UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the
quarterly period ended March 31, 2009
¨ 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: 1-15831
MERRIMAN
CURHAN FORD GROUP, INC.
(Exact
Name of Registrant as Specified in its Charter)
Delaware
|
11-2936371
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
600 California Street, 9th Floor
San Francisco, CA
|
94108
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(415)
248-5600
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes x
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨
No ¨
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 “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes ¨ No x
The
number of shares of Registrant’s common stock outstanding as of May 11,
2009 was 12,733,296.
Form
10-Q
For
the Three Months Ended March 31, 2009
|
Page No.
|
|
|
PART I FINANCIAL
INFORMATION
|
|
|
|
ITEM 1.Financial Statements
(unaudited)
|
|
|
|
Consolidated Statements of Operations For the
Three Months Ended March 31, 2009 and 2008
|
2
|
Consolidated Statements of Financial Condition as
of March 31, 2009 and December 31, 2008
|
3
|
Consolidated Statements of Cash Flows For the
Three Months Ended March 31, 2009 and 2008
|
4
|
Notes to Consolidated Financial
Statements
|
5
|
|
|
ITEM 2.Management’s Discussion and Analysis of Financial
Condition and Results of Operations
|
15
|
|
|
ITEM 3.Quantitative and Qualitative Disclosures About
Market Risk
|
25
|
|
|
ITEM 4.Controls and Procedures
|
25
|
|
|
PART II OTHER INFORMATION
|
|
|
|
ITEM 1.Legal Proceedings
|
26
|
|
|
ITEM 1A.Risk Factors
|
30
|
|
|
ITEM 6.Exhibits
|
30
|
|
|
Signatures
|
31
|
Certifications
|
|
PART
I. FINANCIAL INFORMATION
Item 1. Financial
Statements (unaudited)
MERRIMAN
CURHAN FORD GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
9,117,928
|
|
|
$
|
8,468,710
|
|
Principal
transactions
|
|
|
(842,536
|
)
|
|
|
(1,315,076
|
)
|
Investment
banking
|
|
|
1,216,417
|
|
|
|
3,376,411
|
|
Advisory
and other
|
|
|
558,813
|
|
|
|
(318,590
|
)
|
Total
revenue
|
|
|
10,050,622
|
|
|
|
10,211,455
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
9,265,167
|
|
|
|
12,227,174
|
|
Brokerage
and clearing fees
|
|
|
312,959
|
|
|
|
775,301
|
|
Professional
services
|
|
|
1,112,750
|
|
|
|
794,884
|
|
Occupancy
and equipment
|
|
|
576,390
|
|
|
|
453,413
|
|
Communications
and technology
|
|
|
721,265
|
|
|
|
909,914
|
|
Depreciation
and amortization
|
|
|
147,242
|
|
|
|
123,918
|
|
Travel
and business development
|
|
|
235,124
|
|
|
|
922,001
|
|
Other
|
|
|
696,623
|
|
|
|
776,990
|
|
Total
operating expenses
|
|
|
13,067,520
|
|
|
|
16,983,595
|
|
Operating
loss
|
|
|
(3,016,899
|
)
|
|
|
(6,772,140
|
)
|
Other
income
|
|
|
1,200,000
|
|
|
|
—
|
|
Interest
income
|
|
|
6,488
|
|
|
|
96,404
|
|
Interest
expense
|
|
|
(15,365
|
)
|
|
|
(17,768
|
)
|
Loss
before provision for income tax
|
|
|
(1,825,776
|
)
|
|
|
(6,693,504
|
)
|
Provision
for income tax
|
|
|
(3,216
|
)
|
|
|
—
|
|
Loss
from continued operations
|
|
|
(1,828,992
|
)
|
|
|
(6,693,504
|
)
|
Loss
from discontinued operations
|
|
|
(94,894
|
)
|
|
|
(356,469
|
)
|
Net
loss
|
|
$
|
(1,923,886
|
)
|
|
$
|
(7,049,973
|
)
|
Basic
and diluted loss per share from continued operations
|
|
$
|
(0.14
|
)
|
|
|
(0.54
|
)
|
Basic
and diluted loss per share from discontinued operations
|
|
$
|
(0.01
|
)
|
|
|
(0.03
|
)
|
Basic
net loss per share
|
|
$
|
(0.15
|
)
|
|
|
(0.57
|
)
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
12,603,744
|
|
|
$
|
12,289,582
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
MERRIMAN
CURHAN FORD GROUP, INC.
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(unaudited)
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,139,347
|
|
|
$
|
6,358,128
|
|
Securities
owned:
|
|
|
|
|
|
|
|
|
Marketable,
at fair value
|
|
|
5,206,581
|
|
|
|
4,622,577
|
|
Not
readily marketable, at estimated fair value
|
|
|
216,439
|
|
|
|
366,061
|
|
Other
|
|
|
75,606
|
|
|
|
185,065
|
|
Restricted
cash
|
|
|
1,130,140
|
|
|
|
1,131,182
|
|
Due
from clearing broker
|
|
|
1,997,344
|
|
|
|
1,752,535
|
|
Accounts
receivable, net
|
|
|
820,623
|
|
|
|
612,234
|
|
Prepaid
expenses and other assets
|
|
|
886,485
|
|
|
|
619,759
|
|
Equipment
and fixtures, net
|
|
|
818,391
|
|
|
|
1,260,011
|
|
Assets
held for sale
|
|
|
—
|
|
|
|
1,958,038
|
|
Total
assets
|
|
$
|
14,290,956
|
|
|
$
|
18,865,590
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
473,316
|
|
|
$
|
712,591
|
|
Commissions
and bonus payable
|
|
|
4,044,271
|
|
|
|
3,182,941
|
|
Accrued
expenses
|
|
|
2,518,843
|
|
|
|
3,637,345
|
|
Due
to clearing and other brokers
|
|
|
8,842
|
|
|
|
28,022
|
|
Securities
sold, not yet purchased
|
|
|
231
|
|
|
|
903,217
|
|
Deferred
revenue
|
|
|
674,871
|
|
|
|
709,691
|
|
Capital
lease obligation
|
|
|
789,651
|
|
|
|
923,683
|
|
Liabilities
held for sale
|
|
|
—
|
|
|
|
1,052,899
|
|
Total
liabilities
|
|
|
8,510,025
|
|
|
|
11,150,389
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, Series A—$0.0001 par value; 2,000,000 shares authorized; 2,000,000
shares issued and 0 shares outstanding as of March 31, 2009 and
December 31, 2008, respectively; aggregate liquidation preference of
$0
|
|
|
—
|
|
|
|
—
|
|
Preferred
stock, Series B—$0.0001 par value; 12,500,000 shares authorized; 8,750,000
shares issued and 0 shares outstanding as of March 31, 2009 and
December 31, 2008; aggregate liquidation preference of
$0
|
|
|
—
|
|
|
|
—
|
|
Preferred
stock, Series C—$0.0001 par value; 14,200,000 shares authorized;
11,800,000 shares issued and 0 shares outstanding as of March 31,
2009 and December 31, 2008; aggregate liquidation preference of
$0
|
|
|
—
|
|
|
|
—
|
|
Common
stock—$0.0001 par value; 300,000,000 shares authorized; 12,756,656 and
12,756,656 shares issued and 12,554,779 and 12,730,218 shares outstanding
as of March 31, 2009 and December 31, 2008,
respectively
|
|
|
1,278
|
|
|
|
1,278
|
|
Additional
paid-in capital
|
|
|
127,282,811
|
|
|
|
127,193,195
|
|
Treasury
stock
|
|
|
(225,613
|
)
|
|
|
(125,613
|
)
|
Accumulated
deficit
|
|
|
(121,277,545
|
)
|
|
|
(119,353,659
|
)
|
Total
stockholders’ equity
|
|
|
5,780,931
|
|
|
|
7,715,201
