution of the hedge fund community also decreased the pool of commissions in
the “regular way” business, so both origination and distribution sides of the
business are being badly squeezed. Cost cutting, shrewd application
of capital, and intense focus on ROI, have been the keys to survival in the
brokerage business. For many in the investment community, survival
will truly be the new success in 2009. We expect aggressive
consolidation as firms seek to reduce costs and increase efficiencies, as well
as position themselves for their share of a shrinking pool of
commissions. Our market segment of sub $2 billion market cap
companies has grown exponentially due to the massive disruption in the capital
markets. There are also many companies under $500MM with no research
coverage, advisory relationships or no sponsorship at all. We view
this group of potential clients as a huge opportunity and are aggressively
adjusting our economic breakeven and approach to the business in order to
benefit from this new world economy.
Results
of Operations
The
following table sets forth a summary of financial highlights for the three years
ended December 31, 2008 and includes the results of the Company’s two operating
segments, Merriman Curhan Ford & Co., which is the substantial majority of
the results, and MCF Asset Management:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
33,678,706
|
|
|
$
|
31,681,563
|
|
|
$
|
30,105,085
|
|
Principal
transactions
|
|
|
(9,040,218
|
)
|
|
|
20,116,392
|
|
|
|
(171,055
|
)
|
Investment
banking
|
|
|
11,432,454
|
|
|
|
30,138,783
|
|
|
|
21,190,786
|
|
Advisory
and other fees
|
|
|
496,894
|
|
|
|
1,811,527
|
|
|
|
693,822
|
|
Total
revenue
|
|
|
36,567,836
|
|
|
|
83,748,265
|
|
|
|
51,818,638
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
36,670,457
|
|
|
|
53,669,449
|
|
|
|
42,840,431
|
|
Brokerage
and clearing fees
|
|
|
3,042,133
|
|
|
|
2,635,328
|
|
|
|
2,614,513
|
|
Professional
services
|
|
|
9,161,729
|
|
|
|
2,785,414
|
|
|
|
2,441,417
|
|
Occupancy
and equipment
|
|
|
2,303,944
|
|
|
|
1,638,353
|
|
|
|
1,665,410
|
|
Communications
and technology
|
|
|
3,762,954
|
|
|
|
3,405,411
|
|
|
|
2,969,872
|
|
Depreciation
and amortization
|
|
|
705,883
|
|
|
|
681,756
|
|
|
|
645,129
|
|
Travel
and business development
|
|
|
2,921,196
|
|
|
|
2,499,768
|
|
|
|
2,738,393
|
|
Other
|
|
|
4,411,128
|
|
|
|
3,386,421
|
|
|
|
2,400,765
|
|
Total
operating expenses
|
|
|
62,976,424
|
|
|
|
70,701,900
|
|
|
|
58,315,930
|
|
Operating
(loss) income
|
|
|
(26,411,588
|
)
|
|
|
13,046,365
|
|
|
|
(6,497,292
|
)
|
Loss
on retirement of convertible note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,348,805
|
)
|
Interest
income
|
|
|
375,949
|
|
|
|
461,491
|
|
|
|
484,909
|
|
Interest
expense
|
|
|
(72,304
|
)
|
|
|
(134,868
|
)
|
|
|
(535,014
|
)
|
(Loss)
income from continuing operations before income taxes
|
|
|
(26,107,943
|
)
|
|
|
13,372,988
|
|
|
|
(7,896,202
|
)
|
Income
tax benefit (expense)
|
|
|
1,635,214
|
|
|
|
(2,462,165
|
)
|
|
|
—
|
|
(Loss)
income from continuing operations
|
|
|
(24,472,729
|
)
|
|
|
10,910,823
|
|
|
|
(7,896,202
|
)
|
Loss
on discontinued operations
|
|
|
(5,801,076
|
)
|
|
|
(1,587,788
|
)
|
|
|
(324,213
|
)
|
Net
(loss) income
|
|
$
|
(30,273,805
|
)
|
|
|
9,323,035
|
|
|
$
|
(8,220,415
|
)
|
Our
revenue during 2008 decreased by $47,180,000 or 56%, from 2007 reflecting
weaknesses across our businesses, with accentuated decline in principal
transactions and investment banking transactions. Net loss for 2008 was
$30,274,000 as compared to net income of $9,323,000 during 2007.
Our net
(loss) income during the three years ended December 31, 2008 included the
following non-cash items:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Stock-based
compensation
|
|
$
|
2,353,383
|
|
|
$
|
2,824,107
|
|
|
$
|
3,836,781
|
|
Reversal
of FIN 48 Liability
|
|
|
(1,838,743
|
)
|
|
|
—
|
|
|
|
—
|
|
Impairment
of goodwill and intangible assets
|
|
|
4,538,945
|
|
|
|
—
|
|
|
|
—
|
|
Amortization
of intangible assets
|
|
|
466,142
|
|
|
|
750,185
|
|
|
|
138,051
|
|
Depreciation
and amortization
|
|
|
828,598
|
|
|
|
740,445
|
|
|
|
655,334
|
|
Provision
for uncollectible accounts receivable
|
|
|
476,713
|
|
|
|
368,272
|
|
|
|
383,565
|
|
Issuance
of common stock to consultant
|
|
|
—
|
|
|
|
75,791
|
|
|
|
—
|
|
Amortization
of discounts on debt
|
|
|
2,584
|
|
|
|
10,332
|
|
|
|
146,776
|
|
Loss
on retirement of convertible note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
1,348,805
|
|
Amortization
of debt issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
35,757
|
|
Common
stock received for services
|
|
|
(1,752,625
|
)
|
|
|
(400,875
|
)
|
|
|
—
|
|
Total
|
|
$
|
5,074,997
|
|
|
$
|
4,368,257
|
|
|
$
|
6,545,069
|
|
Investment
Banking Revenue
Our
investment banking activity includes the following:
|
·
|
Capital Raising -
Capital raising includes private placements of equity and debt instruments
and underwritten public offerings.
