Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
Fiscal Year ended December 31, 2009
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
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(IRS
Employer
Identification
No.)
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600
California Street, 9th Floor
San
Francisco, CA 94108
(Address
of principal executive offices)(Zip Code)
(415)
248-5600
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes 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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yeso Nox
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 ¨
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Non-accelerated filer (Do not check if a smaller reporting company) ¨
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Smaller Reporting Company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨
No x
The
aggregate market value of the 12,554,779 shares of common stock of the
Registrant issued and outstanding as of June 30, 2009, the last business day of
the registrant’s most recently completed second fiscal quarter, excluding
1,272,827 shares of common stock held by affiliates of the Registrant was
$5,076,878. This amount is based on the closing price of the common stock on
NASDAQ of $0.45 per share on June 30, 2009.
The
number of shares of Registrant’s common stock outstanding as of March 15, 2010
was 12,824,294
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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9
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Item 1B.
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Unresolved
Staff Comments
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21
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Item 2.
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Properties
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21
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Item 3.
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Legal
Proceedings
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22
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Item 4.
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Reserved
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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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27
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Item 6.
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Selected
Consolidated Financial Data
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29
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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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30
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Item 7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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49
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Item 8.
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Financial
Statements and Supplementary Data
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50
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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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101
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Item 9A.
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Controls
and Procedures
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101
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Item 9B.
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Other
Information
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102
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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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104
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Item 11.
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Executive Compensation
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104
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Item 12.
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Security Ownership
of Certain Beneficial Owners and Management
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104
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Item 13.
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Certain
Relationships and Related Transactions
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104
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Item 14.
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Principal Accounting Fees and Services
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104
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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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105
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This
Annual Report on Form 10-K and the information incorporated by reference in this
Form 10-K include forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Some of the forward-looking statements can be
identified by the use of forward-looking words such as “believes,” “expects,”
“may,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or
“anticipates,” or the negative of those words or other comparable terminology.
Forward-looking statements involve risks and uncertainties. You should be aware
that a number of important factors could cause our actual results to differ
materially from those in the forward-looking statements. We will not necessarily
update the information presented or incorporated by reference in this Annual
Report on Form 10-K if any of these forward-looking statements turn out to be
inaccurate. Risks affecting our business are described throughout this Form 10-K
and especially in the section “Risk Factors.” This entire Annual Report on Form
10-K, including the consolidated financial statements and the notes and any
other documents incorporated by reference into this Form 10-K, should be read
for a complete understanding of our business and the risks associated with that
business.
PART
I
Item
1. Business
Overview
We are a
financial services holding company that provides equity research, capital
markets services, corporate and venture services, and investment banking through
our primary operating subsidiary, Merriman Curhan Ford & Co.
(“MCF”). In 2009, we sold the operating assets of Panel Intelligence,
LLC, which had been our subsidiary dedicated to primary research, and
discontinued operations of MCF Asset Management, our subsidiary which managed
investment products.
MCF 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 $1 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.
Institutional
Cash Distributors (“ICD”) is a division of MCF which brokers money market funds
serving the short-term investing needs of corporate finance departments at
companies throughout the United States and Europe. In January 2009,
we sold the primary assets related to the ICD operations to a group of investors
which included some of our employees. To assist in the transition of
operations to the new owners, we are providing substantial services to ICD,
including collecting its revenues. When ICD receives its
broker-dealer license, we will no longer provide such services and record ICD
revenues.
Panel
Intelligence, LLC was acquired in April 2007. It offered 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 provided 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 managed absolute return investment products for institutional
and high-net worth clients. We were 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 liquidated the funds under management and
returned investments to the investors in the fourth quarter of 2008. We no
longer have, for all practical purposes, a subsidiary dedicated to asset
management. At December 31, 2009, we held an immaterial amount
of illiquid assets and were in the process of distributing these to
investors.
We are
headquartered in San Francisco, with additional offices in New York, NY. As of
December 31, 2009, we had 94 employees, including employees of our Institutional
Cash Distributor division (ICD), whose assets we sold in January 2009. Merriman
Curhan Ford & Co. is registered with the Securities and Exchange Commission
(“SEC”) as a broker-dealer and is a member of Financial Industry Regulatory
Authority (“FINRA”) and the Securities Investors Protection Corporation
(“SIPC”).
Liquidity
We
incurred substantial losses and negative cash flows from operations in 2009 and
2008. We had net losses of $5,462,000 and $30,274,000 in 2009 and 2008,
respectively, and negative operating cash flows of $12,648,000 and $24,945,000
for the same respective years. As of December 31, 2009, we had retained deficit
of $124,815,000. While we believe our current funds will be sufficient to enable
us to meet our planned expenditures through at least January 1, 2011, if
anticipated operating results are not achieved, management has the intent and
believes it has the ability to delay or reduce expenditures if not to raise
additional capital. Failure to generate sufficient cash flows from operations,
raise additional capital or reduce certain discretionary spending could have a
material adverse effect on our ability to achieve our intended business
objectives.
Principal
Services
Our
investment bank / broker-dealer segment provides three service offerings:
investment banking, brokerage and equity research. We provide traditional
research-based financial services to companies with market capitalizations up to
$1 billion, which we believe is an underserved sector in the financial services
industry.
Investment
Banking
Our
investment bankers provide a full range of corporate finance and strategic
advisory services. Our corporate finance practice is comprised of industry
coverage investment bankers 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, 2009, we had 8 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 who 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 about 324
institutional accounts in the United States. We execute securities transactions
for money managers, mutual funds, hedge funds, insurance companies, and pension
and profit-sharing plans. Institutional investors normally purchase and sell
securities in large quantities, 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 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, 2009, we
were a market maker in 163 securities.
The
customer base of our institutional brokerage business includes mutual funds,
hedge funds, and private investment firms. We believe this group of potential
clients to number over 4,000. We grow our business by adding new 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 for purposes such
as stock repurchase programs. We also serve the needs of company executives with
restricted stock transactions, cashless exercise of options, 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 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 10 out of 91 issuers listed on OTCQX.
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. 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 2010, the business will continue operating under Merriman
Curhan Ford & Co. and its financial results included in our consolidated
financial statements.
Equity
Research
A key
part of our strategy is to originate specialized and in-depth research. Our
analysts cover a universe of approximately 114 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 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 12, 2010, approximately 67% of the companies covered by our research
professionals had market capitalizations of $1 billion or less.
Our
equity 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.
Our
objective is to build long lasting relationships with our institutional 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 equity research analysts are in a unique
position to maintain close, ongoing communication with our clients.
The
industry sectors covered by our eight equity research analysts
include:
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Natural
Resources and related sectors
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Consumer, Media &
Internet
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Internet
Media and Infrastructure
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Biotechnology
- Life Sciences
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Clean
Energy Semiconductors
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Communications
- Wireless Technology
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Defense
Electronics/Advanced Communications
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Emerging
Data Center/Enterprise Technologies
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Cloud
Computing Service Providers
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Research
Coverage by Industry
As of
2/2/10
After
initiating coverage on a company, our analysts seek to effectively communicate
new developments to our institutional clients through our sales and trading
professionals. 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 institutional investors, including our annual Investor Summit and
various industry sector conferences. We use these events to primarily showcase
our equity research to the institutional investment community.
Competition
Merriman
Curhan Ford is engaged in the highly competitive financial services and
investment industries. We compete with other securities firms - from large
U.S.-based firms, securities subsidiaries of major commercial bank holding
companies and U.S. subsidiaries of large foreign institutions, to major regional
firms, smaller niche players, and those offering competitive services via the
Internet. Long term developments in the brokerage industry, including
decimalization and the growth of electronic communications networks, or ECNs,
have reduced commission rates and profitability in the brokerage industry. Many
large investment banks have responded to lower margins within their equity
brokerage divisions by reducing research coverage, particularly for smaller
companies, consolidating sales and trading services, and reducing headcount of
more experienced sales and trading professionals.
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. The economic environment in 2009 has marked a
bottom of the negative secular trends experienced by financial institutions in
2008 and the beginning of 2009. During the period, many of our buy-side clients
have merged, gone out of business or have sharply reduced their commission flow.
The reduction in the number of these clients also has 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 “We
face strong competition from larger firms,” under “Item 1A - Risk
Factors.”
Corporate
Support
Accounting,
Administration and Operations
Our
accounting, administration and operations personnel are responsible for
financial controls, internal and external financial reporting, human resources
and personnel services, office operations, information technology and
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 experienced,
we have implemented such enhancements in 2009 and expect to continue in
2010.
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 policies, procedures and risk limits, as
necessary;
· Monitoring
and reporting on adherence with risk policies and limits;
· Developing
and applying new measurement methods to the risk process as appropriate;
and
· Approving
new product developments or business initiatives.
We cannot
provide assurance that our risk management program or our internal controls will
prevent or mitigate losses attributable to the risks to which we are
exposed.
For a
further discussion of the risks affecting our business, see “Item 1A Risk
Factors.”
Regulation
As a
result of federal and state registration and self-regulatory organization, 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 (“SEC”),
and as a member firm of Financial Industry Regulatory Authority (“FINRA”), we
are subject to the net capital requirements of the SEC (Rule 15c3-1 of the
Securities Exchange Act of 1934) as regulated and enforced by FINRA. These
capital requirements specify minimum levels of capital, computed in accordance
with regulatory requirements that 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
(“U.S. GAAP”), plus qualifying subordinated borrowings, less the value of all of
a broker-dealer’s assets that are not readily convertible into cash (such as
furniture, prepaid expenses, and unsecured receivables), and further reduced by
certain percentages (commonly called “haircuts”) of the market value of a
broker-dealer’s positions in securities and other financial instruments. The
amount of net capital in excess of the regulatory minimum is referred to as
“excess net capital.”
The SEC’s
capital rules also (i) require that 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 our subsidiary with an applicable regulation,
governmental regulators and one or more of the SROs may institute administrative
or judicial proceedings that may result in censure, fine, civil penalties
(including treble damages in the case of insider trading violations), the
issuance of cease-and-desist orders, the deregistration or suspension of the
non-compliant broker-dealer, the suspension or disqualification of officers or
employees, or other adverse consequences. The imposition of any such penalties
or orders on us or our personnel could have a material adverse effect on our
operating results and financial condition.
Additional
legislation and regulations, including those relating to the activities of our
broker-dealer, changes in rules promulgated by the SEC, FINRA, or other 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 SEC. We are providing the address to our
Internet site solely for the information of investors. We do not intend the
address to be an active link or to otherwise incorporate the contents of the
website into this report.
We face a
variety of risks in our business, many of which are substantial and inherent in
our business and operations. The following are risk factors that could affect
our business which we consider material to our industry and to holders of our
common stock. Other sections of this Annual Report on Form 10-K, including
reports which are incorporated by reference, may include additional factors
which could adversely impact our business and financial performance. Moreover,
we operate in a very competitive and rapidly changing environment. New risk
factors emerge from time to time and it is not possible for our management to
predict all risk factors, nor can we assess the impact of all factors on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements.
Risks
Related to Our Business
We
may not be able to 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 fail to do any of the following:
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establish,
maintain, and increase our client
base;
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manage
the quality of our services;
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compete
effectively with existing and potential
competitors;
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further
develop our business activities;
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attract
and retain qualified personnel;
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settle
pending litigation, and
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maintain
adequate working capital
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We cannot
be certain that we will be able to 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.