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
14,290,956
|
|
|
$
|
18,865,590
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
MERRIMAN
CURHAN FORD GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Three
Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,923,886
|
)
|
|
$
|
(7,049,973
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
157,852
|
|
|
|
259,759
|
|
Gain
on sale of ICD
|
|
|
(1,200,000
|
)
|
|
|
—
|
|
Stock-based
compensation
|
|
|
89,616
|
|
|
|
662,786
|
|
Loss
on disposal of equipment and fixtures
|
|
|
294,379
|
|
|
|
—
|
|
Unrealized
loss on securities owned
|
|
|
1,011,777
|
|
|
|
1,179,181
|
|
Bad
debt write-off
|
|
|
—
|
|
|
|
166,784
|
|
Securities
received for services
|
|
|
(168,913
|
)
|
|
|
|
|
Other
|
|
|
—
|
|
|
|
(299,137
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Securities
owned
|
|
|
(2,070,773
|
)
|
|
|
(3,588,884
|
)
|
Restricted
cash
|
|
|
1,043
|
|
|
|
(440,914
|
)
|
Due
from clearing broker
|
|
|
(244,809
|
)
|
|
|
138,212
|
|
Accounts
receivable
|
|
|
20,728
|
|
|
|
1,895,273
|
|
Prepaid
expenses and other assets
|
|
|
34,529
|
|
|
|
(858,658
|
)
|
Accounts
payable
|
|
|
(381,632
|
)
|
|
|
599,843
|
|
Commissions
and bonus payable
|
|
|
856,116
|
|
|
|
(13,075,003
|
)
|
Accrued
expenses
|
|
|
(1,556,178
|
)
|
|
|
(1,403,352
|
)
|
Due
to clearing and other brokers
|
|
|
(19,180
|
)
|
|
|
11,480
|
|
Net
cash used in operating activities
|
|
|
(5,099,331
|
)
|
|
|
(21,802,603
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of Panel
|
|
|
702,965
|
|
|
|
—
|
|
Proceeds
from sale of ICD
|
|
|
1,200,000
|
|
|
|
—
|
|
Purchase
of equipment and fixtures
|
|
|
—
|
|
|
|
(72,339
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
1,902,965
|
|
|
|
(72,339
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from the exercise of stock options and warrants
|
|
|
—
|
|
|
|
437,803
|
|
Debt
service principal payments
|
|
|
(245,307
|
)
|
|
|
(159,089
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(245,307
|
)
|
|
|
278,714
|
|
Decrease
in cash and cash equivalents
|
|
|
(3,441,673
|
)
|
|
|
(21,596,228
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
6,358,128
|
|
|
|
31,962,201
|
|
Cash
and cash equivalents, assets held for sale at December 31,
2008
|
|
|
222,892
|
|
|
|
—
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,139,347
|
|
|
$
|
10,365,973
|
|
Supplementary
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
16,067
|
|
|
$
|
18,123
|
|
Income
taxes
|
|
$
|
3,216
|
|
|
$
|
365,150
|
|
Noncash
investing activity:
|
|
|
|
|
|
|
|
|
Stock
received as part of sale of Panel
|
|
$
|
100,000
|
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
Significant Accounting Policies
Basis
of Presentation
The
interim financial statements included herein for Merriman Curhan Ford Group,
Inc. (formerly MCF Corporation), or the Company, have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the financial statements included in
this report reflect all normal recurring adjustments that the Company considers
necessary for the fair presentation of the results of operations for the interim
periods covered and the financial position of the Company at the date of the
interim statement of financial condition. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. However,
the Company believes that the disclosures are adequate to understand the
information presented. The operating results for interim periods are not
necessarily indicative of the operating results for the entire year. These
financial statements should be read in conjunction with the Company’s 2008
audited consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K and on Form 10-K/A for the year ended
December 31, 2008.
Securities
Owned
“Securities
owned” and “Securities sold, but not yet purchased” in the consolidated
statements of financial condition consist of financial instruments carried at
fair value with related unrealized gains or losses recognized in the
consolidated statement of operations. The securities owned are
classified into “Marketable”, “Non-marketable” and
“Other”. Marketable securities are those that can readily be sold,
either through a stock exchange or through a direct sales
arrangement. Non-marketable securities are typically securities
restricted under Rule 144A or have some restriction on their sale whether or not
a buyer is identified. Other securities consist of investments
accounted for under the equity method.
Fair
Value of Financial Instruments
Substantially
all of the Company's financial instruments are recorded at fair value or
contract amounts that approximate fair value. Securities owned and securities
sold, not yet purchased are stated at fair value, with any related changes in
unrealized appreciation or depreciation reflected in Principal Transactions in
the consolidated statements of operations. The carrying amounts of
the Company’s financial instruments, which include cash and cash equivalents,
restricted cash, securities owned, due from clearing broker, accounts
receivable, assets held for sale, accounts payable, commissions and bonus
payable, accrued expenses, due to clearing and other brokers, liabilities held
for sale and securities sold, not yet purchased, approximate their fair
values.
Fair
Value Measurement—Definition and Hierarchy
The
Company adopted the provisions of SFAS No. 157, Fair Value Measurements
(SFAS No. 157), effective January 1, 2008. Under this standard, fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability (
i.e. the “exit price”) in an orderly transaction between market
participants at the measurement date.
Where
available, fair value is based on observable market prices or parameters or
derived from such prices or parameters. Where observable prices or inputs are
not available, valuation models are applied. These valuation techniques involve
some level of management estimation and judgment, the degree of which is
dependent on the price transparency for the instruments or market and the
instruments’ complexity. Assets and liabilities recorded at fair value in the
consolidated statement of financial condition are categorized based upon the
level of judgment associated with the inputs used to measure their fair value.