|
|
·
|
Financial Advisory -
Financial advisory includes advisory assignments with respect to mergers
and acquisitions, divestures, restructurings and
spin-offs.
|
The
following table sets forth our revenue and transaction volumes from our
investment banking activities during the three years ended December 31,
2008:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Capital
raising
|
|
$
|
9,031,592
|
|
|
$
|
26,996,283
|
|
|
$
|
15,939,480
|
|
Financial
advisory
|
|
|
2,400,862
|
|
|
|
3,142,500
|
|
|
|
5,251,306
|
|
Total
investment banking revenue
|
|
$
|
11,432,454
|
|
|
$
|
30,138,783
|
|
|
$
|
21,190,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
Volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
offerings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
underwritten participations
|
|
$
|
182,780,000
|
|
|
$
|
234,596,000
|
|
|
$
|
156,500,000
|
|
Number
of transactions
|
|
|
3
|
|
|
|
13
|
|
|
|
15
|
|
Private
placements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
raised
|
|
$
|
290,380,000
|
|
|
$
|
331,480,000
|
|
|
$
|
173,101,000
|
|
Number
of transactions
|
|
|
13
|
|
|
|
26
|
|
|
|
15
|
|
Financial
advisory:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
amounts
|
|
$
|
82,600,000
|
|
|
$
|
129,161,000
|
|
|
$
|
169,423,000
|
|
Number
of transactions
|
|
|
4
|
|
|
|
1
|
|
|
|
1
|
|
Our
investment banking revenue amounted to $11,432,000, or 31% of our revenue during
2008, representing a 62% decrease compared to $30,139,000 recognized in 2007.
The decrease in revenue was driven by equity underwritten transactions which
decreased by 96% in 2008 as compared to the prior year. Average fees per
investment banking transaction decreased to $273,000 in 2008 from $710,000 in
2007. Our investment banking revenue of $30,139,000 amounted to 36%
of our revenue during 2007, representing a 42% increase compared to $21,191,000
recognized in 2006.
During
the year ended December 31, 2008, two investment banking clients each accounted
for more than 10% of our revenue. No single investment banking client
accounted for more than 10% of our revenue in 2007 and 2006.
Commissions
and Principal Transactions Revenue
Our
broker-dealer activity includes the following:
|
·
|
Commissions -
Commissions include revenue resulting from executing stock trades for
exchange-listed securities, over-the-counter securities and other
transactions as agent, as well as revenue from brokering money market
mutual funds by our Institutional Cash Distributors
group.
|
|
·
|
Principal Transactions
- Principal
transactions consist of a portion of dealer spreads attributed to our
securities trading activities as principal in Nasdaq-listed and other
securities, and include transactions derived from our activities as a
market-maker. Additionally, principal transactions include gains and
losses resulting from market price fluctuations that occur while holding
positions in our trading security
inventory.
|
The
following table sets forth our revenue and several operating metrics which we
utilize in measuring and evaluating performance and the results of our trading
activity operations:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Commissions:
|
|
|
|
|
|
|
|
|
|
Institutional
equities
|
|
$
|
22,385,277
|
|
|
$
|
25,312,803
|
|
|
$
|
26,348,811
|
|
Institutional
Cash Distributors
|
|
|
11,293,429
|
|
|
|
6,368,760
|
|
|
|
3,756,274
|
|
Total
commissions revenue
|
|
$
|
33,678,706
|
|
|
$
|
31,681,563
|
|
|
$
|
30,105,085
|
|
Principal
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
principal transactions, proprietary trading and market
making
|
|
$
|
(7,693,703
|
)
|
|
$
|
18,380,237
|
|
|
$
|
(207,779
|
)
|
Investment
portfolio
|
|
|
(1,346,515
|
)
|
|
|
1,736,155
|
|
|
|
36,724
|
|
Total
principal transactions revenue
|
|
$
|
(9,040,218
|
)
|
|
$
|
20,116,392
|
|
|
$
|
(171,055
|
)
|
Equity
research:
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing
analysts
|
|
|
7
|
|
|
|
15
|
|
|
|
14
|
|
Companies
covered
|
|
|
100
|
|
|
|
186
|
|
|
|
194
|
|
Transaction
Volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares traded
|
|
|
1,281,568,000
|
|
|
|
1,160,782,000
|
|
|
|
937,005,000
|
|
Number
of active clients
|
|
|
491
|
|
|
|
597
|
|
|
|
564
|
|
Commissions
amounted to $33,679,000, or 92%, of our revenue during 2008, representing a 6%
increase over $31,682,000 recognized during 2007. The growth in commissions
revenue was attributed to higher assets brokered by our Institutional Cash
Distributors group during 2008. Commissions revenue from our institutional
equities trading business was down slightly during 2008 due to a decrease in
average commissions per share and a slightly lower average daily trading
volume.
Commissions
amounted to $31,682,000, or 38%, of our revenue during 2007, representing a 5%
increase over $30,105,000 recognized during 2006. The growth in commissions
revenue was attributed to higher assets brokered by our Institutional Cash
Distributors group during 2007. Commissions revenue from our institutional
equities trading business was down slightly during 2007 due to a decrease in
average commissions per share, partially offset by higher average daily trading
volume.