We have
had a number of structural changes to our operations as we divested certain
non-core business lines to focus our service and product offerings.
Additionally, there have been a number of significant challenges faced by the
securities and financial industries in the past 18 months. As a result of our
structural changes and the uncertainty of the current economic environment, the
factors upon which we are able to base our estimates as to the gross revenue and
the number of participating clients that will be required for us to maintain a
positive cash flow are unpredictable. For these and other reasons, we cannot
assure you that we will not require higher gross revenue and an increased number
of clients, securities brokerage, and investment banking transactions, and/or
more time in order for us to complete the development of our business that we
believe we need to be able to cover our operating expenses. It is more likely
than not that our estimates will prove to be inaccurate because actual events
more often than not differ from anticipated events. Furthermore, in the event
that financing is needed in addition to the amount that is required for this
development, we cannot assure you that such financing will be available on
acceptable terms, if at all.
There
are substantial legal proceedings against us involving claims for significant
damages.
The
actions of a former customer, William Del Biaggio III (“Del Biaggio”), and a
former employee, David Scott Cacchione (“Cacchione”), have given rise to many
legal actions against us as described in the Legal Proceedings section below. We
selected the lawsuits we believed were of the most threatening in nature and, as
of September 8, 2009, settled them in conjunction with our strategic transaction
of that date. There are other lawsuits related to these actions of our former
employee which we have elected not to settle. If we are found to be liable for
the claims asserted in any or all of these legal actions, our cash position may
suffer. 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 believe we have meritorious defenses against these claims, 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 cannot assure you that we will not be subject to such
litigation. If we are subject to such litigation, even if we ultimately prevail,
our business and financial condition may be adversely affected.
We
may not be able to continue operating our business
The
Company incurred significant losses in 2009 and 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 financial obligations
is highly dependent on market and economic conditions. We also recorded net
losses in certain quarters within other past fiscal years. If operating
conditions worsen in 2010 or if the Company receives adverse judgments in its
pending litigations, we may not have the resources to meet our financial
obligations. If the Company is not able to continue in business, the entire
investment of our common 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.
MCF, 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, MCF 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 Co-Founder and Chief Executive Officer of the parent company, and the other
members of our Executive Committee. Our senior professionals’ personal
reputations and relationships with our clients are a critical element in
obtaining and executing client engagements. We face intense competition for
qualified employees from other companies in the investment banking industry as
well as from businesses outside the investment banking industry, such as
investment advisory firms, hedge funds, private equity funds, and venture
capital funds. From time to time, we have experienced losses of investment
banking, brokerage, research, and other professionals and losses of our key
personnel may occur in the future. The departure or other loss of Mr. Merriman,
other members of our Executive Committee or any other senior professional who
manages substantial client relationships and possesses substantial experience
and expertise, could impair our ability to secure or successfully complete
engagements, or protect our market share, each of which, in turn, could
materially adversely affect our business and results of operations. Please see
Risk Factor below entitled “If our CEO leaves the Company…“ for additional
information regarding the consequences of the loss of the services of Mr.
Merriman.
If any of
our professionals were to join an existing competitor or form a competing
company, some of our clients could choose to leave. The compensation plans and
other incentive plans we have entered into with certain of our professionals may
not prove effective in preventing them from resigning to join our competitors.
If we are unable to retain our professionals or recruit additional
professionals, our reputation, business, results of operations, and financial
condition may be materially adversely affected.
Our
compensation structure may negatively impact our financial condition if we are
not able to effectively manage our expenses and cash flows.
Historically,
the industry has been able to attract and retain investment banking, research,
and sales and trading professionals in part because the business models have
provided for lucrative compensation packages. Compensation and benefits 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 2009, the potential pool was determined by a
number of components including revenue production, key operating milestones, and
profitability. There is a potential, in order to ensure retention of key
employees, that we could pay individuals for revenue production despite the
business having negative cash flows and/or net losses.
Pricing
and other competitive pressures may impair the revenue and profitability of our
brokerage business.
We derive
a significant portion of our revenue from our brokerage business. Along with
other brokerage firms, we have experienced intense price competition in this
business in recent years. Recent developments in the brokerage industry,
including decimalization and the growth of electronic communications networks,
or ECNs, have reduced commission rates and profitability in the brokerage
industry. We expect this trend toward alternative trading systems to continue.
We believe we may experience competitive pressures in these and other areas as
some of our competitors seek to obtain market share by competing on the basis of
price. In addition, we face pressure from larger competitors, which may be
better able to offer a broader range of complementary products and services to
brokerage 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.
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. It is possible that gains from investing will accrue to these
individuals and /or to the Company, while the Company’s brokerage customers do
not accrue gains in the same securities due to differences in timing of
investment decisions. Conversely, it is possible that losses from investing will
accrue to our Company, while these individuals do not experience losses in their
personal accounts because the individuals did not make investments in their
personal accounts.
We
face strong competition from larger firms.
The
brokerage and investment banking industries are intensely competitive. We
compete on the basis of a number of factors, including client relationships,
reputation, the abilities and past performance of our professionals, market
focus and the relative quality and price of our services and products. We have
experienced intense price competition with respect to our brokerage business,
including large block trades, spreads, and trading commissions. Pricing and
other competitive pressures in investment banking, including the trends toward
multiple book runners, co-managers, and multiple financial advisors handling
transactions, have continued and could adversely affect our revenue, even during
periods where the volume and number of investment banking transactions are
increasing. We believe we may experience competitive pressures in these and
other areas in the future as some of our competitors seek to obtain market share
by competing on the basis of price.
We are a
relatively small investment bank with approximately 94 employees as of December
31, 2009 and revenue less than $50 million in 2009. 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 $5,462,000 for the year ended December 31, 2009
and $30,274,000 for the year ended December 31, 2008. 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 2009 we generated 14% of
our brokerage revenue, or approximately 12% of our total revenue, from our ten
largest brokerage clients. Similarly, in 2008 we generated 37% of our brokerage
revenue, or approximately 25% 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 or trading
activities may not protect us or mitigate our risks from those activities. If
any of the variety of instruments, processes, and strategies we utilize to
manage our exposure to various types of risk are not effective, we may incur
losses.
Our
operations and infrastructure may malfunction or fail.
Our
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 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.
As a
result of the volatile economic conditions faced by the securities and financial
industries, and the restructuring of our business lines, there have been a
number of changes to our operations. Given these changes, we can no longer rely
upon prior operating history to evaluate our business and prospects.
Additionally, we are subject to the risks and uncertainties that face a Company
in the process of restructuring its business in the midst of uncertain economic
environment. Some of these risks and uncertainties relate to our ability to
attract and retain clients on a cost-effective basis, expand and enhance our
service offerings, raise additional capital, and respond to competitive market
conditions. We may not be able to address these risks adequately, and our
failure to do so may adversely affect our business and the value of an
investment in our Common Stock.
Risks
Related to Our Industry
Risks
associated with volatility and losses in the financial markets.
The U.S.
financial markets in 2008 and early 2009 suffered unprecedented volatility and
losses. Several mortgage-related financial institutions and large, reputable
investment banks were not able to continue operating their businesses. In the
event that the securities and financial industries face similar or greater
volatility, there can be no assurance that we will be able to continue our
operations.
Employee
misconduct could harm us and is difficult to detect and deter.
There
have been a number of highly publicized cases involving fraud or other
misconduct by employees in the financial services industry in recent years. Our
experience with our former employee Scott Cacchione hurt our business
significantly, and we run the risk that employee misconduct could occur at our
company. For example, misconduct by employees could involve the improper use or
disclosure of confidential information, which could result in regulatory
sanctions and serious reputation or financial harm to us. It is not always
possible to deter employee misconduct. The precautions we take to detect and
prevent this activity may not be effective in all cases and we may suffer
significant reputation harm for any misconduct by our employees.
Risks
associated with regulatory impact on capital markets.
Highly
publicized financial scandals in recent years have led to investor concerns over
the integrity of the U.S. financial markets and have prompted Congress, the SEC,
the NYSE, and FINRA to significantly expand corporate governance and public
disclosure requirements. To the extent that private companies, in order to avoid
becoming subject to these new requirements, decide to forgo initial public
offerings, our equity underwriting business may be adversely affected. In
addition, provisions of the Sarbanes-Oxley Act of 2002 and the corporate
governance rules imposed by self-regulatory organizations have diverted many
companies’ attention away from capital market transactions, including securities
offerings and acquisition and disposition transactions. In particular, companies
that are or are planning to register their securities with the SEC or to become
subject to the reporting requirements of the Securities Exchange Act of 1934 are
incurring significant expenses in complying with the SEC and accounting
standards relating to internal control over financial reporting, and companies
that disclose material weaknesses in such controls under the new standards may
have greater difficulty accessing the capital markets. These factors, in
addition to adopted or proposed accounting and disclosure changes, may have an
adverse effect on the business.
Financial
services firms have been subject to increased scrutiny over the last several
years, increasing the risk of financial liability and reputation harm resulting
from adverse regulatory actions.
Firms in
the financial services industry have been operating in a 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.
Our
exposure to legal liability is significant, and damages that we may be required
to pay and the reputational harm that could result from legal action against us
could materially adversely affect our businesses.
We face
significant legal risks in our businesses and, in recent years, the volume of
claims and amount of damages sought in litigation and regulatory proceedings
against financial institutions have been increasing. These risks include
potential liability under securities or other laws for materially false or
misleading statements made in connection with securities offerings and other
transactions, potential liability for “fairness opinions,” and other advice we
provide to participants in strategic transactions, and disputes over the terms
and conditions of complex trading arrangements. We are also subject to claims
arising from disputes with employees for alleged discrimination or harassment,
among other things. These risks often may be difficult to assess or quantify and
their existence and magnitude often remain unknown for substantial periods of
time.
Our role
as advisor to our clients on important underwriting or mergers and acquisitions
transactions involves complex analysis and the exercise of professional
judgment, including rendering “fairness opinions” in connection with mergers,
and other transactions. Therefore, our activities may subject us to the risk of
significant legal liabilities to our clients and aggrieved third parties,
including stockholders of our clients who could bring securities class actions
against us. Our investment banking engagements typically include broad
indemnities from our clients and provisions to limit our exposure to legal
claims relating to our services, but these provisions may not protect us or may
not be enforceable in all cases.
For
example, an indemnity from a client that subsequently is placed into bankruptcy
is likely to be of little value to us in limiting our exposure to claims
relating to that client. As a result, we may incur significant legal and other
expenses in defending against litigation and may be required to pay substantial
damages for settlements and adverse judgments. Substantial legal liability or
significant regulatory action against us could have a material adverse effect on
our results of operations or cause significant reputational harm to us, which
could seriously harm our business and prospects.
In the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation often has been instituted against
that company. Such litigation is expensive and diverts management’s attention
and resources. We cannot assure you that we will not be subject to such
litigation. If we are subject to such litigation, even if we ultimately prevail,
our business and financial condition may be adversely affected.
Risks
Related to Ownership of Our Common Stock
We
have issued Series D Convertible Preferred Stock with rights preferences and
privileges that are senior to those of our Common Stock. The exercise of some or
all of these Series D Convertible Preferred Stock rights may have a detrimental
effect on the rights of the holders of the Common Stock.