Hierarchical levels, defined by SFAS 157 and directly related to the amount of
subjectivity associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
Level 1 —
Inputs are unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date. The types of assets and liabilities carried
at Level 1 fair value generally are G-7 government and agency securities,
equities listed in active markets, investments in publicly traded mutual funds
with quoted market prices and listed derivatives.
Level 2 —
Inputs (other than quoted prices included in Level 1) are either directly or
indirectly observable for the asset or liability through correlation with market
data at the measurement date and for the duration of the instrument’s
anticipated life. Fair valued assets that are generally included in this
category are stock warrants for which there are market-based implied
volatilities, unregistered common stock and thinly traded common
stock.
Level 3 —
Inputs reflect management’s best estimate of what market participants would use
in pricing the asset or liability at the measurement date. Consideration is
given to the risk inherent in the valuation technique and the risk inherent in
the inputs to the model. Generally, assets carried at fair value and included in
this category include stock warrants for which market-based implied volatilities
are not available.
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 3.
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
1.
Significant Accounting Policies — continued
Investment Banking
Revenue
Investment
banking revenue includes underwriting and private placement agency fees earned
through the Company’s participation in public offerings and private placements
of equity and convertible debt securities and fees earned as financial advisor
in mergers and acquisitions and similar transactions. Underwriting revenue is
earned in securities offerings in which the Company acts as an underwriter and
includes management fees, selling concessions and underwriting fees. Fee revenue
relating to underwriting commitments is recorded when all significant items
relating to the underwriting cycle have been completed and the amount of the
underwriting revenue has been determined. 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) the Company has made a firm commitment for the purchase of the shares
or debt from the issuer, and (iii) the Company has 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 the Company acts as
underwriter or agent are deferred until the related revenue is recognized or we
determine that it is more likely than not that the securities offerings will not
ultimately be completed. Underwriting revenue is presented net of related
expenses. As co-manager for registered equity underwriting transactions,
management must estimate the Company’s share of transaction related expenses
incurred by the lead manager in order to recognize revenue. Transaction related
expenses are deducted from the underwriting fee and therefore reduces the
revenue that is recognized as co-manager. Such amounts are adjusted to reflect
actual expenses in the period in which the Company receives the final
settlement, typically 90 days following the closing of the
transaction.
Merger
and acquisition fees and other advisory service revenue are generally earned and
recognized only upon successful completion of the engagement. Unreimbursed
expenses associated with private placement and advisory transactions are
recorded as expenses as incurred.
Commissions
and Principal Transactions Revenue
Commissions
revenue includes revenue resulting from executing stock exchange-listed
securities, over-the counter securities and other transactions as agent for the
Company’s clients. Principal transactions consist of a portion of dealer spreads
attributed to the Company’s securities trading activities as principal in
NASDAQ-listed and other securities, and include transactions derived from
activities as a market-maker. Additionally, principal transactions include gains
and losses resulting from market price fluctuations that occur while holding
positions in trading security inventory. 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 the Company
are recorded on a trade-date basis.
Share-Based
Compensation Expense
The
Company measures and recognizes compensation expense based on estimated fair
values for all share-based awards made to employees and directors, including
stock options, non-vested stock, and participation in the Company’s employee
stock purchase plan. The Company estimates fair value of share-based awards on
the date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as expense in the
Company’s consolidated statements of operations over the requisite service
periods. Share-based compensation expense recognized in the Company’s
consolidated statement of operations 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. Because share-based compensation expense is
based on awards that are ultimately expected to vest, share-based compensation
expense has been reduced to account for estimated forfeitures. Forfeitures are
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.
To
calculate option-based compensation, the Company uses the Black-Scholes option
pricing model, which is affected by the Company’s stock price as well as
assumptions regarding a number of subjective variables. These variables include,
but are not limited to the Company’s expected stock price volatility over the
term of the awards, and actual and projected employee stock option exercise
behaviors. No tax benefits were attributed to the share-based compensation
expense because a valuation allowance was maintained for all net deferred tax
assets.
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.
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
1.
Significant Accounting Policies — continued
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. Actual results could differ from those
estimates.
Segment
Reporting
The
Company has determined that it has only one operating and reportable segment,
Merriman Curhan Ford & Co., for the purpose of making operating decisions
and assessing performance, which comprised more than 90% of the Company’s
consolidated total assets as of March 31, 2009 and consolidated total revenues
for the three-months period ended March 31, 2009. In the fourth
quarter of 2008, Merriman Curhan Ford Group, Inc. decided to begin the process
of liquidating the funds under management by MCF Asset Management, LLC, and is
not considered 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, see Note
4 for further discussion.
Newly
Adopted Accounting Pronouncements
SFAS
141(R). In December 2007, the FASB issued SFAS No. 141(R), Business
Combinations. SFAS 141(R) expands the definition of transactions and events that
qualify as business combinations; requires that the acquired assets and
liabilities, including contingencies, be recorded at the fair value determined
on the acquisition date and changes thereafter reflected in revenue, not
goodwill; changes the recognition timing for restructuring costs; and requires
acquisition costs to be expensed as incurred. Adoption of SFAS 141(R) is
required for combinations after December 15, 2008. Early adoption and
retroactive application of SFAS 141(R) to fiscal years preceding the effective
date are not permitted. We will adopt the provisions of SFAS 141(R) on future
business combination transactions, if any.
Pending
Accounting Pronouncements
SFAS
107-b and APB 28-a. In January 2009, the FASB released Proposed Staff Position
SFAS 107-b and Accounting Principles Board (APB) Opinion No. 28-a, “Interim
Disclosures about Fair Value of Financial Instruments” (SFAS 107-b and APB
28-a). This proposal amends FASB Statement No. 107, “Disclosures
about Fair Values of Financial Instruments,” to require disclosures about fair
value of financial instruments in interim financial statements as well as in
annual financial statements. The proposal also amends APB Opinion No.
28, “Interim Financial Reporting,” to require those disclosures in all interim
financial statements. This proposal is effective for interim periods
ending after June 15, 2009, but early adoption is permitted for interim periods
ending after March 15, 2009. The Company plans to adopt SFAS 107-b
and APB 28-a and provide the additional disclosure requirements for second
quarter 2009.
SFAS
157-e. In April 2009, the FASB issued Financial Staff Position (FSP)
157-e “Determining Whether a Market Is Not Active and a Transaction Is Not
Distressed” (SFAS 157-e). This proposal provides additional guidance
in determining whether a market for a financial asset is not active and a
transaction is not distressed for fair value measurement purposes as defined in
SFAS 157, “Fair Value Measurements.” SFAS 157-e is effective for
interim periods ending after June 15, 2009, but early adoption is permitted for
interim periods ending after March 15, 2009. The Company plans to
adopt the provisions of SFAS 157-e during second quarter 2009, but does not
believe this guidance will have a significant impact on the Company’s financial
position, cash flows, or disclosures.