Principal
transaction revenue consists of four different activities - customer principal
trades, market making, trading for our proprietary account, and realized and
unrealized gains and losses in our investment portfolio. As a broker-dealer, we
account for all of our marketable security positions on a trading basis and as a
result, all security positions are marked to fair market value each day. Returns
from market making and proprietary trading activities tend to be more volatile
than acting as agent or principal for customers.
Principal
transactions decreased revenue by $9,040,000 in 2008, while principal
transactions were $20,116,000, or 24% of revenue during 2007. Of the 2008
revenue, a substantial portion of the loss resulted from our concentrated
positions in two securities which accounted for 52% and 41% of our positions
held for proprietary trading as of December 31, 2008.
Other
components of principal transactions revenue during 2008 included principal
trades for customers, realized and unrealized gains from our investment
portfolio and trading gains from making markets in equity
securities.
During
the year ended December 31, 2008, one brokerage customer accounted for more than
10% of our revenues. During the previous two years, no single
brokerage customer accounted for more than 10% of our revenue.
Compensation
and Benefits Expenses
Compensation
and benefits expense represents the majority of our operating expenses and
includes commissions, base salaries, discretionary bonuses and stock-based
compensation. Commissions are typically paid to sales representatives based on
their production. Historically, these employees have not been
eligible for discretionary bonuses. Investment banking, research, support and
executives are salaried and may participate in the discretionary bonus plan. The
bonus pool is funded based on a number of criteria including revenue production,
profitability and other key metrics. However, the total bonuses pool is
considered by management and theBoard of Directors and can be adjusted at their
discretion. Salaries, payroll taxes and employee benefits tend to vary based on
title and overall headcount.
The
following table sets forth the major components of our compensation and benefits
for the three years ended December 31, 2008:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
compensation and discretionary bonuses
|
|
$
|
17,824,388
|
|
|
$
|
34,408,271
|
|
|
$
|
26,563,425
|
|
Salaries
and wages
|
|
|
13,009,535
|
|
|
|
12,756,961
|
|
|
|
9,076,815
|
|
Stock-based
compensation
|
|
|
2,353,383
|
|
|
|
2,824,109
|
|
|
|
3,836,781
|
|
Payroll
taxes, benefits and other
|
|
|
3,483,151
|
|
|
|
3,680,108
|
|
|
|
3,363,410
|
|
Total
compensation and benefits
|
|
$
|
36,670,457
|
|
|
$
|
53,669,449
|
|
|
$
|
42,840,431
|
|
Total
compensation and benefits as a percentage of revenue
|
|
|
100
|
%
|
|
|
64
|
%
|
|
|
83
|
%
|
Cash
compensation and benefits as a percentage of revenue
|
|
|
94
|
%
|
|
|
61
|
%
|
|
|
75
|
%
|
The
decrease in compensation and benefits expense of $16,999,000, or 32%, from 2007
to 2008 was due primarily to lower incentive compensation which is directly
correlated to revenue production. Cash compensation is equal to total
compensation and benefits expense excluding stock-based compensation, which is a
non-cash expense. Cash compensation and benefits expense as a percentage of
revenue increased to 94% during 2008 as compared to 61% during 2007. This
increase in 2008 was largely attributed to our overall decrease in revenue which
was 56% lower than 2007.
The
increase in compensation and benefits expense of $10,829,000, or 25%, from 2006
to 2007 was due primarily to higher incentive compensation which is directly
correlated to revenue production. Cash compensation and benefits expense as a
percentage of revenue decreased to 61% during 2007 as compared to 75% during
2006. This improvement in 2007 was largely attributed to our overall revenue
growth which was 62% higher than 2006 and our extraordinary principal
transactions revenue as this activity has a low compensation expense
ratio.
Our
headcount increased from 166 at December 31, 2006 to 198 as of December 31,
2007, and decreased to 128 at December 31, 2008. Two single sales professionals
each accounted for more than 10% of our revenue in 2008. No single
sales professional accounted for more than 10% of our revenue in 2007 and
2006.
Other
Operating Expenses
Brokerage
and clearing fees include trade processing expenses that we pay to our clearing
broker and execution fees that we pay to floor brokers and electronic
communication networks. Merriman Curhan Ford & Co. is a fully-disclosed
broker-dealer, which has engaged a third-party clearing broker to perform all of
the clearance functions. The clearing broker-dealer processes and settles the
customer transactions for Merriman Curhan Ford & Co. and maintains the
detailed customer records. Security trades are executed by third-party
broker-dealers and electronic trading systems. These expenses are almost
entirely variable with commissions revenue and the volume of brokerage
transactions. The increase in brokerage and clearing fees of $407,000, or 15%
from 2007 to 2008 reflected increased per-transaction costs during the latest
year, as we added to costs by deploying electronic tools to assist in our
trading. The slight increase in brokerage and clearing fees of $21,000, or
1% from 2006 to 2007 reflected increased market making activity during
2007.
Professional
services expense includes legal fees, accounting fees, expenses related to
investment banking transactions and various consulting fees. The increase of
$6,376,000, or 229%, from 2007 to 2008 reflected higher legal fees for
litigation defense related to the Del Biaggio matters and increased audit fees.
The increase of $344,000, or 14%, from 2006 to 2007 reflected higher legal fees
for litigation defense and corporate matters, as well as higher accounting and
consulting fees mostly in connection with the integration of the MedPanel
acquisition. We anticipate professional services expense for 2009
will decrease substantially as compared to 2008, as the legal expenses in 2008
were unusually high.