On
September 8, 2009, we closed a private placement Preferred Stock strategic
transaction. We sold 23,720,916 shares of our Series D Convertible Preferred
Stock at $0.43 per share and warrants to purchase 23,720,916 share of Common
Stock at $0.65 per share to an investor group that includes certain of our
officers and directors in addition to outside investors. In connection with this
transaction, the Company converted the principal and accrued interest of certain
notes issued by the Company between May 2009 and July 2009 into Series D
Convertible Stock. The aggregate principal amount from these cancelled notes was
$1,425,000.
As the
warrants originally contained a full ratchet antidilution provision, we recorded
a non-cash warrant liability of approximately $26 million as of September 30,
2009 in accordance with generally accepted accounting principles (“GAAP”), which
resulted in a stockholders’ deficit (negative stockholders’ equity). This, in
turn, caused us to fall outside of the NASDAQ Listing Rules which require a
minimum of $2,000,000 of stockholders’ equity.
We have
since remedied the noncompliance with the NASDAQ listing rules by amending the
warrants to remove the full ratchet antidilution provision and thus remove the
resulting stockholders’ deficit. At December 31, 2009, we no longer carried
warrant liabilities on our Statement of Financial Condition. In consideration
for such amendment, the Company has agreed to pay the holders of the warrants
$0.005 per warrant share in cash, which is anticipated to be paid around August
15, 2010. We believe we are now in full compliance with the NASDAQ minimum
shareholders’ equity requirements.
The
Series D Convertible Preferred Stock has a number of rights, preferences, and
privileges that are superior to those of the Common Stock. Holders of the Series
D Convertible Preferred Stock are entitled to a 6% annual dividend payable
monthly in arrears. As of December 31, 2009, the Company recorded cash dividends
payable of $51,000. The Company cannot pay any dividends on the Common Stock
until all accrued dividends on the Series D Convertible Preferred Stock are
first paid.
The
holders of Series D Convertible Preferred Stock are entitled to a “liquidation
preference payment” of $0.43 per share of Series D Convertible Preferred Stock
plus all accrued but unpaid dividends on such shares prior and in preference to
any payment to holders of the Common Stock upon a merger, acquisition, sale of
substantially all the assets, or certain other liquidation events of the
Company. Any proceeds after payment of the “liquidation preference payment”
shall be paid pro rata to the holders of the Series D Convertible Preferred
Stock and Common Stock on an as converted to Common Stock basis. As such,
holders of Common Stock might receive nothing in liquidation, or receive much
less than they would if there were no Series D Convertible Preferred Stock
outstanding.
The
Series D Convertible Preferred Stock has antidilution protection, including a
full ratchet provision for certain new issuances of Company Stock, as specified
in the Certificate of Designation of Series D Convertible Preferred Stock which
is incorporated herein by reference. If such antidilution protection is
triggered, the holders of Common Stock may have their ownership in the Company
diluted.
The
holders of the Series D Convertible Preferred Stock also have substantial voting
power over the Company. Such holders are entitled to elect four of the nine
members of our Board of Directors. Additionally, they have certain “protective
provisions,” as set forth in the Certificate of Designation, requiring us to
obtain their approval before we can carry out certain actions. The holders of
Series D Convertible Preferred Stock may gain additional voting power if they
exercise the warrants or they acquire shares of our Common Stock in the
market.
The
interests of the holders of the Series D Convertible Preferred Stock might not
be aligned with those of the holders of Common Stock, which could result in the
Company being sold or liquidated in a transaction in which the holders of Common
Stock receive little or nothing.
In
connection with the private placement transaction, we entered into an Investors’
Rights Agreement with the investors. Under the terms of the Investors’ Rights
Agreement, if a registration statement relating to the Common Shares underlying
the Series D Convertible Preferred Stock and warrants is not declared effective
or is not available within time lines provided in the Investors’ Rights
Agreement (with certain limited exceptions), then we are required to pay the
investors, pro rata, in proportion to the number of shares of Series D
Convertible Preferred Stock purchased by such investor in the transaction, five
year warrants to purchase 150,000 shares of the Company’s Common Stock at $0.65
per share, on terms identical to those issued to the investors under the
financing transaction (the “Registration Warrants”), as liquidated damages and
not as penalty, subject to an overall limit of liquidated damages in the
aggregated of 900,000 Registration Warrants. The liquidated damages pursuant to
the terms hereof shall apply on a daily pro rata basis for any portion of a
month prior to securing an effective registration statement. The foregoing shall
in no way limit any equitable remedies available to investors for failure to
secure an effective registration statement by the time specified in the
Investors’ Rights Agreement. Investors shall also be able to pursue monetary
damages for failure to secure an effective registration statement by the time
specified in the Investors’ Rights Agreement. Investors shall also be able to
pursue monetary damages for failure to secure an effective registration
statement by the agreed upon time but only if such failure is due to the willful
or deliberate action or inaction of the Company in breach of the
covenants.
Your
ownership percentage may be diluted by warrants issued in connection with our
convertible notes financing.
The
investors of the convertible notes issued on May 29, 2009 and June 1, 2009
received warrants to purchase an aggregate of 937,500 shares of the Common Stock
of the Company at $0.50 per share. The investor and guarantors of the Note
issued on July 31, 2009 received warrants to purchase an aggregate of 2,326,000
shares of the Common Stock of the Company at $0.65 per share. While the
convertible notes and the note are no longer outstanding, the warrants issued in
conjunction with them are, and exercise of these warrants would dilute the
ownership percentage of existing stockholders in the Company.
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 44% of our outstanding common stock including exercise of
their options and D Preferred stock and associated 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 13,729,083 shares of preferred stock, without approval from our
stockholders. This preferred stock, often called “blank check” preferred stock,
could have conversion terms that would allow one share of preferred stock to
convert into multiple shares of common stock. It could also have voting rights
and other rights advantageous to holders of that preferred stock, but
disadvantageous to holders of the Company’s common stock.
If you
hold our common stock, this means that our Board of Directors has the right,
without your approval as a common 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, and
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 and preferred stock, conversion of securities convertible into
common stock, exercise of options and warrants to purchase common stock,
or termination of stock transfer
restrictions;
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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 trading
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 2009,
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 9% of our total outstanding stock on a fully diluted basis using
the treasury stock method. Associated with the strategic transaction we closed
in September 2009, we issued a total of 23,720,916 shares of Series D Preferred
Stock which may convert, at the holders’ option, to an equal number of common
stock. In addition, we issued warrants to purchase 28,755,791 shares of common
stock at per share exercisable at the holders’ option. Unrelated to the Series D
Preferred Stock transaction, we issued warrants to purchase an additional
1,030,833 shares of common stock in 2009. The Company has a total of 29,023,649
warrants outstanding, with exercise prices from $0.50 to $9.87.
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, we received a
notice from Nasdaq that our common stock is not currently in compliance with the
requirements of Nasdaq for continued listing which requires a minimum bid price
of $1.00 per share. We have 180 days from the date of notification to regain
compliance and may be eligible at the end of that period for an additional 180
days to regain compliance. Even if we regain compliance, an active trading
market in our stock has been limited. Accordingly, you may not be able to sell
your shares when you want or at the price you want.
We
do not expect to pay any cash dividends on our common stock in the foreseeable
future.
We do not
anticipate paying cash dividends on our common stock in the foreseeable future.
Accordingly, our common stock shareholders must rely on sales of their shares of
common stock after price appreciation, which may never occur, as the only way to
realize any future gains on an investment in our common stock. Investors seeking
cash dividends should not purchase our common stock.
If
our CEO leaves the Company, additional warrants will be issued, which may
further dilute the ownership percentage of the holders of the Company's Common
Stock
If D.
Jonathan Merriman ceases to serve as Chief Executive Officer of the Company
prior to August 27, 2012, the Company agreed in connection with the issuance of
the Series D Convertible Preferred Stock to issue additional warrants (the
“Merriman Warrants”) to the holders of the Series D Preferred Stock to purchase
shares of the Company’s Common Stock. The Merriman Warrants would be
exercisable for a total of 23,720,916 shares of Common Stock, with an exercise
price of $0.65 per share and a term of five years. Exercise of the
Merriman Warrants would dilute the ownership percentage of existing holders of
Common Stock. If Mr. Merriman dies, is terminated without “Cause” or
resigns with “Good Reason,” these warrants will not be
issuable. “Cause” and “Good Reason” are defined in the Investors
Rights Agreement entered into in connection with the issuance of the Series D
Preferred Stock, which was filed as Exhibit 10.48 to the Company’s Amended
Current Report on Form 8-K/A on September 2, 2009.
Item
1b. Unresolved Staff Comments
None.
Item
2. Properties
As of
December 31, 2009, all of our real estate properties are leased. Our principal
executive offices are located in San Francisco, California. We lease additional
offices to support our business activities. These offices are located in New
York, NY. 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 but we remain as the
lessee on the rental contract.
Item
3. Legal Proceedings
Settlement with the
Securities and Exchange Commission
On
November 10, 2009, the Securities and Exchange Commission (“SEC”) issued an
Order Instituting
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and
21(c) of the Securities and Exchange Act of 1934, Making Findings and Imposing
Remedial Sanctions and a Cease-and-Desist Order as to MCF, D. Jonathan Merriman,
and Christopher Aguilar (the “Order”). The Order was issued in connection
with the conduct of a former broker of the Company, Cacchione, from
approximately March 2006 to April 2008 for violation of the anti-fraud
provisions of the federal securities laws. Cacchione was fired in May 2008,
shortly after the underlying facts became known.
The Order
censures and imposes sanctions for the failure of MCF to reasonably supervise
Cacchione with a view toward preventing future violations arising out of his
disseminating confidential customer information to third parties and executing
unauthorized orders for certain customers. Pursuant to the Order, MCF paid a
penalty of $100,000 and hired an Independent Consultant to review and make
recommendations as needed to MCF’s written policies and procedures relating to
the supervision of registered representatives.
The Order
also imposes sanctions on D. Jonathan Merriman, MCF’s former CEO and current CEO
of Merriman Curhan Ford Group, Inc., the Company’s parent; and Christopher
Aguilar, MCF’s former Chief Compliance Officer; for failure to adequately
supervise Cacchione. Pursuant to the Order, Mr. Merriman paid a penalty of
$75,000 and Mr. Aguilar must pay a penalty of $40,000. Both individuals are also
suspended from acting in a supervisory capacity for any broker or dealer for a
period of twelve months from the date of the Order.
The Order
makes no finding or allegation of any fraudulent activity involving anyone in
MCF other than Cacchione. MCF, Mr. Merriman, and Mr. Aguilar cooperated fully
with the SEC’s investigation and consented to the SEC’s Order without admitting
or denying the findings.
Del Biaggio/Cacchione
Matters
A number
of lawsuits have been filed against MCF in connection with the actions of
William Del Biaggio III (“Del Biaggio”), a former customer of MCF and Cacchione,
a former retail broker of MCF. Del Biaggio and Cacchione pleaded guilty to
securities fraud and were sentenced to prison terms of 97 and 60 months,
respectively.