2.
Going Concern
These
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern for the foreseeable future and will be able to
realize its assets and discharge its liabilities in the normal course of
operations.
During
the three months ended March 31, 2009, the Company incurred a net loss of
$1,924,000 and used $5,099,000 in net cash from operating
activities. At March 31, 2009, the Company had cash and cash
equivalents of $3,139,000, marketable securities of $5,207,000 and receivables
from clearing broker of $1,997,000. The Company had liabilities of
$8,510,000. The Company’s ability to generate profits is highly dependent
on stock market trading volumes and the general economic environment. As a
result, the ability of the Company to meet its forward obligations and the
ability to continue as a going concern may be in question.
In 2008,
the Company incurred a net loss of over $30 million and used approximately $25
million in cash.
The
Company is in the process of implementing a plan to increase its operating
flexibility and extend its cash reserves. The plan primarily consists of four
steps which are more fully described below:
|
|
1.
|
Continue
to reduce operating costs
|
|
|
2.
|
Shed
non-essential operations
|
|
|
3.
|
Negotiate
a settlement of pending litigations
|
|
|
4.
|
Raise
additional capital
|
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
2.
Going Concern — continued
During
2008 and early 2009, the Company implemented significant expense control and
cost reduction programs focused on reducing cash losses and increasing
operational flexibility eliminating more than $10 million in annual operating
expenses. The primary contributor to these savings has been the elimination of
more than 50% of the Company’s workforce, as well as salary reductions. The
Board of Directors has voluntarily eliminated its compensation for the
first quarter of 2009. The Company believes that it has been able to
execute these reductions with limited impact to its ability to generate and
execute new business in the current market environment. With these measures
largely complete, the Company believes that it has increased its ability to meet
its obligations during 2009 and beyond.
The
CEO, the Head of Institutional Securities and the Head of Professional Services
are remunerated based on the Company’s profitability.
As a part
of the four-step plan mentioned above, in January of 2009, the Company shed
non-essential operations or those requiring substantial cash
infusions. First, the Company sold Panel Intelligence, LLC on January
30, 2009. This subsidiary required a cash injection of $1,131,000 during 2008
and was projected to reach breakeven only in late 2009. Also in January 2009,
the Company sold its operations known as Institutional Cash Distributors to a
group of its employees. While this business was profitable, management
structured a transaction that substantially increases the near-term flow of
capital. The Company expects to finalize the sale of ICD in the second quarter
2009.
Finally,
the Company is in the process of shutting down MCF Asset Management, another
subsidiary in which the Company had invested considerable resources during 2008.
The result of these actions has been to reduce operating loses and increase
available cash, which will also strengthen its capital position.
The
Company has entered into a process of mediation to reach a settlement with a
majority of the civil litigants resulting from the alleged fraud by its former
customer William Del Biaggio III and its terminated employee Scott
Cacchione. The Company is focused on reducing its potential liability
in these legal proceedings and the resources required to fight the allegations.
In addition, it is also aiming to free up valuable management resources needed
to face challenging market and economic conditions. At present, there
is no indication that these negotiations will be successful and whether it will
serve the Company’s aims and should a settlement result, the amount of such
settlement is not yet estimable.
The
Company is assessing the interest of both strategic and non-strategic investors
in providing additional capital to the business. There are no assurances that
the Company will be successful in completing its plans outlined above and in
raising sufficient additional capital for its continuing
operations.
The
Company’s ability to meet its going concern obligations is highly dependent on
market and economic conditions. Even if it is successful in executing
its four-step plan, it will not be capable of sustaining losses such as those
incurred in 2008. However, it is worth noting that 2008 was an
unprecedented year both in terms of stock market volatility and general economic
challenges. Furthermore, the large number of civil litigations and resulting SEC
investigation was a massive drain on corporate resources. The Company believes
that its reduced cost structure and shedding of non-core business has increased
its operating runway. However, if operating conditions worsen or if the company
receives adverse judgments in its pending litigations, it may not have the
resources to meet its financial obligations as a going concern.
These
financial statements do not reflect adjustments in the carrying values of assets
and liabilities, the reported revenues and expenses, and the balance sheet
classifications used that would be necessary if the going concern assumption
were not appropriate. These adjustments could be
material.
3.
Fair Value of Assets and Liabilities
Fair
value is defined as the price at which an asset would sell for or an amount paid
to transfer a liability in an orderly transaction between market participants at
the measurement date (the exit price). 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. A description of
the valuation techniques applied to the Company’s major categories of assets and
liabilities measured at fair value on a recurring basis follows.
Securities
Owned
Corporate
Equities
Corporate
equities are comprised primarily of exchange-traded equity securities that the
Company takes selective proprietary positions based on expectations of future
market movements and conditions. They are generally valued based on quoted
prices from the exchange. To the extent these securities are actively traded,
valuation adjustments are not applied and they are categorized in Level 1 of the
fair value hierarchy.
Stock
Warrants
Stock
warrants represent warrants to purchase equity in a publicly traded
company. Such positions are considered illiquid and do not have
readily determinable fair values, and therefore require significant management
judgment or estimation. For these securities, the Company uses the Black-Scholes
valuation methodology or similar techniques. They are classified within Level 3
of the fair value hierarchy.
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
3.
Fair Value of Assets and Liabilities — continued
Underwriters’
Purchase Options
Underwriters’
purchase options represent the overallotment of units for a publicly traded
company for which the Company acted as an underwriter. Such positions
are considered illiquid and do not have readily determinable fair values, and
therefore require significant management judgment or estimation. For these
securities, the Company uses the Black-Scholes valuation methodology. They are
classified within Level 3 of the fair value hierarchy.
Preferred
Stock
Preferred
stock represents preferred equity in a publicly traded company. The
preferred stock owned by the Company is convertible at the Company’s discretion.
For these securities, the Company uses the exchange-quoted price of the common
stock to value the security. They are classified within Level 1 of the fair
value hierarchy.
Securities
Sold, Not Yet Purchased
Securities
sold, not yet purchased are comprised primarily of exchange-traded equity
securities that the Company sold short based on expectations of future market
movements and conditions. They are generally valued based on quoted prices from
the exchange. To the extent these securities are actively traded, valuation
adjustments are not applied and they are categorized in Level 1 of the fair
value hierarchy.