Occupancy
and equipment includes rental costs for our office facilities and equipment, as
well as equipment, software and leasehold improvement expenses. Occupancy
expense is largely fixed in nature while equipment expense tends to increase as
we hire additional employees. The increase of $666,000, or 41%, from 2007 to
2008 resulted mostly from expansion of our offices. The slight
decrease of $27,000, or 2%, from 2006 to 2007 resulted mostly from assets being
fully depreciated during the year. During 2008, we relocated our New
York office to larger premises. We anticipate occupancy and equipment
expense in 2009 will decrease slightly over 2008 as we vacated some
premises.
Communications
and technology expense includes market data and quote services, voice, data and
Internet service fees, and data processing costs. The increase of $358,000, or
10%, from 2007 to 2008 was due to higher per unit cost and the notice period
typically required for cancellations of service contracts to take
effect. The increase of $436,000, or 15%, from 2006 to 2007 was
primarily due to upgrading our trading order management system in June 2006, as
well as the increase in market data and quote services as we continue to expand
our market maker activities. We anticipate communications and technology expense
for 2009 will decrease by approximately 10% over 2008.
Depreciation
and amortization expense primarily relate to the depreciation of our computer
equipment and leasehold improvements. Depreciation and amortization are mostly
fixed in nature. The increase of $24,000, or 4%, from 2007 to 2008 mostly
resulted from the depreciation of assets acquired with our expanded New York
offices requiring additional equipment and leasehold improvements. The increase
of $37,000, or 6%, from 2006 to 2007 mostly resulted from the expansion of our
facilities in San Francisco. We anticipate depreciation and
amortization expense for 2009 will be slightly lower as compared to 2008 as some
of our fixed assets become fully depreciated.
Travel
and business development expenses are incurred by each of our lines of business
and include business development costs by our investment bankers, travel costs
for our research analysts to visit the companies that they cover and non-deal
road show expenses. Non-deal road shows represent meetings in which management
teams of our corporate clients present directly to our institutional investors.
The increase of $421,000, or 17%, from 2007 to 2008 resulted from active sales
and marketing efforts in the early part of the year. The decrease of $239,000,
or 9%, from 2006 to 2007 resulted from fewer uncompleted investment banking
transactions in 2007 as compared to 2006. Syndicate expenses related to
securities offerings in which we act as underwriter or agent are deferred until
either the related revenue is recognized or we determine that the security
offerings are unlikely to be completed. We anticipate travel and entertainment
expense for 2009 will likely be lower than 2008.
The
following expenses are included in other operating expenses for the three years
ended December 31, 2008:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Investor
conferences
|
|
$
|
817,177
|
|
|
$
|
918,153
|
|
|
$
|
947,793
|
|
Recruiting
|
|
|
288,500
|
|
|
|
476,483
|
|
|
|
316,021
|
|
Public
and investor relations
|
|
|
508,692
|
|
|
|
436,977
|
|
|
|
294,664
|
|
Provision
for uncollectible accounts receivable
|
|
|
347,410
|
|
|
|
368,271
|
|
|
|
(116,435
|
)
|
Insurance
|
|
|
450,872
|
|
|
|
315,186
|
|
|
|
271,725
|
|
Supplies
|
|
|
335,778
|
|
|
|
297,814
|
|
|
|
300,598
|
|
Dues
and subscriptions
|
|
|
359,606
|
|
|
|
198,967
|
|
|
|
162,064
|
|
Other
|
|
|
1,303,092
|
|
|
|
374,570
|
|
|
|
224,335
|
|
Total
other operating expenses
|
|
$
|
4,411,128
|
|
|
$
|
3,386,421
|
|
|
$
|
2,400,765
|
|
The
significant increase of $1,025,000, or 30%, from 2007 to 2008 was due primarily
to a legal settlement with a former employee as described in the Legal
Proceedings section above. In addition, higher costs of dues and
subscriptions related to information services and higher insurance premiums
partially attributable to our legal matters also contributed to the increase.
The increase of $986,000, or 41%, from 2006 to 2007 was due primarily to
one-time events in 2006 that reduced other expense by approximately $600,000. We
anticipate other operating expense for 2009 will decrease over 2008 as we are
permitted to cancel services and activities which are less suited to our reduced
business levels.
Loss
on Retirement of Convertible Note Payable
In
December 2006, the Company repaid the $7.5 million variable rate secured
convertible note issued to Midsummer Investment, Ltd, or Midsummer, in March
2006. The loss of $1,349,000 recorded as of December 31, 2006 on repayment of
the convertible note consists of the write-off of the unamortized discount
related to the stock warrant as well as the write-off the unamortized debt
issuance costs. Midsummer retained the stock warrant to purchase 267,857 shares
of our common stock.
Interest
Income
Interest
income represents interest earned on our cash balances maintained at financial
institutions. The decrease of $86,000, or 19%, from 2007 to 2008 and the
decrease of $23,000, or 5%, from 2006 to 2007 were due to changes in average
interest earning assets and average interest rates during these
periods.
Interest
Expense
Interest
expense for 2008 included $70,000 for interest expense and $2,500 for
amortization of discounts while 2007 included $125,000 for interest expense and
$10,000 for amortization of discounts.
Income
Tax Expense
We
recorded an income tax benefit of $1,635,000 in 2008 resulting in an effective
tax rate of 5%. Income tax expense was $2,462,000 in 2007 resulting in an
effective tax rate of 21%. The effective tax rate differs from the
statutory rate primarily due to the existence and utilization of net operating
loss carryforwards which have been offset by a valuation allowance resulting in
a tax provision equal to our expected current expense for the year. We
historically have had current tax expense primarily related to alternative
minimum, state and minimum tax liabilities.