The
claims filed against the Company by DGB Investments, Inc., Craig Leipold,
Heritage Bank of Commerce, Modern Bank, Valley Community Bank, AEG Facilities
and the Federal Deposit Insurance Company (“FDIC”) as receiver for Security
Pacific Bank in an aggregate amount of $43,577,000 related to the fraud were
settled as of September 8, 2009. The amount for which the claims were settled
was $4,300,000, the issuance of 5-year warrants to buy 1,538,461 shares of the
Company’s common stock at $0.65 each, and the assignment of certain rights to
collect potential insurance payments from the Company’s insurers.
On
February 12, 2010, the Company and MCF settled with the insurers collecting an
aggregate amount of $5,750,000. The Company was allocated $325,000, less
expenses, of the settlement. The balance of the settlement amount was allocated
to the litigants on a pro rata basis. As a result of these proceeds, the Company
was obligated to issue 373,563 warrants to purchase shares of the Company’s
common stock at a price of $0.87 per shares. The warrant expense was accrued as
of December 31, 2009. (See Note 21, “Subsequent Events.”)
There are
additional lawsuits related to the fraud that the Company has elected not to
settle. We intend to defend vigorously each case, other than matters we describe
as having been settled. Although there can be no assurance as to the ultimate
outcome, the Company generally believes it has meritorious defenses and denies
liability in all litigation pending against it, including the matters described
below. In accordance with applicable accounting guidance, the Company
establishes reserves for litigation and regulatory matters when those matters
present loss contingencies which are both probable and estimable. When loss
contingencies are not both probable and estimable, we do not establish reserves.
In the matters described below, loss contingencies are not both probable and
estimable in the view of management, and accordingly, reserves have not been
established for those matters.
Don
Arata, et al. v. Merriman Curhan Ford & Co.
In July
2008, MCF and the Company were served with a complaint filed in the San
Francisco County, California Superior Court by several plaintiffs who invested
money with Del Biaggio and related entities. In March 2009, MCF and the Company
were served with an amended consolidated complaint on behalf of 39 plaintiffs
which consolidated several similar pending actions filed by the same law firm.
Plaintiffs allege, among other things, fraud based on Cacchione’s alleged
assistance to Del Biaggio in connection with the allegedly fraudulent
investments and MCF’s failure to discover and stop the continuing fraud.
Plaintiffs in this lawsuit seek damages of over $9 million. MCF and the Company
responded to the amended consolidated complaint in June 2009 denying all
liability. We believe that MCF and the Company have meritorious defenses and
intend to contest these claims vigorously. (The previously disclosed Davis,
Cook, and Bachelor cases now are part of the consolidated cases.)
David
Hengehold v. Merriman Curhan Ford & Co.
In June
2008, the Company and MCF were served with a complaint filed in San Mateo
County, California Superior Court by David Hengehold. Plaintiff alleges fraud
based on Cacchione having induced plaintiff into making loans to Del Biaggio.
Plaintiff in this lawsuit seeks damages of over $500,000. We believe that the
Company has meritorious defenses and intends to contest this claim
vigorously.
United
American Bank v. Merriman Curhan Ford & Co.
In July
2008, MCF was served with a complaint filed in the Santa Clara County Superior
Court by United American Bank, which loaned money to Del Biaggio, alleging that
MCF 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 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. After ensuring that the proper clearance
had been obtained from the court in Del Biaggio's bankruptcy case, MCF turned
over the pledged collateral to Plaintiff United American Bank, performing its
obligation under the account control agreement. MCF then demanded that it be
dismissed from the action, and is continuing to follow up that demand. We
believe that MCF has little or no remaining exposure in this matter and intends
to contest this claim vigorously.
The
Private Bank of the Peninsula v. Merriman Curhan Ford & Co.
In July
2008, MCF was served with a complaint filed in the Santa Clara County Superior
Court 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. Plaintiff in this lawsuit alleges damages of $916,666.65. We
believe that MCF has meritorious defenses and intends to contest this claim
vigorously.
Pacific
Capital Bank v. Merriman Curhan Ford & Co.
In
October 2008, MCF was served with a complaint filed in the San Francisco County
Superior Court by Pacific Capital Bank. Plaintiff alleges, among other things,
fraud based on Cacchione having induced plaintiff into making loans to Del
Biaggio. Plaintiff in this lawsuit alleges damages of $1.84 million. We believe
that MCF has meritorious defenses and intends to contest this claim
vigorously.
Gary
Thornhill, et al. v. Merriman Curhan Ford & Co.
In May
2009, a complaint was filed in the San Francisco County Superior Court by Gary
Thornhill and several related family members and entities, naming as defendants
the Company and MCF. The complaint alleges, , among other things, fraud based on
Cacchione’s alleged assistance to Del Biaggio in connection with the allegedly
fraudulent investments and MCF’s failure to discover and stop the continuing
fraud. Plaintiffs in this lawsuit seek damages of $230,000. We believe that MCF
has meritorious defenses and intend to contest these claims vigorously. (This
case was consolidated with the Arata case disclosed above on February 5, 2010.
See Note 21, “Subsequent Events.”)
Irving
Bronstein et al. v. Merriman Curhan Ford & Co.
In early
2009, MCF and D. Jonathan Merriman were served with a FINRA arbitration claim
filed by Irving Bronstein and several related family members and entities.
Claimants allege, among other things, that MCF benefited from the sale of a
particular security it held at the expense of its customers, including the
claimants, and fraud based on Cacchione’s alleged assistance to Del Biaggio in
connection with allegedly fraudulent investments and MCF’s failure to discover
and stop the fraud. This case was settled on March 1, 2010. (See Note 21,
“Subsequent Events”).
John
Zarich v. Merriman Curhan Ford & Co.
In or
around April 2009, John Zarich filed an arbitration claim with FINRA naming MCF.
The statement of claim alleges that Zarich was convinced by Cacchione to
purchase shares of a small, risky stock in which MCF held a position. It further
alleges that Cacchione convinced Zarich not to sell the shares when the stock’s
price fell. The statement seeks $265,000 in compensatory damages plus punitive
damages of $200,000 and 10% interest beginning January 2, 2008. We believe that
MCF has meritorious defenses and intends to contest this claim
vigorously.
Demand
by Shelly Schaffer to Merriman Curhan Ford & Co. for Payment of Attorneys’
Fees
On April
24, 2009, former Vice President of Client Services, Shelly Schaffer, through her
attorney, Robert Shartsis, made a written demand for payment of attorneys’ fees
for Ms. Schaffer’s defense in a civil action by the Securities and Exchange
Commission. Ms. Schaffer, who was hired by MCF on May 25, 2006, retained Mr.
Shartsis to respond to an SEC Enforcement action in which it is alleged that Ms.
Schaffer violated the antifraud provisions of federal securities laws and
applicable regulations. Ms. Schaffer worked for Cacchione prior to their coming
to MCF. MCF has denied Ms. Schaffer’s requests for payment of her attorneys’
fees on the grounds that the accusations against her concern activities that
were outside the course and scope of her employment. Ms. Schaffer’s attorneys
are demanding payment of their fees from MCF in a total amount of approximately
$150,000. We believe that MCF has meritorious defenses and intends to contest
the claims vigorously.
Other
Litigation
There
have been a number of legal cases that are unrelated to the Del
Biaggio/Cacchione matters. These are as follows:
Spare
Backup Inc. v. Merriman Curhan Ford & Co.
In April
2008, MCF entered into an engagement to provide investment banking services to
Spare Backup, Inc. (“Spare Backup”). MCF was able to close a round of bridge
financing in June 2008. MCF was successful in raising $1,300,000 in capital for
Spare Backup. As a result of closing the financing transaction, MCF was entitled
to reimbursement of its 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 MCF. We hired counsel to seek
payment of the fees and to proceed to arbitration, as is specified in the
engagement letter. In January 2009, MCF 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 MCF
fraudulently induced it to execute the investment banking engagement letter. The
petition for arbitration was granted in May of 2009 and the Indio action was
stayed for all purposes pending the outcome of arbitration. The arbitration date
has been set for March 22, 2010.
Joy
Ann Fell v. Merriman Curhan Ford & Co.
In
November 2008, MCF received a demand letter from a former employee, Joy Ann
Fell. In January 2009, MCF 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 MCF has meritorious defenses and intends to contest
this claim vigorously. MCF has responded to the claim and the parties have
propounded, but not responded to, written discovery. The parties and FINRA have
jointly selected an arbitration panel of three New York-based arbitrators: Aaron
Tyk, Caryl D. Feldman, and Beth Bird Pocker.
Wesley
Rusch v. Merriman Curhan Ford & Co.
In
October 2008, MCF was served with a claim in FINRA Arbitration by Wesley Rusch.
Mr. Rusch is a former at-will employee of MCF and worked in the compliance
department. Mr. Rusch was terminated by MCF in July 2007. Mr. Rusch alleges
theories of discrimination and lack of cause for termination. Mr. Rusch filed a
Statement of Claim seeking damages of over $1 million. We contested this claim
at the arbitration before a FINRA arbitration panel in March 2009 which resulted
in a decision in our favor in July 2009. Mr. Rusch requested that the San
Francisco Superior Court vacate the decision, and we requested that it be
confirmed.
Peter
Marcil v. Merriman Curhan Ford & Co.
In
January 2009, our broker-dealer subsidiary, MCF, was served with a claim in
FINRA Arbitration by Peter Marcil. Mr. Marcil is a former at-will employee of
MCF and worked in the investment banking department. Mr. Marcil resigned from
MCF 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. MCF has not
replied to the claim and an arbitration hearing date has not been set. The
parties participated in a mediation with San Francisco Attorney/Mediator Mark
Rudy on September 14, 2009 and have agreed to continue settlement negotiations.
We believe that MCF has meritorious defenses and it intends to contest this
claim vigorously. However, in the event that MCF does 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.
Dow
Corning Corporation vs. Merriman Curhan Ford & Co.
In late
July and early August 2009, counsel for Dow Corning Corporation (DCC) indicated
in correspondence and communications that DCC may have some type of claim
against MCF in connection with its purchases of auction rate securities through
MCF’s ICD Division. Counsel would not furnish any specifics about the purported
claim or any purported damages, but requested an agreement tolling any
applicable statute of limitations to allow the parties to undertake “settlement
discussions.” MCF, Institutional Cash Distributors, LLC and certain
representatives of MCF’s ICD Division entered into such a tolling agreement with
DCC for a period of 60 days, which was extended for a further 60 days. MCF’s ICD
Division has refused to extend the tolling agreement further. No claim has been
filed. Accordingly, MCF is not aware of the basis of any purported
claim.
Merriman
Curhan Ford & Co. and Merriman Curhan Ford Group, Inc. v. XL Specialty
Insurance Company
On
January 14, 2009, MCF and the Company (collectively “MCF”) filed a civil action
in the Superior Court for Los Angeles County (the “Coverage Lawsuit”) against
its directors’ and officers’ liability insurer, XL Specialty Insurance Company
(XL Specialty). In the Coverage Lawsuit, MCF had asserted claims for breach of
contract, tortious breach of contract, and declaratory relief, alleging that XL
Specialty wrongfully denied coverage for various ongoing third-party claims and
government investigations. This case was settled on February 12, 2010. (Please
see Note 21, “Subsequent Events.”)
Midsummer
Investment, Ltd., v. Merriman Curhan Ford Group, Inc.