In
accordance with SFAS 157, assets measured at fair value on a recurring basis are
categorized in the table below based upon the lowest level of significant input
to the valuations.
|
Assets
at Fair Value at March 31, 2009
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
equities
|
|
$ |
3,917,207 |
|
|
$ |
— |
|
|
$ |
27,966 |
|
|
$ |
3,945,173 |
|
Stock
warrants
|
|
|
— |
|
|
|
— |
|
|
|
1,477,769 |
|
|
|
1,477,769 |
|
Preferred
stock
|
|
|
78 |
|
|
|
— |
|
|
|
— |
|
|
|
78 |
|
Total
securities owned
|
|
$ |
3,917,285 |
|
|
$ |
— |
|
|
$ |
1,505,735 |
|
|
$ |
5,423,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold, not yet purchased
|
|
$ |
231 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
231 |
|
|
|
|
Assets
at Fair Value at December 31, 2008
|
|
Level
1
|
|
Level 2
|
|
Level
3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
equities
|
|
$ |
3,353,784 |
|
|
$ |
650 |
|
|
$ |
695 |
|
|
$ |
3,355,129 |
|
Stock
warrants
|
|
|
— |
|
|
|
— |
|
|
|
1,605,451 |
|
|
|
1,605,451 |
|
Underwriters’
purchase option
|
|
|
— |
|
|
|
— |
|
|
|
27,995 |
|
|
|
27,995 |
|
Preferred
stock
|
|
|
63 |
|
|
|
— |
|
|
|
— |
|
|
|
63 |
|
Total
securities owned
|
|
$ |
3,353,847 |
|
|
$ |
650 |
|
|
$ |
1,634,141 |
|
|
$ |
4,988,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold, not yet purchased
|
|
$ |
903,217 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
903,217 |
|
The
following summarizes the change in carrying values associated with Level 3
financial instruments for the three months ended March 31,
2009:
|
|
Corporate
Equities
|
|
|
Stock
Warrants
|
|
|
Underwriters’
Purchase Option
|
|
|
Total
|
|
Balance
at December 31, 2008
|
|
$ |
695 |
|
|
$ |
1,605,451 |
|
|
$ |
27,995 |
|
|
$ |
1,634,141 |
|
Purchases,
issuances and settlements
|
|
|
50,998 |
|
|
|
132,879 |
|
|
|
— |
|
|
|
183,877 |
|
Net
transfers in / (out)
|
|
|
(695
|
) |
|
|
(10,315
|
) |
|
|
— |
|
|
|
(11,010
|
) |
Gains
/ (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
— |
|
|
|
— |
|
|
|
(91,058
|
) |
|
|
(91,058
|
) |
Unrealized
|
|
|
(23,032
|
) |
|
|
(250,246
|
) |
|
|
63,063 |
|
|
|
(210,215
|
) |
Balance
at March 31, 2009
|
|
$ |
27,966 |
|
|
$ |
1,477,769 |
|
|
$ |
— |
|
|
$ |
1,505,735 |
|
The
amounts of unrealized losses for the three months ended March 31, 2009
included in the table above are all attributable to those assets still held as
of March 31, 2009. Net losses (both realized and unrealized) for
Level 3 financial instruments are a component of Principal transactions in
the consolidated statements of operations.
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
4.
Discontinued Operations
Panel
Intelligence
On April
17, 2007, Merriman Curhan Ford Group, Inc. acquired 100 percent of the
outstanding common shares of MedPanel Corp. which was subsequently renamed Panel
Intelligence LLC (“Panel”) and made into a subsidiary of the Company. The
results of Panel’s operations have been included in the consolidated financial
statements since that date. As a result of the acquisition, the Company began
providing independent market data and information to clients in the
biotechnology, pharmaceutical, medical device, and financial industries by
leveraging Panel's proprietary methodology and vast network of medical
experts.
The
Company 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 Company's common stock over the period including three days before and
after the terms of the acquisition were agreed to and announced. The selling
stockholders were also entitled to additional consideration on the third
anniversary from the closing which is based upon Panel Intelligence achieving
specific revenue and profitability milestones.
In
December 2008, the Company determined that the sale of Panel would reduce
investments required to develop Panel’s business. Its sale would also
generate capital necessary for its core business. The sale of
Panel closed in January 2009. As of December 31, 2008, the Company
determined that the plan of sale criteria in FASB Statement No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets,” had been met. Accordingly,
the carrying value of the Panel assets was adjusted to their fair value less
costs to sell. As a result, an impairment loss in the amount of
$1,937,000 was recorded. In January 2009, the Company sold Panel to
Panel Intelligence, LLC (Newco) for $1,000,000 and shares of the Company’s
common stock in the amount of $100,000. Furthermore, the revenue and
expenses of Panel Intelligence have been reclassified and included in
discontinued operations in the consolidated statements of
operations.
The
following revenue and expenses have been reclassified as discontinued operations
for the three months ended March 31, 2009 and 2008:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
217,141
|
|
|
$
|
1,556,850
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
193,723
|
|
|
|
943,468
|
|
Cost
of primary research services
|
|
|
64,179
|
|
|
|
585,164
|
|
Professional
services
|
|
|
42,180
|
|
|
|
32,601
|
|
Occupancy
and equipment
|
|
|
27,775
|
|
|
|
83,769
|
|
Communications
and technology
|
|
|
1,179
|
|
|
|
30,064
|
|
Depreciation
and amortization
|
|
|
10,610
|
|
|
|
135,842
|
|
Travel
and entertainment
|
|
|
8,123
|
|
|
|
37,592
|
|
Other
expenses
|
|
|
(36,436
|
)
|
|
|
61,880
|
|
|
|
|
311,333
|
|
|
|
1,910,380
|
|
Operating
loss
|
|
|
(94,192
|
)
|
|
|
(353,530
|
)
|
Interest
expense, net
|
|
|
(702
|
)
|
|
|
(2,939
|
)
|
Net
loss
|
|
$
|
(94,894
|
)
|
|
$
|
(356,469
|
)
|
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
5.
Share-Based Compensation Expense
Stock
Options
As of
March 31, 2009, there were 7,091,430 shares authorized for issuance under
the Option Plans, and 612,858 shares authorized for issuance outside of the
Option Plans. As of March 31, 2009, 4,108,814 shares were available for
future option grants under the Option Plans. There were no shares available for
future option grants outside of the Options Plans. Compensation expense for
stock options during the three months ended March 31, 2009 and 2008 was
$65,000 and $381,000, respectively.