Historically
and currently, we have recorded a valuation allowance on our deferred tax
assets, the significant component of which relates to net operating loss tax
carryforwards. Management continually evaluates the realizability of its
deferred tax assets based upon negative and positive evidence available. Based
on the evidence available at this time, we continue to conclude that it is not
"more likely than not" that we will be able to realize the benefit of our
deferred tax assets in the near future.
We
adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes -
an Interpretation of FASB Statement 109 (“FIN 48”) on January 1, 2007. As a
result of the implementation of FIN 48, we recognized no adjustment in the
liability for unrecognized income tax benefits and no corresponding change in
retained earnings. During 2008, we recognized $1,839,000 of unrecognized tax
benefits previously established in 2007. Accordingly, there were no
unrecognized tax benefits as of December 31, 2008, and we do not have any
material accrued interest or penalties associated with any unrecognized tax
benefits. We do not believe it is reasonably possible that our unrecognized tax
benefits will significantly change within the next twelve months. We are subject
to taxation in the US and various state and foreign jurisdictions. The tax years
2000-2008 remain open in the U.S. and several U.S. state
jurisdictions.
Discontinued
Operations
On April
17, 2007, we acquired 100 percent of the outstanding common shares of MedPanel
Corp. which we subsequently renamed Panel Intelligence LLC (“Panel”) and made
into a subsidiary of the Merriman Curhan Ford Group, Inc. The results of Panel’s
operations have been included in our consolidated financial statements since
that date. As a result of the acquisition, we began providing independent market
data and information to clients in the biotechnology, pharmaceutical, medical
device, and financial industries by leveraging Panel's proprietary methodology
and vast network of medical experts.
We paid
$6.1 million in common stock for Panel. The value of the 1,547,743 shares of
common shares issued was determined based on the average market price of the our
common stock over the period including three days before and after the terms of
the acquisition were agreed to and announced. The selling stockholders were also
entitled to additional consideration on the third anniversary from the closing
which is based upon Panel Intelligence achieving specific revenue and
profitability milestones.
In
December 2008, we determined that the sale of Panel would reduce investments
required to develop Panel’s business. Its sale would also generate
capital necessary for our core business. We determined that the
plan of sale criteria in FASB Statement No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets,” had been met. Accordingly, the carrying value
of the Panel assets was adjusted to their fair value less costs to
sell. As a result, an impairment loss in the amount of $1,937,000 was
recorded and is included in “Other expenses” in the table in Note
8. In January 2009, we sold Panel to Panel Intelligence, LLC (Newco)
for $1,000,000 and shares of our common stock in the amount of
$100,000.
Critical
Accounting Policies and Estimates
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to the valuation of securities owned and deferred tax assets. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ
from those estimates. We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements.
Revenue
Recognition
Investment
banking revenue includes underwriting and private placement agency fees earned
through our 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 we act as an underwriter and includes management
fees, selling concessions and underwriting fees. Fee revenue relating to
underwriting commitments is recorded when all significant items relating to the
underwriting cycle have been completed and the amount of the underwriting
revenue has been determined. This generally is the point at which all of the
following have occurred: (i) the issuer's registration statement has become
effective with the SEC, or other offering documents are finalized, (ii) we have
made a firm commitment for the purchase of the shares or debt from the issuer,
and (iii) we have been informed of the exact number of shares or the principal
amount of debt that it has been allotted.
Syndicate
expenses related to securities offerings in which we act as underwriter or agent
are deferred until the related revenue is recognized or we determine that it is
more likely than not that the securities offerings will not ultimately be
completed. Underwriting revenue is presented net of related expenses. As
co-manager for registered equity underwriting transactions, management must
estimate our 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 reduces the revenue that is recognized as
co-manager. Such amounts are adjusted to reflect actual expenses in the period
in which we receive 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.
Commissions
revenue and related clearing expenses are recorded on a trade-date basis as
security transactions occur. Principal transactions in regular-way trades are
recorded on the trade date, as if they had settled. Profit and loss arising from
all securities and commodities transactions entered into for the account and
risk of our company are recorded on a trade-date basis.
Primary
research revenue is recognized on a proportional performance basis as services
are provided. It is reported in our financial statements under
captions labeled “Discontinued Operations”.
OTCQX
revenue is recognized in two parts – Due Diligence and Listing
Fees. Due Diligence Fees are recognized at its
completion. The Listing Fees are pro-rated monthly from the time the
end of the Due Diligence period until the end of the engagement
term.
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. Securities owned and securities
sold, not yet purchased are stated at fair value, with any related changes in
unrealized appreciation or depreciation reflected in Principal Transactions in
the consolidated statements of operations. Financial instruments carried at
contract amounts include cash and cash equivalents and amounts due from and to
brokers, dealers and clearing brokers.
Fair
Value Measurement—Definition and Hierarchy
The
Company adopted the provisions of SFAS No. 157, Fair Value Measurements
(SFAS No. 157), effective January 1, 2008. Under this standard, 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 SFAS 157 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 —
Inputs are unadjusted, quoted prices 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 —
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 that are generally included in this
category are stock warrants for which there are market-based implied
volatilities, unregistered common stock and thinly traded common
stock.
Level 3 —
Inputs 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. Generally, assets carried at fair value and included in
this category include stock warrants for which market-based implied volatilities
are not available.
Assets
measured at fair value on a recurring basis are categorized into a Level based
upon the lowest level of significant input to the valuations.
Stock-Based
Compensation
On
January 1, 2006, the company adopted SFAS 123(R), “Share-Based Payment,” which
requires the measurement and recognition of compensation expense, based on
estimated fair values, for all share-based awards, made to employees and
directors, including stock options, non-vested stock, and participation in our
employee stock purchase plan. Share-based compensation expense recognized in our
consolidated statement of operations for the three years ended December 31, 2008
includes compensation expense for share-based awards granted (i) prior to, but
not yet vested as of December 31, 2005, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123, and (ii) subsequent to
December 31, 2005, based on the grant date fair value estimated in accordance
with the provisions of SFAS 123(R).