On
November 6, 2009, Midsummer Investment, Ltd. (“Midsummer”) filed a complaint in
federal court, Southern District of New York, alleging that Midsummer was denied
an anti-dilution adjustment to a warrant issued by the Company to them, and that
the Company refused to honor an exercise of that warrant. The Company believes
that Midsummer is not entitled to any anti-dilution adjustment and its attempted
exercise was not accompanied by proper payment. We believe that the Company has
meritorious defenses and intends to contest this claim vigorously.
The
Company and MCF deny any liability and are vigorously contesting these lawsuits
and arbitrations. At this point, the Company cannot estimate the amount of
damages if they are resolved unfavorably or does not believe that the cases will
result in unfavorable outcomes and accordingly, management has not provided an
accrual for these lawsuits and arbitrations.
Based on
the facts presently known, the Company does not believe the outcome of these
proceedings will have a material adverse effect on its financial
condition.
Additionally,
from time to time, we are involved in ordinary routine litigation incidental to
our business.
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
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$ |
1.63 |
|
|
$ |
0.67 |
|
Third
Quarter
|
|
|
1.80 |
|
|
|
0.38 |
|
Second
Quarter
|
|
|
0.62 |
|
|
|
0.30 |
|
First
Quarter
|
|
|
0.65 |
|
|
|
0.24 |
|
|
|
|
|
|
|
|
|
|
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 |
|
The
closing sale price for the common stock on March 15, 2010 was $0.86 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 638 stockholders of record as of
December 31, 2009. 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, 2009.
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
|
|
Securities
|
|
|
|
Securities to
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
be Issued
|
|
|
Average
|
|
|
Available
|
|
|
|
Upon
|
|
|
Exercise
|
|
|
For Future
|
|
|
|
Exercise of
|
|
|
Price of
|
|
|
Issuance
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Under Equity
|
|
|
|
Options and
|
|
|
Options and
|
|
|
Compensation
|
|
Plan Category
|
|
Warrants
|
|
|
Warrants
|
|
|
Plans
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by stockholders:
|
|
|
|
|
|
|
|
|
|
1999
Stock Option Plan (expired 12/30/08)
|
|
|
65,865 |
|
|
$ |
4.47 |
|
|
|
- |
|
2000
Stock Option and Incentive Plan (expired 2/28/10)
|
|
|
365,797 |
|
|
$ |
1.29 |
|
|
|
206,753 |
|
2001
Stock Option and Incentive Plan
|
|
|
443,243 |
|
|
$ |
0.80 |
|
|
|
50,032 |
|
2003
Stock Option and Incentive Plan
|
|
|
3,644,879 |
|
|
$ |
1.03 |
|
|
|
345,025 |
|
2009
Stock Incentive Plan
|
|
|
4,945,000 |
|
|
$ |
1.16 |
|
|
|
3,011,462 |
|
2006
Directors’ Stock Option and Incentive Plan
|
|
|
98,838 |
|
|
$ |
0.43 |
|
|
|
5,069 |
|
2002
Employee Stock Purchase Plan
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
Equity
compensation not approved by stockholders
|
|
|
25,001 |
|
|
$ |
49.00 |
|
|
|
- |
|
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
On
September 8, 2009, the Company closed on the sale and purchase of approximately
23,721,000 shares of Series D Preferred Stock at $0.43 per share, together with
warrants to purchase an additional 23,721,000 shares of the Company’s common
stock at $0.65 per share pursuant to a Series D Preferred Stock Purchase
Agreement (the “Series D Financing”). The investor group included approximately
fifty individuals and entities, including certain officers, directors and
employees of the Company, as well as outside investors. The Series D Preferred
Stock was issued in a private placement exempt from registration requirements
pursuant to Regulation D of the Securities Act of 1933, as amended. Cash
consideration was deposited into escrow. Each share of Series D Preferred Stock
is convertible into one share of Common Stock of the Company. The Series D
Preferred Stock carries a dividend rate of 6% per annum, payable in cash
monthly.
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.
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
49,263,042 |
|
|
$ |
36,567,836 |
|
|
$ |
83,748,265 |
|
|
$ |
51,818,638 |
|
|
$ |
43,184,315 |
|
Operating
expenses
|
|
|
62,842,395 |
|
|
|
62,979,424 |
|
|
|
70,701,900 |
|
|
|
58,315,930 |
|
|
|
44,912,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
|
(13,579,353 |
) |
|
|
(26,411,588 |
) |
|
|
13,046,365 |
|
|
|
(6,497,292 |
) |
|
|
(1,728,457 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on retirement of convertible notes payable (1)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,348,805 |
) |
|
|
- |
|
Other
income
|
|
|
2,000,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Change
in warrant liability
|
|
|
6,910,656 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Interest
income
|
|
|
15,658 |
|
|
|
375,949 |
|
|
|
461,491 |
|
|
|
484,909 |
|
|
|
446,273 |
|
Interest
expense
|
|
|
(1,341,753 |
) |
|
|
(72,304 |
) |
|
|
(134,868 |
) |
|
|
(535,014 |
) |
|
|
(76,103 |
) |
Income
tax benefit (expense)
|
|
|
627,923 |
|
|
|
1,635,214 |
|
|
|
(2,462,165 |
) |
|
|
- |
|
|
|
(142,425 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
|
(5,366,869 |
) |
|
|
(24,472,729 |
) |
|
|
10,910,823 |
|
|
|
(7,896,202 |
) |
|
|
(1,500,712 |
) |
Loss
from discontinued operations
|
|
|
(94,894 |
) |
|
|
(5,801,076 |
) |
|
|
(1,587,788 |
) |
|
|
(324,213 |
) |
|
|
(13,731 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(5,461,763 |
) |
|
$ |
(30,273,805 |
) |
|
$ |
9,323,035 |
|
|
$ |
(8,220,415 |
) |
|
$ |
(1,514,443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) income from continuing operations
|
|
$ |
(0.42 |
) |
|
$ |
(1.95 |
) |
|
$ |
0.95 |
|
|
$ |
(0.79 |
) |
|
$ |
(0.16 |
) |
Diluted
(loss) income from continuing operations
|
|
$ |
(0.42 |
) |
|
$ |
(1.95 |
) |
|
$ |
0.86 |
|
|
$ |
(0.79 |
) |
|
$ |
(0.16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of financial condition data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
5,656,750 |
|
|
$ |
6,358,128 |
|
|
$ |
31,653,657 |
|
|
$ |
13,746,590 |
|
|
$ |
11,138,923 |
|
Marketable
securities owned
|
|
|
4,728,940 |
|
|
|
4,622,577 |
|
|
|
14,115,022 |
|
|
|
7,492,914 |
|
|
|
8,627,543 |
|
Total
assets
|
|
|
16,123,741 |
|
|
|
18,865,590 |
|
|
|
64,573,331 |
|
|
|
30,498,213 |
|
|
|
27,694,413 |
|
Capital
lease obligations
|
|
|
397,958 |
|
|
|
923,683 |
|
|
|
721,380 |
|
|
|
1,292,378 |
|
|
|
883,993 |
|
Notes
payable, net
|
|
|
- |
|
|
|
- |
|
|
|
238,989 |
|
|
|
325,650 |
|
|
|
408,513 |
|
Stockholders’
equity
|
|
|
8,016,828 |
|
|
|
7,715,201 |
|
|
|
34,806,048 |
|
|
|
16,215,020 |
|
|
|
18,403,001 |
|
(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 of 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
company that provides investment banking, capital markets services, corporate
and venture services, and investment banking through its primary operating
wholly-owned subsidiary, MCF.
MCF 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 $1 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. MCF is registered with the Securities and
Exchange Commission (“SEC”) as a broker-dealer and is a member of the Financial
Industry Regulatory Authority (“FINRA”), and the Securities Investor Protection
Corporation (“SIPC”).
We
acquired Panel Intelligence, LLC (formerly MedPanel, Inc.) (“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 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 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.”
On
January 16, 2009, the Company entered into an agreement to sell the assets of
ICD, a division of Merriman Curhan Ford & Co., to a group of investors who
are also its employees in order to raise capital. The assets being sold include
the Company’s rights in trademark, copyright, and other intellectual property
used in the business, customer lists, marketing materials, and books and
records. As of December 31, 2009, the Company determined that the discontinued
operations criteria in ASC Topic 205, Discontinued Operations, had
not been met, as such the revenues and expenses of ICD are still presented as
part of continuing operations. In accordance with Securities and Exchange
Commission (SEC) Staff Accounting Bulletin (SAB) 104, “Revenue Recognition”, the
Company recognized $2,000,000 as Other Income for the year ended December 31,
2009.
To assist
in the transition of operations to the new owners, the Company is providing
substantial services to ICD, including collecting its revenues. Under guidance
provided in ASC Subtopic 605-45, “Principal Agent Considerations,” the Company
records ICD’s revenues and expenses at gross levels. In 2010, the Company
expects to no longer provide such services and will no longer record ICD
revenues.
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 liquidate
the funds under management and returning investments to the investors. As of
December 31, 2009, we have liquidated all but an immaterial amount of illiquid
assets which we are distributing to investors in the Focus fund.
We were
formerly known 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 MCF. 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, 2009 and
2008.
In 2008
and 2009, we aggressively reduced our cost structure by exiting businesses and
eliminating positions which were not essential to generate revenues. We also
examined all our expenses and eliminated those deemed to be unessential. We
settled all the legal cases we believed were the most threatening. Going into
2010, we believe our current funds are sufficient to enable us to meet our
planned expenditures through at least January 1, 2011. If anticipated operating
results are not achieved, we intend and we believe we have the ability to delay
or reduce expenditures, if not to raise additional financing. Failure to
generate sufficient cash flows from operations, raise additional capital or
reduce certain discretionary spending could have a material adverse effect on
our ability to achieve our intended business objectives.
Executive
Summary
In 2009,
following the sale of ICD assets, management determined that it would be useful
to view the Company’s financial results without ICD’s sizable revenues and
expenses. Management’s focus is on operating results, excluding ICD revenues and
expenses (which essentially net to zero after signing the asset purchase
agreement in January 2009), unrealized gains and losses, and legal expenses
related to the Del Biaggio/Cacchione matters. In the Form 10-Q for the three
months ended September 30, 2009, we began presenting our operating results
excluding these items, which are not according to generally accepted accounting
principles (non-GAAP). We also present a reconciliation of these non-GAAP
results to our GAAP-based financial results. Management uses the non-GAAP
(“pro-forma”) results in addition to GAAP results in its analyses of the
business.
Our
revenue increased 35% during 2009 to $49,263,000, attributable to increased
brokerage revenue related to ICD, a business we sold in January 2009. On a
pro-forma basis, our revenue declined by 35% during the same period. Including
discontinued operations, net loss in 2009 was $5,462,000, or $0.43 per diluted
share, compared to $30,274,000, or $2.41 per diluted share, during
2008.
We were
able to remove significant costs beginning the second half of 2008 and into
2009, particularly with regards to our legal expenses as we reached settlements
with a selected group of litigants and with the SEC. We instituted aggressive
plans to reduce our operating costs and focus our business back to our core
offerings. In addition, management took steps to eliminate non-core businesses
such as Panel and MCF Asset Management LLC that had consumed a large portion of
our operating cash flow. Our focus in 2009 was to build on our core businesses,
aided by a recovery in the broad financial markets beginning in the Spring of
2009.