The
following table is a summary of the Company’s stock option activity for the
three months ended March 31, 2009:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Balance
as of December 31, 2008
|
|
|
1,167,117 |
|
|
$ |
5.85 |
|
Granted
|
|
|
580,671 |
|
|
|
0.34 |
|
Exercised
|
|
|
— |
|
|
|
— |
|
Canceled
|
|
|
(112,976
|
) |
|
|
(4.43
|
) |
Balance
as of March 31, 2009
|
|
|
1,634,812 |
|
|
$ |
3.99 |
|
Exercisable
as of March 31, 2009
|
|
|
664,781 |
|
|
$ |
7.34 |
|
The
following table summarizes information with respect to stock options outstanding
at March 31, 2009:
|
|
|
Options
Outstanding
|
|
|
Vested
Options
|
|
|
|
|
Number
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Number
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
$0 -
$1.00 |
|
|
|
593,241 |
|
|
|
9.94 |
|
|
$ |
0.35 |
|
|
$ |
53,273 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
$1.01
- $3.50 |
|
|
|
317,527 |
|
|
|
4.86 |
|
|
$ |
2.54 |
|
|
|
—
|
|
|
|
231,847 |
|
|
|
2.69 |
|
|
|
— |
|
$3.51
- $7.00 |
|
|
|
443,276 |
|
|
|
7.15 |
|
|
$ |
4.41 |
|
|
|
— |
|
|
|
163,915 |
|
|
|
4.86 |
|
|
|
— |
|
$7.01
- $14.00 |
|
|
|
254,620 |
|
|
|
2.35 |
|
|
$ |
9.08 |
|
|
|
— |
|
|
|
242,871 |
|
|
|
9.14 |
|
|
|
— |
|
$14.01
- $28.00 |
|
|
|
1,147 |
|
|
|
1.75 |
|
|
$ |
15.34 |
|
|
|
— |
|
|
|
1,147 |
|
|
|
15.34 |
|
|
|
— |
|
$28.01
- $49.00 |
|
|
|
25,001 |
|
|
|
0.91 |
|
|
$ |
49.00 |
|
|
|
— |
|
|
|
25,001 |
|
|
|
49.00 |
|
|
|
— |
|
|
|
|
|
1,634,812 |
|
|
|
6.87 |
|
|
$ |
3.99 |
|
|
$ |
53,273 |
|
|
|
664,781 |
|
|
$ |
7.34 |
|
|
$ |
— |
|
As of
March 31, 2009, total unrecognized compensation expense related to unvested
stock options was $635,000. This amount is expected to be recognized as expense
over a weighted-average period of 2.39 years.
Non-Vested
Stock
At the
date of grant, the recipients of non-vested stock have most of the rights of a
stockholder other than voting rights, subject to certain restrictions on
transferability and a risk of forfeiture. Non-vested shares typically vest over
a two to four year period beginning on the date of grant. The fair value of
non-vested stock is equal to the market value of the shares on the date of
grant. The Company recognizes the compensation expense for non-vested stock on a
straight-line basis over the requisite service period. Compensation expense for
non-vested stock during the three months ended March 31, 2009 and 2008 was
$25,000 and$282,000, respectively.
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
5.
Share-Based Compensation Expense — continued
The
following table is a summary of the Company’s non-vested stock activity for the
three months ended March 31, 2009:
|
|
Non-Vested
Stock
Outstanding
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Intrinsic
Value
at
March 31,
2009
|
|
Balance
as of December 31, 2008
|
|
|
48,779 |
|
|
$ |
9.84 |
|
|
|
|
Granted
|
|
|
— |
|
|
|
— |
|
|
|
|
Vested
|
|
|
(3,024
|
) |
|
|
(7.90
|
) |
|
|
|
Canceled
|
|
|
— |
|
|
|
— |
|
|
|
|
Balance
as of March 31, 2009
|
|
|
45,755 |
|
|
$ |
9.96 |
|
|
$ |
455,720 |
|
As of
March 31, 2009, total unrecognized compensation expense related to
non-vested stock was $139,000. This expense is expected to be recognized over a
weighted-average period of 0.78 year.
Fair
Value and Assumptions Used to Calculate Fair Value
The
weighted average fair value of each stock option granted for the three months
ended March 31, 2009 and 2008 was $0.24 and$3.48, respectively. The
fair value of each option award is estimated on the date of grant using the
Black-Scholes Option Pricing Model, with the following assumptions for the three
months ended March 31, 2009 and 2008:
|
|
Three
months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Expected
volatility
|
|
|
92
|
% |
|
|
70
|
% |
Expected
life (years)
|
|
|
4.54 |
|
|
|
6.35 |
|
Risk-free
interest rate
|
|
|
1.74
|
% |
|
|
2.75
|
% |
Expected
dividend yield
|
|
|
0
|
% |
|
|
0
|
% |
The
weighted average fair value of the non-vested stock granted under the Company’s
stock option plans for the three months ended March 31, 2009 and 2008 was
$0 and $5.15 per share, respectively. The fair value of the non-vested
stock award is estimated on the date of grant using the intrinsic value
method.
6. Sale
of a Component of an Entity
On
January 16, 2009, the Company entered into an agreement to sell the assets of
Institutional Cash Distributors (ICD), a division of Merriman Curhan Ford &
Co., to a group of investors who are also its employees in order to raise
capital. 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. 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 March 31, 2009, the Company determined that the
discontinued operations criteria in FASB Statement No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” have not been met, as such the
revenues and expenses of ICD are still presented as part of continuing
operations. In accordance with SAB 104, Revenue Recognition, the
Company recognized $1.2 million as Other Income in the first quarter
2009.
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
7.
Income Taxes
At the
end of each interim reporting period the Company calculates an effective tax
rate based on the Company’s estimate of the tax provision (benefit) that will be
provided for the full year, stated as a percentage of estimated annual pre-tax
income (loss). The tax provision (benefit) for the interim period is determined
using this estimated annual effective tax rate. For the three months ended
March 31, 2009 and 2008, the Company recorded immaterial income tax
expense. The effective tax rate for the quarter ended March 31, 2009 is
zero because the Company is operating at a loss.
Historically
and currently, the Company has recorded a valuation allowance on the 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, the Company continues 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 future.
The
Company does not have any material accrued interest or penalties associated with
any unrecognized tax benefits. The Company’s policy is to account for interest,
if any, as interest expense and penalties as income tax expense.
The
Company’s tax years 2001-2008 will remain open for three years for examination
by the Internal Revenue Service from the date the federal corporation tax
returns were filed. The Company’s tax years 2000-2008 will remain open for all
tax years with loss carryforwards for examination by state tax authorities from
the date the state corporation tax returns were filed. Net operating losses
deducted are subject to review and adjustment for three to four years after the
net operating losses are deducted on the U.S. and state returns
filed.
8.
Loss per Share
The
following is a reconciliation of the basic and diluted net loss available to
common stockholders and the number of shares used in the basic and diluted net
loss per common share computations for the periods presented:
|
|
Three
Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net
loss available to common stockholders - basic
|
|
$ |
(1,923,886 |
) |
|
$ |
(7,049,973 |
) |
Interest
on convertible note payable
|
|
|
— |
|
|
|
4,084 |
|
Net
loss available to common stockholders - diluted
|
|
|
(1,923,886
|
) |
|
|
(7,045,889 |
) |
Weighted-average
number of common shares – basic and diluted
|
|
|
12,603,744 |
|
|
|
12,289,582 |
|
Basic
and diluted loss per common share:
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(0.14 |
) |
|
$ |
(0.54 |
) |
Loss
from discontinued operations
|
|
$ |
(0.01 |
) |
|
$ |
(0.53 |
) |
Net
loss
|
|
$ |
(0.15 |
) |
|
$ |
(0.57 |
) |
Basic
loss per share is computed by dividing net loss by the weighted average number
of common shares outstanding, excluding shares of non-vested stock. Diluted loss
per share is calculated by dividing net income, plus interest and dividends on
dilutive securities, by the weighted average number of common shares used in the
basic earnings per share calculation plus the number of common shares that would
be issued assuming exercise or conversion of all potentially dilutive common
shares outstanding, including non-vested stock. Diluted loss per share is
unchanged from basic loss per share for the three months ended March 31,
2009 and 2008 because the addition of common shares that would be issued
assuming exercise or conversion would be anti-dilutive.