The
company estimates the fair value of stock options granted using the
Black-Scholes option pricing method. This option pricing model requires the
input of highly subjective assumptions, including the option's expected life and
the price volatility of the underlying stock. 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 lattice model with specific assumptions about the suboptimal exercise
behavior, post-vesting termination rates and other relevant factors. The
expected stock price volatility was determined using the historical volatility
of our common stock. The fair value is then amortized on a straight-line basis
over the requisite service periods of the awards, which is generally the vesting
period.
Because
share-based compensation expense is based on awards that are ultimately expected
to vest, it has been reduced to account for estimated forfeitures. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Changes in these inputs and assumptions can materially affect the
measure of estimated fair value of our share-based compensation.
Deferred
Tax Valuation Allowance
We
account for income taxes in accordance with the provision of SFAS No. 109,
Accounting for 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. We have concluded that it is more likely than not that our deferred
tax assets as of December 31, 2008 and 2007 will not be realized 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 we
determine that we 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.
Goodwill
and Intangible Assets
In
accordance with SFAS 142, indefinite-life intangible assets and goodwill are not
amortized. Rather, they are subject to impairment testing on an annual basis or
more often if events or circumstances indicate there may be impairment. This
test involves assigning tangible assets and liabilities, identified intangible
assets and goodwill to reporting units and comparing the fair value of each
reporting unit to its carrying amount. If the fair value is less than the
carrying amount, a further test is required to measure the amount of the
impairment. When available, we use recent, comparable transactions to
estimate the fair value of the respective reporting unit. We calculate an
estimated fair value based on multiples of revenue, earnings, and book value of
comparable transactions. However, when such comparable transactions are not
available or have become outdated, we use discounted cash flow scenarios to
estimate the fair value of the reporting units.
The
goodwill and intangible assets we recorded are related to Panel assets,
classified as held for sale in our financial statements. In the year
ended December 31, 2008, we recorded impairments to goodwill and intangible
assets in the amounts of $3,338,000 and $1,301,000, respectively. At
December 31, 2008, the assets held for sale included no remaining goodwill and
$283,000 of intangible assets after impairment and depreciation.
Liquidity
and Capital Resources
As of
December 31, 2008, liquid assets consisted primarily of cash and cash
equivalents of $6,358,000 and marketable securities of $4,623,000, for a total
of $10,981,000, which is $34,788,000 lower than $45,769,000 in liquid
assets as of December 31, 2007.
Cash and
cash equivalents decreased by $25,296,000 during 2008. Cash used in our
operating activities for 2008 was $24,945,000 which consists of our net loss of
$30,274,000 adjusted for non-cash expenses including unrealized loss on
securities owned of $9,775,000, partially offset by the decrease in commissions
and bonus payable of $14,223,000, net stock-based compensation of $2,353,000,
depreciation and amortization of $829,000, provision for doubtful accounts of
$477,000, and amortization of intangible assets of $466,000. Cash used in
investing activities amounted to $204,000 during 2008 which reflects our
purchase of equipment and fixtures. Cash used in our financing activities was
$232,000. Our financing activities included debt service payments partially
offset by proceeds from the exercise of stock options by our
employees.
Merriman
Curhan Ford & Co., as a broker-dealer, is subject to Rule 15c3-1 of the
Securities Exchange Act of 1934, which specifies uniform minimum net capital
requirements, as defined, for their registrants. As of December 31, 2008,
Merriman Curhan Ford & Co. had regulatory net capital of $2,899,000, which
exceeded the required amount by $1,899,000.
During
the year ended December 31, 2008, the Company incurred a net loss of $30,274,000
and used $24,945,000 in net cash from operating activities. At
December 31, 2008, the Company had cash and cash equivalents of $6,358,000,
marketable securities of $4,623,000 and receivables from clearing broker of
$1,753,000. The Company had liabilities of
$11,150,000. The Company’s ability to generate profits is highly
dependent on stock market trading volumes and the general economic environment.
As a result, the ability of the Company to meet its forward obligations and the
ability to continue as a going concern may be in question.
We
believe that our existing cash balances and investments could be sufficient to
meet our liquidity and capital spending requirements depending on the
successful implementation of the plan to increase the Company’s operating
flexibility and extend its cash reserves, the settlement of our legal
proceedings, the stability of financial markets and the economic
environment. The company may require additional capital investment to
fund our working capital. We cannot be certain that additional debt or equity
financing will be available when required or, if available, that we can secure
it on terms satisfactory to us.
The
following is a table summarizing our significant commitments as of December 31,
2008, consisting of capital leases and future minimum lease payments under all
non-cancelable operating leases with initial or remaining terms in excess of one
year.
|
|
Operating
Leases
|
|
|
Capital
Leases
|
|
|
|
|
|
|
|
|
2009
|
|
|
1,772,554
|
|
|
|
634,968
|
|
2010
|
|
|
1,720,897
|
|
|
|
319,733
|
|
2011
|
|
|
1,658,148
|
|
|
|
146,647
|
|
2012
|
|
|
1,095,440
|
|
|
|
—
|
|
2013
|
|
|
616,000
|
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
Total
commitments
|
|
$
|
6,863,039
|
|
|
$
|
1,101,347
|
|
Interest
|
|
|
—
|
|
|
|
(66,441
|
)
|
Net
commitments
|
|
$
|
6,863,039
|
|
|
$
|
1,034,906
|
|
Off-Balance
Sheet Arrangements
We were
not a party to any off-balance sheet arrangements during the three years ended
December 31, 2008. In particular, we do not have any interest in so-called
limited purpose entities, which include special purpose entities and structured
finance entities.