Investment Banking – The
investment banking team had an unfavorable year with a decrease in revenue of
37% in 2009. In 2009, we closed 27 corporate financing and strategic advisory
transactions during the year with lower average transaction fees compared to 20
corporate financing and strategic advisory transactions in 2008. As a percentage
of total revenue, on a pro-forma basis, Investment Banking’s contribution was
32% in 2009 compared to 33% in 2008. Throughout 2008 and the first half of 2009,
the new issue market was largely closed.
Principal Transactions –
Principal transactions produced a loss of $22,000 in 2009 compared to a loss of
$9,040,000 during 2008. 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.
Commissions – Commissions
revenue from brokering equity securities to institutional investors increased by
19% to $40,180,000 from $33,679,000 in 2008 attributable to increased ICD
business. On a pro-forma basis, commissions revenue declined by 45% to
$12,391,000 from $22,385,000 due to adverse market conditions. 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. ICD is a division of MCF. In January 2009, we sold our ICD
assets to three of our employees. We expect we will no longer benefit from these
revenues when ICD obtains its broker-dealer license in 2010. We will then cease
to provide services to them, including collection of their
revenues.
Primary Research – We closed
the acquisition of MedPanel, Inc. in April 2007, renamed it Panel Intelligence,
LLP (“Panel”) 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 Panel in order to focus on our core investment
banking and broker-dealer businesses and to reduce expenses. The primary
research revenues and expenses were classified as discontinued operations in our
consolidated statements of operations for the year ending December 31, 2008 and
certain Panel assets and liabilities were reclassified to assets and liabilities
held for sale in the consolidated statements of financial condition at December
31, 2008.
OTCQX Advisory – During 2007,
MCF 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. MCF was the first U.S. investment
bank to achieve DAD and PAL designations.
Employees – We began 2009
with 128 employees after reducing our headcount by 36% in 2008. After the sale
of Panel assets, we reduced our headcount further to 89 employees. We have since
strategically hired staff and increased our headcount to 94 employees at
December 31, 2009. Our headcount will be further reduced when ICD obtains its
broker-dealer license and we no longer provide services, including serve as an
employer to its staff, expected for 2010. We expect that we will maintain
headcount below 100 people during 2010, 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. Our operating expenses in 2009 were slightly lower than
in 2008 primarily due to cost cutting measures we implemented.
Business
Environment
Equity
indices rose sharply in 2009 for the biggest annual gain since 2003, and some
commodities, such as copper, headed for their best rally in at least a decade
after China pledged to maintain policies that helped pull the world market from
recession.
Stocks
worldwide have risen the most since 2003 this year on dramatically increased
liquidity conditions, with interest rates near zero and increased government
spending which may sustain the recovery from the first global recession since
World War II. The MSCI World Index plunged 42% in 2008, the most in its 40-year
history, hurt by the collapse of the subprime-mortgage market in the U.S. and
the bankruptcy of Lehman Brothers Holdings Inc.
The Dow
bottomed in March 2009 at 6,547, with the dollar at 1.2607 Euro and oil at $47.
The biggest dynamics in the sharp recovery were extremely aggressive easing by
China, which drove a significant commodity rally that carried over to the global
equity markets. The U.S. government also instituted extremely aggressive
liquidity measures which had a powerful impact on all U.S. indices.
At year
end, the stimulus policies had not carried over into the small business lending
arena or employment. U.S. unemployment remained near its highs, and banks were
reluctant to lend, dampening the “real” recovery. The financing markets were
very muted despite the impressive stock market rally, with only 49 IPO
transactions being completed in 2009, the second lowest annual total volume on
record. Small business creation and sustainability remained the primary problem
in the 2009 economy. Until small business, which supplies the true engine of
U.S. economic growth, comes back, prospects for better employment performance
remain low.
Results
of Operations
In
evaluating our financial performance, management reviews results from operations
excluding non-operating revenues and expenses. Such pro-forma results are
non-GAAP (Generally Accepted Accounting Principles) performance measures, but we
believe it is useful to assist investors in gaining an understanding of the
trends and results of our core business. Pro-forma results should be viewed in
addition to, not instead of, our reported results under U.S. GAAP.
The
following is a reconciliation of U.S. GAAP results to pro-forma results for the
periods presented.
|
|
Three Months Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
As Reported
|
|
|
Less ICD
|
|
|
Less Other
|
|
|
Pro-Forma
|
|
|
As Reported
|
|
|
Less ICD
|
|
|
Less Other
|
|
|
Pro-Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$ |
11,287,720 |
|
|
$ |
7,714,682 |
|
|
$ |
- |
|
|
$ |
3,573,038 |
|
|
$ |
9,325,010 |
|
|
$ |
4,132,373 |
|
|
$ |
- |
|
|
$ |
5,192,637 |
|
Principal
transactions
|
|
|
109,318 |
|
|
|
(685 |
) |
|
|
(815,183 |
) |
|
|
925,186 |
|
|
|
(3,759,668 |
) |
|
|
- |
|
|
|
(1,669,516 |
) |
|
|
(2,090,152 |
) |
Investment
banking
|
|
|
1,824,596 |
|
|
|
- |
|
|
|
- |
|
|
|
1,824,596 |
|
|
|
2,008,788 |
|
|
|
- |
|
|
|
- |
|
|
|
2,008,788 |
|
Advisory
and other fees
|
|
|
250,116 |
|
|
|
- |
|
|
|
- |
|
|
|
250,116 |
|
|
|
90,267 |
|
|
|
- |
|
|
|
- |
|
|
|
90,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
13,471,750 |
|
|
|
7,713,997 |
|
|
|
(815,183 |
) |
|
|
6,572,936 |
|
|
|
7,664,397 |
|
|
|
4,132,373 |
|
|
|
(1,669,516 |
) |
|
|
5,201,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
12,045,620 |
|
|
|
6,979,109 |
|
|
|
- |
|
|
|
5,066,511 |
|
|
|
5,465,311 |
|
|
|
2,535,574 |
|
|
|
- |
|
|
|
2,929,737 |
|
Brokerage
and clearing fees
|
|
|
202,905 |
|
|
|
16,923 |
|
|
|
- |
|
|
|
185,982 |
|
|
|
999,305 |
|
|
|
39,355 |
|
|
|
- |
|
|
|
959,950 |
|
Professional
services
|
|
|
718,928 |
|
|
|
210,286 |
|
|
|
- |
|
|
|
508,642 |
|
|
|
1,980,129 |
|
|
|
35,420 |
|
|
|
1,172,607 |
|
|
|
772,102 |
|
Occupancy
and equipment
|
|
|
531,386 |
|
|
|
12,672 |
|
|
|
- |
|
|
|
518,714 |
|
|
|
702,839 |
|
|
|
21,702 |
|
|
|
- |
|
|
|
681,137 |
|
Communications and
technology
|
|
|
921,192 |
|
|
|
195,869 |
|
|
|
- |
|
|
|
725,323 |
|
|
|
1,206,302 |
|
|
|
213,324 |
|
|
|
- |
|
|
|
992,978 |
|
Depreciation
and amortization
|
|
|
104,816 |
|
|
|
- |
|
|
|
- |
|
|
|
104,816 |
|
|
|
168,717 |
|
|
|
- |
|
|
|
- |
|
|
|
168,717 |
|
Travel
and entertainment
|
|
|
448,267 |
|
|
|
147,744 |
|
|
|
- |
|
|
|
300,523 |
|
|
|
393,113 |
|
|
|
174,152 |
|
|
|
- |
|
|
|
218,961 |
|
Legal
and litigation settlement expense
|
|
|
1,140,860 |
|
|
|
- |
|
|
|
717,089 |
|
|
|
423,771 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
expenses
|
|
|
694,661 |
|
|
|
115,337 |
|
|
|
- |
|
|
|
579,324 |
|
|
|
1,114,028 |
|
|
|
29,706 |
|
|
|
- |
|
|
|
1,084,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
16,808,635 |
|
|
|
7,677,940 |
|
|
|
717,089 |
|
|
|
8,413,606 |
|
|
|
12,029,744 |
|
|
|
3,049,233 |
|
|
|
1,172,607 |
|
|
|
7,807,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income/(loss)
|
|
$ |
(3,336,885 |
) |
|
$ |
36,057 |
|
|
$ |
(1,532,272 |
) |
|
$ |
(1,840,670 |
) |
|
$ |
(4,365,347 |
) |
|
$ |
1,083,140 |
|
|
$ |
(2,842,123 |
) |
|
$ |
(2,606,364 |
) |
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
As Reported
|
|
|
Less ICD
|
|
|
Less Other
|
|
|
Pro-Forma
|
|
|
As Reported
|
|
|
Less ICD
|
|
|
Less Other
|
|
|
Pro-Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$ |
40,180,288 |
|
|
$ |
27,789,003 |
|
|
$ |
- |
|
|
$ |
12,391,285 |
|
|
$ |
33,678,706 |
|
|
$ |
11,293,429 |
|
|
$ |
- |
|
|
$ |
22,385,277 |
|
Principal
transactions
|
|
|
(21,702 |
) |
|
|
(2,973 |
) |
|
|
(1,295,475 |
) |
|
|
1,276,746 |
|
|
|
(9,040,218 |
) |
|
|
- |
|
|
|
(9,774,573 |
) |
|
|
734,355 |
|
Investment
banking
|
|
|
7,236,059 |
|
|
|
- |
|
|
|
- |
|
|
|
7,236,059 |
|
|
|
11,432,454 |
|
|
|
- |
|
|
|
- |
|
|
|
11,432,454 |
|
Advisory
and other fees
|
|
|
1,868,397 |
|
|
|
- |
|
|
|
- |
|
|
|
1,868,397 |
|
|
|
496,894 |
|
|
|
- |
|
|
|
- |
|
|
|
496,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
49,263,042 |
|
|
|
27,786,030 |
|
|
|
(1,295,475 |
) |
|
|
22,772,487 |
|
|
|
36,567,836 |
|
|
|
11,293,429 |
|
|
|
(9,774,573 |
) |
|
|
35,048,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
41,733,106 |
|
|
|
25,499,105 |
|
|
|
- |
|
|
|
16,234,001 |
|
|
|
36,670,457 |
|
|
|
7,489,738 |
|
|
|
- |
|
|
|
29,180,719 |
|
Brokerage
and clearing fees
|
|
|
994,312 |
|
|
|
62,652 |
|
|
|
- |
|
|
|
931,660 |
|
|
|
3,042,133 |
|
|
|
101,898 |
|
|
|
- |
|
|
|
2,940,235 |
|
Professional
services
|
|
|
2,514,224 |
|
|
|
307,283 |
|
|
|
- |
|
|
|
2,206,941 |
|
|
|
9,161,729 |
|
|
|
108,900 |
|
|
|
4,191,590 |
|
|
|
4,861,239 |
|
Occupancy
and equipment
|
|
|
2,148,733 |
|
|
|
54,278 |
|
|
|
- |
|
|
|
2,094,455 |
|
|
|
2,303,944 |
|
|
|
28,742 |
|
|
|
- |
|
|
|
2,275,202 |
|
Communications and
technology
|
|
|
3,364,171 |
|
|
|
573,709 |
|
|
|
- |
|
|
|
2,790,462 |
|
|
|
3,762,954 |
|
|
|
456,501 |
|
|
|
- |
|
|
|
3,306,453 |
|
Depreciation
and amortization
|
|
|
477,729 |
|
|
|
- |
|
|
|
- |
|
|
|
477,729 |
|
|
|
705,883 |
|
|
|
- |
|
|
|
- |
|
|
|
705,883 |
|
Travel
and entertainment
|
|
|
1,507,107 |
|
|
|
674,471 |
|
|
|
- |
|
|
|
832,636 |
|
|
|
2,921,196 |
|
|
|
620,016 |
|
|
|
- |
|
|
|
2,301,180 |
|
Legal
and litigation settlement expense
|
|
|
7,776,918 |
|
|
|
- |
|
|
|
7,707,548 |
|
|
|
69,370 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
expenses
|
|
|
2,326,095 |
|
|
|
404,678 |
|
|
|
- |
|
|
|
1,921,417 |
|
|
|
4,411,128 |
|
|
|
147,583 |
|
|
|
- |
|
|
|
4,263,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
62,842,395 |
|
|
|
27,576,176 |
|
|
|
7,707,548 |
|
|
|
27,558,671 |
|
|
|
62,979,424 |
|
|
|
8,953,378 |
|
|
|
4,191,590 |
|
|
|
49,834,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income/(loss)
|
|
$ |
(13,579,353 |
) |
|
$ |
209,854 |
|
|
$ |
(9,003,023 |
) |
|
$ |
(4,786,184 |
) |
|
$ |
(26,411,588 |
) |
|
$ |
2,340,051 |
|
|
$ |
(13,966,163 |
) |
|
$ |
(14,785,476 |
) |
Note –
The column headed “Less Other” includes unrealized gains/losses in “Principal
transactions” revenues, and legal and litigation settlement expense as
related to the Del Biaggio/Cacchione matters in “Litigation
settlement”.