Shares
used in the diluted net income per share computation include the dilutive impact
of the Company’s stock options and warrants. The impact of the Company’s stock
options and warrants on shares used for the diluted loss per share computation
is calculated based on the average share price of the Company’s common stock for
each period using the treasury stock method. Under the treasury stock method,
the tax-effected proceeds that would be hypothetically received from the
exercise of all stock options and warrants with exercise prices below the
average share price of the Company’s common stock are assumed to be used to
repurchase shares of the Company’s common stock. Because the Company reported a
net loss during the three months ended March 31, 2009 and 2008, the Company
excluded the impact of all stock options and warrants in the computation of
dilutive earnings per share, as their effect would be
anti-dilutive.
The
Company excludes all potentially dilutive securities from its diluted net loss
per share computation when their effect would be anti-dilutive. The following
common stock equivalents were excluded from the diluted net loss per share
computation, as their inclusion would have been anti-dilutive:
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Stock
options and warrants excluded due to the exercise price exceeding the
average fair value of the Company’s common stock during the
period
|
|
|
1,454,058 |
|
|
|
1,649,267 |
|
Weighted
average non-vested stock, stock options and stock warrants, calculated
using the treasury stock method, that were excluded due to the Company
reporting a net loss during the period
|
|
|
126,474 |
|
|
|
1,055,821 |
|
Weighted
average shares issuable upon conversion of the convertible notes
payable
|
|
|
— |
|
|
|
142,858 |
|
Total
common stock equivalents excluded from diluted net loss per
share
|
|
|
1,580,532 |
|
|
|
2,847,946 |
|
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
9.
Regulatory Requirements
Merriman
Curhan Ford & Co. is a broker-dealer subject to Rule 15c3-1 of the
Securities and Exchange Commission, which specifies uniform minimum net capital
requirements, as defined, for their registrants. As of March 31, 2009,
Merriman Curhan Ford & Co. had regulatory net capital, as defined, of
$1,051,000, which exceeded the amount required by $616,000. Merriman Curhan
Ford & Co. is exempt from Rules 15c3-3 and 17a-13 under the Securities
Exchange Act of 1934 because it does not carry customer accounts, nor does it
hold customer securities or cash.
10.
Contingencies
A number
of lawsuits have been filed against the Company’s wholly owned subsidiary,
Merriman Curhan Ford & Co. (“MCF”) (including at least one which also names
the parent company as the defendant) in connection with the actions of William
Del Biaggio III (“Del Biaggio”), a former customer of MCF and David Scott
Cacchione (“Cacchione”), a former retail broker of MCF. The total amount
of damages sought under such lawsuits is approximately $47.5 million. In
addition, there is at least one additional threatened claim against MCF relating
to the actions of Del Biaggio and Cacchione, in the approximate amount of $10
million
Unrelated
to the actions of the former client, the Company is in arbitration with regards
to an action brought by a former at-will employee of the Company who worked in
the investment banking department. No decision has yet been rendered. The former
employee resigned from Merriman Curhan Ford & Co. in March 2007. The former
employee alleges breach of an implied employment contract, wrongful termination,
and intentional infliction of emotional distress.
The
Company and MCF deny any liability and are vigorously contesting these lawsuits
and the arbitration. At this point, we cannot estimate the amount of damages if
they are resolved unfavorably and accordingly, we have not provided an accrual
for these lawsuits and arbitration. If the Company or MCF were to be found
liable in these lawsuits and the arbitration and the plaintiffs were to be
awarded the damages they seek, it would have a severe impact on the Company's
financial condition and the Company would likely not be able to continue in
business. Even if the Company and MCF ultimately prevail in all of these
lawsuits, they will almost certainly incur significant legal fees which could
also have a severe impact on the Company's financial condition.
From time
to time, the Company is also named as a defendant in the routine conduct of its
business.
11.
Reduction in Force
On
January 23, 2009, the Company performed an additional reduction-in-force
affecting 10 employees in order to reduce its cost structure. There
were one-time termination benefits of $41,000 included as Compensation and
Benefits reported in the Consolidated Statements of Operations. There
was no disposal of assets nor contract terminations associated with the
reduction-in-force.
ITEM 2 Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
This
Quarterly Report on Form 10-Q, including this Management’s Discussion and
Analysis of Financial Condition and Results of Operations contains
forward-looking statements regarding future events and our future results that
are based on current expectations, estimates, forecasts, and projections about
the industries in which we operate and the beliefs and assumptions of our
management. Words such as “may,” “will,” “should,” “expects,” “anticipates,”
“targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,”
“estimates,” “predicts,” “potential” or “continue,” variations of such words,
and similar expressions are intended to identify such forward-looking
statements. In addition, any statements that refer to projections of our future
financial performance, our anticipated growth and trends in our businesses, and
other characterizations of future events or circumstances, are forward-looking
statements. Readers are cautioned that these forward-looking statements are only
predictions and are subject to risks, uncertainties, and assumptions that are
difficult to predict. Therefore, actual results may differ materially and
adversely from those expressed in any forward-looking statements. Readers are
referred to risks and uncertainties identified under “Risk Factors” beginning on
Page 30 and elsewhere herein. We undertake no obligation to revise or update
publicly any forward-looking statements for any reason.
Overview
We are a
financial services holding company that provides investment research, capital
markets services, corporate and venture services, and investment banking through
our operating subsidiary, Merriman Curhan Ford & Co.
Merriman
Curhan Ford & Co. is an investment bank and securities broker-dealer
focused on fast growing companies and institutional investors. Our mission is to
become a leader in the researching, advising, financing, trading and investing
in fast growing companies under $2 billion in market capitalization. We provide
equity research, brokerage and trading services primarily to institutions, as
well as investment banking and advisory services to corporate clients. We
originate differentiated research for our institutional investor clients and
provide specialized and integrated services for our fast-growing corporate
clients.
In
January 2009, we entered into an agreement to sell the assets of Institutional
Cash Distributors (ICD), a division of Merriman Curhan Ford & Co., to a
group of investors who are also its employees in order to raise
capital. 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. We expect the sale to be completed in the
second quarter 2009 and no longer include the results of its operations and its
financial condition in our financial statements.