Newly
Issued Accounting Standards
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value
Measurements (“SFAS No. 157”), which defines fair value,
establishes a framework for measuring fair value under generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. On February 6, 2008, the FASB deferred the effective date of SFAS No. 157
for one year for all nonfinancial assets and nonfinancial liabilities, except
for those items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The adoption of SFAS No.
157 did not have a material impact on the Company's consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”), which permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value and
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. The Company did not adopt SFAS No. 159
on any individual instrument as of January 1, 2008.
In May
2007, the FASB issued FASB Staff Position (“FSP”) FIN No. 46R-7, Application of FASB Interpretation
No. 46(R) to Investment Companies (“FSP FIN 46R-7”), which amends
the scope of the exception to FIN No. 46R to state that investments accounted
for at fair value in accordance with the specialized accounting guidance in the
American Institute of Certified Public Accountants Audit and Accounting Guide,
Investment Companies, are not subject to consolidation under FIN No. 46R. This
interpretation is effective for fiscal years beginning on or after December 15,
2007. The adoption of FSP FIN No. 46R-7 did not have a material impact on the
Company’s consolidated financial statements
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
141R”), which requires the acquiring entity in a business combination to
recognize the full fair value of assets acquired and liabilities assumed in the
transaction (whether a full or partial acquisition); establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; requires expensing of most transaction and
restructuring costs; and requires the acquirer to disclose to investors and
other users all of the information needed to evaluate and understand the nature
and financial effect of the business combination. SFAS 141R applies to all
transactions or other events in which the Company obtains control of one or more
businesses, including those sometimes referred to as “true mergers” or “mergers
of equals” and combinations achieved without the transfer of consideration, for
example, by contract alone or through the lapse of minority veto rights.
SFAS 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company does not expect
the adoption of SFAS 141R will have a material impact on its consolidated
financial position or results of operations.
Also in
December 2007, SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (“SFAS 160”), which requires reporting
entities to present noncontrolling (minority) interests as equity (as opposed to
as a liability or mezzanine equity) and provides guidance on the accounting for
transactions between an entity and noncontrolling interests. SFAS 160 applies to
all fiscal years and interim periods within those fiscal years, beginning on or
after December 15, 2008, except for the presentation and disclosure
requirements which will be applied retrospectively for all periods presented.
The Company does not expect the adoption of SFAS 160 will have a material effect
on its consolidated financial statements.
In
February 2008, the FASB issued FSP FAS 157-1, Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13 (“FSP FAS 157-1”), which amends SFAS 157 to
exclude its applicability to leases, except if the lease asset is acquired or
lease liability is assumed as part of a merger or business combination. FSP FAS
157-1 was effective upon the initial adoption of SFAS No. 157. The adoption of
FSP FAS 157-1 did not have a material impact on the Company’s consolidated
financial statements.
In
October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not
Active (“FSP 157-3”) , which
clarifies the application SFAS No. 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP 157-3 was effective immediately upon issuance and includes
prior period financial statements that have not yet been issued, and therefore
the Company is subject to the provisions of FSP-157-3 effective
September 30, 2008. The implementation of FSP 157-3 did not affect the
Company’s fair value measurements of financial assets as of December 31,
2008 and had no impact on its consolidated results of operations or financial
condition.
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 Stockholders’ Equity
|
|
·
|
Consolidated
Statements of Cash Flows
|
|
·
|
Notes
to Consolidated Financial
Statements
|
Schedules
other than those listed above are omitted because of the absence of conditions
under which they are required or because the required information is presented
in the financial statements or notes thereto.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders of
Merriman
Curhan Ford Group, Inc.
We have
audited the accompanying consolidated statements of financial condition of
Merriman Curhan Ford Group, Inc. (the Company) as of December 31, 2008 and 2007,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31,
2008. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Merriman Curhan Ford
Group, Inc. at December 31, 2008 and 2007, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As more fully described in Note 3, the Company
has incurred recurring operating losses and is facing significant litigation as
discussed more fully in Note 14. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s
plans in regard to these matters also are described in Note 3. The 2008
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Merriman Curhan Ford Group, Inc.’s internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March
30, 2009 expressed an unqualified opinion thereon.