Other
than the tables immediately above, all other results in our Form 10-K and in the
consolidated financial statements are prepared and displayed in accordance with
U.S. GAAP.
The
following table sets forth a summary of financial highlights for the two years
ended December 31, 2009:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
Commissions
|
|
$ |
40,180,288 |
|
|
$ |
33,678,706 |
|
Principal
transactions
|
|
|
(21,702 |
) |
|
|
(9,040,218 |
) |
Investment
banking
|
|
|
7,236,059 |
|
|
|
11,432,454 |
|
Advisory
and other fees
|
|
|
1,868,397 |
|
|
|
496,894 |
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
49,263,042 |
|
|
|
36,567,836 |
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
41,733,106 |
|
|
|
36,670,457 |
|
Brokerage
and clearing fees
|
|
|
994,312 |
|
|
|
3,042,133 |
|
Professional
services
|
|
|
2,514,225 |
|
|
|
9,161,729 |
|
Occupancy
and equipment
|
|
|
2,148,733 |
|
|
|
2,303,944 |
|
Communications
and technology
|
|
|
3,364,171 |
|
|
|
3,762,954 |
|
Depreciation
and amortization
|
|
|
477,729 |
|
|
|
705,883 |
|
Travel
and business development
|
|
|
1,507,107 |
|
|
|
2,921,196 |
|
Legal
services and litigation settlement expense
|
|
|
7,776,917 |
|
|
|
- |
|
Other
|
|
|
2,326,095 |
|
|
|
4,411,128 |
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
62,842,395 |
|
|
|
62,979,424 |
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(13,579,353 |
) |
|
|
(26,411,588 |
) |
Other
income
|
|
|
2,000,000 |
|
|
|
- |
|
Change
in warrant liability
|
|
|
6,910,656 |
|
|
|
- |
|
Interest
income
|
|
|
15,658 |
|
|
|
375,949 |
|
Interest
expense
|
|
|
(1,341,753 |
) |
|
|
(72,304 |
) |
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(5,994,792 |
) |
|
|
(26,107,943 |
) |
Income
tax benefit
|
|
|
627,923 |
|
|
|
1,635,214 |
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(5,366,869 |
) |
|
|
(24,472,729 |
) |
Loss
on discontinued operations
|
|
|
(94,894 |
) |
|
|
(5,801,076 |
) |
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,461,763 |
) |
|
$ |
(30,273,805 |
) |
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$ |
(10,720,565 |
) |
|
$ |
(30,273,805 |
) |
Our
revenue during 2009 increased by $12,695,000 or 35%, from 2008 attributable to
ICD, a line of business we sold. On a pro-forma basis, our revenues
declined by $12,276,000, reflecting accentuated weaknesses in our brokerage and
investment banking businesses, partially offset by greatly reduced losses in our
principal transactions. Net loss for 2009 was $5,462,000 as compared to net loss
of $30,274,000 during 2008.
Our net
loss during the two years ended December 31, 2009 included the following
selected non-cash items:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Amortization
of discounts on notes payable
|
|
$ |
552,639 |
|
|
$ |
2,584 |
|
Amortization
of debt issuance costs
|
|
|
346,995 |
|
|
|
- |
|
Amortization
of beneficial conversion feature
|
|
|
180,639 |
|
|
|
- |
|
Change
in fair value of warrant liability
|
|
|
(6,820,567 |
) |
|
|
- |
|
Non-cash
legal settlement expense
|
|
|
1,230,953 |
|
|
|
- |
|
Stock-based
compensation
|
|
|
837,822 |
|
|
|
2,353,383 |
|
Reversal
of FIN 48 liability
|
|
|
- |
|
|
|
(1,838,743 |
) |
Amortization
of intangible assets
|
|
|
- |
|
|
|
466,142 |
|
Depreciation
and amortization
|
|
|
488,339 |
|
|
|
828,598 |
|
Provision
for uncollectible note payable
|
|
|
128,073 |
|
|
|
476,713 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(3,055,107 |
) |
|
$ |
2,288,677 |
|
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 two years ended December 31,
2009:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
Capital
raising
|
|
$ |
4,921,976 |
|
|
$ |
9,031,592 |
|
Financial
advisory
|
|
|
2,314,083 |
|
|
|
2,400,862 |
|
|
|
|
|
|
|
|
|
|
Total
investment banking revenue
|
|
$ |
7,236,059 |
|
|
$ |
11,432,454 |
|
|
|
|
|
|
|
|
|
|
Transaction
Volumes:
|
|
|
|
|
|
|
|
|
Public
offerings:
|
|
|
|
|
|
|
|
|
Capital
underwritten participations
|
|
$ |
644,560,000 |
|
|
$ |
182,780,000 |
|
Number
of transactions
|
|
|
7 |
|
|
|
3 |
|
Private
placements:
|
|
|
|
|
|
|
|
|
Capital
raised
|
|
$ |
98,588,481 |
|
|
$ |
290,380,000 |
|
Number
of transactions
|
|
|
12 |
|
|
|
13 |
|
Financial
advisory:
|
|
|
|
|
|
|
|
|
Transaction
amounts
|
|
$ |
78,900,000 |
|
|
$ |
82,600,000 |
|
Number
of transactions
|
|
|
8 |
|
|
|
4 |
|
Our
investment banking revenue amounted to $7,236,000, or 15% of our revenue, or 32%
of our pro forma revenue, during 2009, representing a 37% decrease compared to
$11,432,000 recognized in 2008. The decrease in revenue was driven by a
reduction in capital raising transactions due to the unfavorable market
conditions. Average fees per investment banking transaction decreased slightly
to $268,000 in 2009 from $273,000 in 2008.
During
the years ended December 31, 2009 and 2008, no single investment banking client
accounted for more than 10% of our total revenue.
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:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
Commissions:
|
|
|
|
|
|
|
Institutional
equities
|
|
$ |
12,391,285 |
|
|
$ |
22,385,277 |
|
Institutional
Cash Distributors
|
|
|
27,789,003 |
|
|
|
11,293,429 |
|
|
|
|
|
|
|
|
|
|
Total
commissions revenue
|
|
$ |
40,180,288 |
|
|
$ |
33,678,706 |
|
|
|
|
|
|
|
|
|
|
Principal
transactions:
|
|
|
|
|
|
|
|
|
Customer
principal transactions, proprietary trading and market
making
|
|
$ |
316,105 |
|
|
$ |
(7,693,703 |
) |
Investment
portfolio
|
|
|
(337,807 |
) |
|
|
(1,346,515 |
) |
|
|
|
|
|
|
|
|
|
Total
principal transactions revenue
|
|
$ |
(21,702 |
) |
|
$ |
(9,040,218 |
) |
|
|
|
|
|
|
|
|
|
Equity
research:
|
|
|
|
|
|
|
|
|
Publishing
analysts
|
|
|
8 |
|
|
|
7 |
|
Companies
covered
|
|
|
114 |
|
|
|
100 |
|
Transaction
Volumes:
|
|
|
|
|
|
|
|
|
Number
of shares traded
|
|
|
868,751,782 |
|
|
|
1,281,568,000 |
|
Number
of active clients
|
|
|
324 |
|
|
|
491 |
|
Commissions
amounted to $40,180,000, or 82%, of our revenue during 2009, representing a 19%
increase over $33,679,000 recognized during 2008. The growth in
commissions revenue was attributed to higher assets brokered by our
Institutional Cash Distributors group during 2009. On a pro-forma
basis, commissions revenue was $12,391,000, or 54%, of revenue during 2009,
representing a 45% decrease from 2008 due to a decrease in average commissions
per share and lower 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.
On a
pro-forma basis, principal transactions revenue was $1,277,000 in 2009 compared
to $734,000 during 2008. Other components of principal transactions revenue
during 2009 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, 2009, no single brokerage customer accounted for
more than 10% of our revenues. During the year ended December 31,
2008, one 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 the Board 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, 2009:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Incentive
compensation and discretionary bonuses
|
|
$ |
31,273,090 |
|
|
$ |
17,824,388 |
|
Salaries
and wages
|
|
|
7,280,251 |
|
|
|
13,009,535 |
|
Stock-based
compensation
|
|
|
837,822 |
|
|
|
2,353,383 |
|
Payroll
taxes, benefits and other
|
|
|
2,341,943 |
|
|
|
3,483,151 |
|
|
|
|
|
|
|
|
|
|
Total
compensation and benefits
|
|
$ |
41,733,106 |
|
|
$ |
36,670,457 |
|
|
|
|
|
|
|
|
|
|
Total
compensation and benefits as a percentage of revenue
|
|
|
85 |
% |
|
|
100 |
% |
Cash
compensation and benefits as a percentage of revenue
|
|
|
83 |
% |
|
|
94 |
% |
The
increase in compensation and benefits expense of $5,063,000, or 14%, from 2008
to 2009 was due primarily to higher commissions paid to the ICD partners,
reflecting higher ICD revenues. On a pro-forma basis, compensation
declined by about 44% due to lower headcount and lower incentive compensation
which is directly correlated to revenue production. On a pro-forma basis, total
compensation declined to 71% of total revenue in 2009 compared to 83% in
2008. Cash compensation is equal to total compensation and benefits
expense excluding stock-based compensation, which is a non-cash
expense.
Our
headcount decreased from 198 as of January 1, 2008 to 128 at December 31, 2008,
and decreased further to 94 at December 31, 2009, including about 12 employees
of ICD who will be transitioned out of the Company when we cease to provide
support services to ICD in 2010. No single sales professional accounted for more
than 10% of our revenue in 2009. Two single sales professionals each
accounted for more than 10% of our revenue in 2008.