|
/s/
Ernst & Young LLP
|
|
|
San
Francisco, California
March
30, 2009
|
|
MERRIMAN
CURHAN FORD GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
33,678,706
|
|
|
$
|
31,681,563
|
|
|
$
|
30,105,085
|
|
Principal
transactions
|
|
|
(9,040,218
|
)
|
|
|
20,116,392
|
|
|
|
(171,055
|
)
|
Investment
banking
|
|
|
11,432,454
|
|
|
|
30,138,783
|
|
|
|
21,190,786
|
|
Advisory
and other fees
|
|
|
496,894
|
|
|
|
1,811,527
|
|
|
|
693,822
|
|
Total
revenue
|
|
|
36,567,836
|
|
|
|
83,748,265
|
|
|
|
51,818,638
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
36,670,457
|
|
|
|
53,669,449
|
|
|
|
42,840,431
|
|
Brokerage
and clearing fees
|
|
|
3,042,133
|
|
|
|
2,635,328
|
|
|
|
2,614,513
|
|
Professional
services
|
|
|
9,161,729
|
|
|
|
2,785,414
|
|
|
|
2,441,417
|
|
Occupancy
and equipment
|
|
|
2,303,944
|
|
|
|
1,638,353
|
|
|
|
1,665,410
|
|
Communications
and technology
|
|
|
3,762,954
|
|
|
|
3,405,411
|
|
|
|
2,969,872
|
|
Depreciation
and amortization
|
|
|
705,883
|
|
|
|
681,756
|
|
|
|
645,129
|
|
Travel
and business development
|
|
|
2,921,196
|
|
|
|
2,499,768
|
|
|
|
2,738,393
|
|
Other
|
|
|
4,411,128
|
|
|
|
3,386,421
|
|
|
|
2,400,765
|
|
Total
operating expenses
|
|
|
62,979,424
|
|
|
|
70,701,900
|
|
|
|
58,315,930
|
|
Operating
(loss) income
|
|
|
(26,411,588
|
)
|
|
|
13,046,365
|
|
|
|
(6,497,292
|
)
|
Loss
on retirement of convertible note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,348,805
|
)
|
Interest
income
|
|
|
375,949
|
|
|
|
461,491
|
|
|
|
484,909
|
|
Interest
expense
|
|
|
(72,304
|
)
|
|
|
(134,868
|
)
|
|
|
(535,014
|
)
|
(Loss)
income from continuing operations before income taxes
|
|
|
(26,107,943
|
)
|
|
|
13,372,988
|
|
|
|
(7,896,202
|
)
|
Income
tax benefit (expense)
|
|
|
1,635,214
|
|
|
|
(2,462,165
|
)
|
|
|
—
|
|
(Loss)
income from continuing operations
|
|
|
(24,472,729
|
)
|
|
|
10,910,823
|
|
|
|
(7,896,202
|
)
|
Loss
from discontinued operations
|
|
|
(5,801,076
|
)
|
|
|
(1,587,788
|
)
|
|
|
(324,213
|
)
|
Net
(loss) income
|
|
$
|
(30,273,805
|
)
|
|
$
|
9,323,035
|
|
|
$
|
(8,220,415
|
)
|
Basic
net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$
|
(1.95
|
)
|
|
$
|
0.95
|
|
|
$
|
(0.79
|
)
|
Loss
from discontinued operations
|
|
$
|
(0.46
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.03
|
)
|
Net
(loss) income
|
|
$
|
(2.41
|
)
|
|
$
|
0.81
|
|
|
$
|
(0.82
|
)
|
Diluted
net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$
|
(1.95
|
)
|
|
$
|
0.86
|
|
|
$
|
(0.79
|
)
|
Loss
from discontinued operations
|
|
$
|
(0.46
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.03
|
)
|
Net
(loss) income
|
|
$
|
(2.41
|
)
|
|
$
|
0.74
|
|
|
$
|
(0.82
|
)
|
Weighted
average number of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,550,872
|
|
|
|
11,528,187
|
|
|
|
9,989,265
|
|
Diluted
|
|
|
12,550,872
|
|
|
|
12,643,524
|
|
|
|
9,989,265
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
MERRIMAN
CURHAN FORD GROUP, INC.
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,358,128
|
|
|
$
|
31,653,657
|
|
Securities
owned:
|
|
|
|
|
|
|
|
|
Marketable,
at fair value
|
|
|
4,622,577
|
|
|
|
14,115,022
|
|
Not
readily marketable, at estimated fair value
|
|
|
366,061
|
|
|
|
2,275,668
|
|
Other
|
|
|
185,065
|
|
|
|
2,229,120
|
|
Restricted
cash
|
|
|
1,131,182
|
|
|
|
689,157
|
|
Due
from clearing broker
|
|
|
1,752,535
|
|
|
|
1,251,446
|
|
Accounts
receivable, net
|
|
|
612,234
|
|
|
|
2,940,959
|
|
Prepaid
expenses and other assets
|
|
|
619,759
|
|
|
|
1,651,051
|
|
Equipment
and fixtures, net
|
|
|
1,260,011
|
|
|
|
995,880
|
|
Assets
held for sale
|
|
|
1,958,038
|
|
|
|
6,771,371
|
|
Total
assets
|
|
$
|
18,865,590
|
|
|
$
|
64,573,331
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
712,591
|
|
|
$
|
579,097
|
|
Commissions
and bonus payable
|
|
|
3,182,941
|
|
|
|
17,346,304
|
|
Accrued
expenses
|
|
|
3,637,345
|
|
|
|
5,541,501
|
|
Due
to clearing and other brokers
|
|
|
28,022
|
|
|
|
6,865
|
|
Securities
sold, not yet purchased
|
|
|
903,217
|
|
|
|
3,804,558
|
|
Deferred
revenue
|
|
|
709,691
|
|
|
|
119,999
|
|
Capital
lease obligation
|
|
|
923,683
|
|
|
|
721,380
|
|
Convertible
notes payable, net
|
|
|
—
|
|
|
|
197,416
|
|
Notes
payable
|
|
|
—
|
|
|
|
41,573
|
|
Liabilities
held for sale
|
|
|
1,052,899
|
|
|
|
1,408,590
|
|
Total
liabilities
|
|
|
11,150,389
|
|
|
|
29,767,283
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Convertible
Preferred stock, Series A—$0.0001 par value; 2,000,000 shares
authorized; 2,000,000 shares issued and 0 shares outstanding as of
December 31, 2008 and 2007, respectively; 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, 2008 and 2007; 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, 2008 and 2007; aggregate liquidation preference of
$0
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.0001 par value; 300,000,000 shares authorized; 12,756,656 and
12,310,886 shares issued and 12,730,218 and 12,284,448 shares
outstanding as of December 31, 2008 and 2007, respectively
|
|
|
1,278
|
|
|
|
1,232
|
|
Additional
paid-in capital
< |