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. MCF 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
MCF 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 decrease in brokerage and clearing fees of $2,048,000, or 67%,
from 2008 to 2009 is a result of lower brokerage business and
revenues.
Professional
services expense includes accounting fees, expenses related to investment
banking transactions and various consulting fees. The decrease of $6,648,000, or
73%, from 2008 to 2009 reflected lower legal fees in this expense
category.
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 or
decrease in direct relation to the number of employees we have. The decrease of
$155,000, or 7%, from 2008 to 2009 on a pro-forma basis is due to a decline in
purchase of equipment and the subletting of excess office space.
Communications
and technology expense includes market data and quote services, voice, data and
Internet service fees, and data processing costs. The decrease of
$399,000, or 11%, from 2008 to 2009 is a result of our efforts to reduce non
revenue-generating costs.
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 decrease of $228,000 or 32% is a result of fewer
purchases of equipment and leasehold improvements, reducing the depreciable base
of assets.
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 decrease of $1,414,000, or 48%, from 2008 to 2009 is a
result of our cost savings efforts, partially offset by increased sales efforts.
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.
Legal services and litigation
settlement expenses were incurred in connection with our activities in
2009. We concluded a number of legal cases by
settlement. We incurred expenses in the settlement and related to
other outstanding legal cases.
The
following expenses are included in other operating expenses for the two years
ended December 31, 2009:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Investor
conferences
|
|
$ |
93,245 |
|
|
$ |
817,177 |
|
Recruiting
|
|
|
31,352 |
|
|
|
288,500 |
|
Public
and investor relations
|
|
|
138,837 |
|
|
|
508,692 |
|
Provision
for uncollectible accounts receivable
|
|
|
160,073 |
|
|
|
347,410 |
|
Insurance
|
|
|
466,329 |
|
|
|
450,872 |
|
Supplies
|
|
|
168,057 |
|
|
|
335,778 |
|
Dues
and subscriptions
|
|
|
149,847 |
|
|
|
359,606 |
|
Other
|
|
|
1,118,355 |
|
|
|
1,303,093 |
|
|
|
|
|
|
|
|
|
|
Total
other operating expenses
|
|
$ |
2,326,095 |
|
|
$ |
4,411,128 |
|
Reduced
expenses in other operating expenses is a result of our cost savings efforts,
partially offset by higher insurance expenses related to the Del
Biaggio/Cacchione fraud we experienced.
The
Company contests liability and/or the amount of damages as appropriate in each
pending matter. In view of the inherent difficulty of predicting the outcome of
such matters, particularly in cases where claimants seek substantial or
indeterminate damages or where investigations and proceedings are in the early
stages, we cannot predict with certainty the loss or range of loss, if any,
related to such matters; how or if such matters will be resolved; when they will
ultimately be resolved; or what the eventual settlement, fine, penalty or other
relief, if any, might be. Subject to the foregoing, we believe, based on current
knowledge and after consultation with counsel, that the outcome of such pending
matters will not have a material adverse effect on our Consolidated Statements
of Financial Condition, although the outcome of such matters could be material
to our operating results and cash flows for a particular future period,
depending on, among other things, the level our revenues, income or cash flows
for such period. We established appropriate legal reserves as of
December 31, 2009.
Interest
Income
Interest
income represents interest earned on our cash balances maintained at financial
institutions. The decrease of $360,000, or 96%, from 2008 to 2009 was due to
changes in average interest earning assets and average interest rates during
these periods.
Interest
Expense
Interest
expense for 2009 included $455,000 for interest expense and $886,000 for
amortization of discounts while 2008 included $70,000 for interest expense and
$2,500 for amortization of discounts.
Income
Tax Expense
We
recorded an income tax benefit of $628,000 and $1,635,000 in 2009 and 2008,
respectively, resulting in an effective tax rate of 10% and 5% in 2009 and 2008,
respectively. 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.
The
Company adopted ASC Topic 740, Income Taxes on January 1,
2007. As a result of the implementation of ASC 740, the Company recognized no
adjustment in the liability for unrecognized income tax benefits and no
corresponding change in retained earnings. During 2008, the Company recognized
$1,839,000 of unrecognized tax benefits previously established in 2007.
Accordingly, there were no unrecognized tax benefits as of December 31, 2008.
The Company has no unrecognized tax benefit liabilities for the year ended
December 31, 2009. The Company does not have any material accrued interest or
penalties associated with any unrecognized tax benefits. The Company does not
believe it is reasonably possible that the unrecognized tax benefits will
significantly change within the next twelve months.
Discontinued
Operations
On April
17, 2007, we acquired 100% of the outstanding common shares of MedPanel Corp.
which we subsequently renamed Panel Intelligence, LLC 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 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
ASC Topic 350, Intangibles –
Goodwill and Other, and ASC Topic 360, Property, Plant, and
Equipment, 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 for the period ended
December 31, 2009 and is included in “Other expenses” in the table in Note 9,
“Discontinued Operations.” 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 of America, 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 reduce 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
The
Company adopted the provisions of the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and
Disclosures (“ASC 820”), effective January 1, 2008. Under this
guidance, 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.
Fair
Value Measurement—Definition and Hierarchy
Where
available, fair value is based on observable market prices or parameters, or
derived from such prices or parameters. Where observable prices or inputs are
not available, valuation models are applied. These valuation techniques involve
some level of management estimation and judgment, the degree of which is
dependent on the price transparency for the instruments or market and the
instruments’ complexity. Assets and liabilities recorded at fair value in the
consolidated statement of financial condition are categorized based upon the
level of judgment associated with the inputs used to measure their fair value.
Hierarchical levels, defined by ASC 820 and directly related to the amount of
subjectivity associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
Level 1 —
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. The valuation of these securities may require
management estimates of some or all the inputs, including
volatilities.
In
certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for
disclosure purposes, the level in the fair value hierarchy within which the fair
value measurement falls in its entirety is determined based on the lowest level
input that is significant to the fair value measurement in its
entirety.
For
further information on financial assets and liabilities that are measured at
fair value on a recurring and nonrecurring basis, and a description of valuation
techniques, see Note 6.
Stock-Based
Compensation
We
measure and recognize compensation expense based on estimated fair values for
all share-based awards made to employees and directors, including stock options,
restricted stock, and participation in our employee stock purchase plan.
Share-based compensation expense recognized in our consolidated statement of
operations for the two years ended December 31, 2009 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, and (ii) subsequent to
December 31, 2005. Compensation expense for all share-based awards
subsequent to December 31, 2005 is recognized using the straight-line
single-option method.
We
estimate the fair value of stock options granted using the Black-Scholes option
pricing model. This 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. We
calculated the expected term using the Black-Scholes model with specific
assumptions about the suboptimal exercise behavior, post-vesting termination
rates and other relevant factors. The 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. Forfeitures
are estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Changes in inputs and
assumptions used in our model, including forfeiture rates, can materially affect
the measure of estimated fair value of our share-based
compensation.
Change
in Warrant Liabilities
Stock
warrants to purchase the Company’s common stock issued to our investors and
creditors are rights to purchase our common stock. Such positions are
considered illiquid and do not have readily determinable fair values, and
therefore require significant management judgment or estimation. For the warrant
derivative liabilities, we use the Black-Scholes valuation methodology or
similar techniques.
On
December 28, 2009, we received binding agreements from 100% of the holders of
our warrants agreeing to amend the warrants to remove the ratchet provision
which had triggered the derivative accounting giving rise to the warrant
liability. As of the date of amendment, the Company marked the
warrant liability on its Consolidated Statements of Financial Condition to
market value and reclassified the market value of $10,073,000 to additional
paid-in capital. The change in warrant liability market value of $16,551,000 was
recorded to change in fair value of warrant liability on the Consolidated
Statements of Operations. We no longer account for the warrants as derivatives
and no longer carry a warrant liability as of December 31, 2009 and all other
future periods. At December 31, 2009, the Company included $139,000
due to the warrant holders in accrued liabilities in consideration for the
amendment.
Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
recorded to reduce deferred tax assets to an amount whose realization is more
likely than not. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in the consolidated statements of operations in the
period that includes the enactment date.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. Actual results could differ from those
estimates.
Segment
Reporting
The
Company has determined that it has only one operating and reportable segment,
MCF, for the purpose of making operating decisions and assessing performance,
which comprised most of the Company’s consolidated total assets as of December
31, 2009 and consolidated total revenues for the year ended December 31,
2009. In the fourth quarter of 2008, Merriman Curhan Ford Group, Inc.
decided to liquidate the funds under management by MCF Asset Management, LLC,
which was no longer considered by management as an operating and reportable
segment. In January 2009, the Company sold its primary research
business, Panel Intelligence, LLC, and has presented its results of operations
as discontinued operations.
Goodwill
and Intangible Assets
In
accordance with ASC Topic 350, Intangibles – Goodwill and
Others (“ASC 350”), 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 recorded were related to Panel assets and were
classified as held for sale in our financial statements for the year ended
December 31, 2008. During 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. During the year ended December 31, 2009, the Company
sold Panel, hence, as of December 31, 2009, the Company did not have assets held
for sale, goodwill or intangible assets reported on its balance
sheets.
Liquidity
and Capital Resources
As of
December 31, 2009, liquid assets consisted primarily of cash and cash
equivalents of $5,657,000 and marketable securities of $4,729,000, for a total
of $10,386,000, which is $595,000 lower than $10,981,000 in liquid assets
as of December 31, 2008.
Cash and
cash equivalents decreased by $924,000 during 2009. Cash used in our operating
activities for 2009 was $12,648,000 which primarily consists of our net loss of
$5,462,000 adjusted for non-cash expenses, including unrealized loss on
securities owned of $1,295,000 and noncash legal expenses of 1,231,000, offset
by a change in warrant liability of $6,821,000, gain on sale of ICD of
$2,000,000, increase in Securities owned and sold, but not purchased, the
decrease in commissions and bonus payable of $946,000, the decrease of accrued
liabilities of $1,629,000, net stock-based compensation of $838,000,
depreciation and amortization of $488,000, and provision for doubtful accounts
of $128,000. Cash provided by investing activities amounted to $2,694,000 during
2009 which reflects our sale of ICD for $2,000,000 and our sale of Panel for
$703,000. Cash provided by our financing activities was $9,030,000. Our
financing activities included strategic transactions which raised net proceeds
of $8,808,000 on September 8, 2009 through the sale of Series D Convertible
preferred stock, proceeds from convertible debt financing of $625,000 and
proceeds from issuance of a bridge note of $500,000, partially offset by debt
service payments of $637,000.
MCF, 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, 2009, MCF had regulatory net capital of
$2,685,000, which exceeded the amount required by $2,369,000.
During
the year ended December 31, 2009, the Company incurred a net loss of $5,462,000
and used $12,648,000 in net cash from operating activities. At
December 31, 2009, the Company had cash and cash equivalents of $5,657,000,
marketable securities of $4,729,000 and receivables from clearing broker of
$2,547,000. The Company had liabilities of $8,107,000. The
Company’s ability to generate profits is highly dependent on stock market
trading volumes and the general economic environment.
In 2008
and 2009, we aggressively reduced our cost structure by exiting businesses and
eliminating positions which were not essential to generate
revenues. We also examined all our expenses and eliminated those
deemed to be unessential. We settled all the legal cases we believed
were the most threatening. Going into 2010, we believe our current
funds are sufficient to enable us to meet our pla