Also in
January 2009, we sold the assets of our subsidiary Panel Intelligence, LLC
(Panel) which provides custom and published primary research to industry clients
and investment professionals through online panel discussions, quantitative
surveys and an extensive research library. We decided to sell Panel
to reduce our costs and to refocus on our core investment banking and
broker-dealer services. The results of Panel are presented as
“discontinued operations” for financial reporting purposes.
MCF Asset
Management, LLC is another subsidiary of ours which manages absolute return
investment products for institutional and high-net worth clients. We are in the
process of liquidating the funds under management and returning investments to
the investors. As of March 31, 2009, we liquidated our Voyager
and Focus funds and are in the process of liquidating our third fund,
Navigator. We expect to complete the liquidation in the second
quarter 2009.
Going
Concern
These
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern for the foreseeable future and will be able to
realize its assets and discharge its liabilities in the normal course of
operations.
During
the three months ended March 31, 2009, the Company incurred a net loss of
$1,924,000 and used $5,099,000 in net cash from operating
activities. At March 31, 2009, the Company had cash and cash
equivalents of $3,139,000, marketable securities of $5,207,000 and receivables
from clearing broker of $1,997,000. The Company had liabilities of
$8,510,000. The Company’s ability to generate profits is highly dependent
on stock market trading volumes and the general economic environment. As a
result, the ability of the Company to meet its forward obligations and the
ability to continue as a going concern may be in question.
In 2008,
the Company incurred a net loss of over $30 million and used approximately $25
million in cash.
The
Company is in the process of implementing a plan to increase its operating
flexibility and extend its cash reserves. The plan primarily consists of four
steps which are more fully described below:
1. Continue
to reduce operating costs
2. Shed
non-essential operations
3. Negotiate
a settlement of pending litigations
4. Raise
additional capital
During
2008 and early 2009, the Company implemented significant expense control and
cost reduction programs focused on reducing cash losses and increasing
operational flexibility eliminating more than $10 million in annual operating
expenses. The primary contributor to these savings has been the elimination of
more than 50% of the Company’s workforce, as well as salary reductions. The
Board of Directors has voluntarily eliminated its compensation for the first
quarter 2009. The Company believes that it has been able to execute
these reductions with limited impact to its ability to generate and execute new
business in the current market environment. With these measures largely
complete, the Company believes that it has increased its ability to meet its
obligations during 2009 and beyond.
The CEO,
the Head of Institutional Securities and the Head of Professional Services are
remunerated based on the Company’s profitability.
As a part
of the four-step plan mentioned above, in January of 2009, the Company shed
non-essential operations or those requiring substantial cash
infusions. First, the Company sold Panel Intelligence, LLC on January
30, 2009. This subsidiary required a cash injection of $1,131,000 during 2008
and was projected to reach breakeven only in late 2009. Also in January 2009,
the Company sold its operations known as Institutional Cash Distributors to a
group of its employees. While this business was profitable, management
structured a transaction that substantially increases the near-term flow of
capital. The Company expects to finalize the sale of ICD in the second quarter
2009.
Finally,
the Company is in the process of shutting down MCF Asset Management, another
subsidiary in which the Company had invested considerable resources during 2008.
The result of these actions has been to reduce operating loses and increase
available cash, which will also strengthen its capital position.
The
Company has entered into a process of mediation to reach a settlement with a
majority of the civil litigants resulting from the alleged fraud by its former
customer William Del Biaggio III and its terminated employee Scott
Cacchione. The Company is focused on reducing its potential liability
in these legal proceedings and the resources required to fight the allegations.
In addition, it is also aiming to free up valuable management resources needed
to face challenging market and economic conditions. At present, there
is no indication that these negotiations will be successful and whether it will
serve the Company’s aims and should a settlement result, the amount of such
settlement is not yet estimable.
The
Company is assessing the interest of both strategic and non-strategic investors
in providing additional capital to the business. There are no assurances that
the Company will be successful in completing its plans outlined above and in
raising sufficient additional capital for its continuing
operations.
The
Company’s ability to meet its going concern obligations is highly dependent on
market and economic conditions. Even if it is successful in executing
its four-step plan, it will not be capable of sustaining losses such as those
incurred in 2008. However, it is worth noting that 2008 was an
unprecedented year both in terms of stock market volatility and general economic
challenges. Furthermore, the large number of civil litigations and resulting SEC
investigation was a massive drain on corporate resources. The Company believes
that its reduced cost structure and shedding of non-core business has increased
its operating runway. However, if operating conditions worsen or if the company
receives adverse judgments in its pending litigations, it may not have the
resources to meet its financial obligations as a going concern.
These
financial statements do not reflect adjustments in the carrying values of assets
and liabilities, the reported revenues and expenses, and the balance sheet
classifications used that would be necessary if the going concern assumption
were not appropriate. These adjustments could be
material.
Executive
Summary
Revenue
from continuing operations declined by 2% in the first quarter 2009 relative to
the first quarter 2008 during one of the most tumultuous capital market
environments in a generation. Our commissions revenue for the same period grew
by 8% year-over-year, due primarily to continued growth with our Institutional
Cash Distributors money fund business which was sold in January 2009. Investment
banking revenue declined by 64%, as very few companies came to market during the
first quarter. Principal transactions improved to a loss of $843,000 for the
three months ended March 31, 2009 compared to a loss of $1,315,000 during the
same period 2008 mainly due to the partial stabilization in the fair value of
positions in our proprietary trading account and the managed reduction of our
portfolio through the sales of both stock and warrant securities.. We incurred a
net loss of $1,924,000, or $0.15 per share.
Business
Environment
After
posting the third-worst year in more than a century, the equity markets
continued to be volatile to the downside in the first quarter
2009. The broad-based S&P 500 ® Index,
a widely followed large-cap benchmark, declined 11.7% in the first quarter after
falling 38.5% in 2008. The NASDAQ Composite ® Index
(“NASDAQ”) fell a further 3.1% in the first quarter from the 40.5% last year,
the worst in its 38-year history. The Russell 2000 ® Index,
comprising small-cap stocks, posted a 15.4% loss in the first three months of
2009 continuing its decline of 34.8% in 2008.
Hedge
funds, some of which went out of business in 2008, in general have not
recovered, continuing to depress the demand for our services. The
hedge fund community is an important component of our business, as they are one
of the most active purchasers of our investment banking and research
products. Our securities broker-dealer and investment banking
activities are linked to the capital markets. In addition, our business
activities are focused on the CleanTech, Consumer/Internet/Media, Health Care,
and Tech/Telecom sectors. By their nature, our business activities are highly
competitive and are not only subject to general market conditions, volatile
trading markets and fluctuations in the volume of market activity, but also to
the conditions affecting the companies and markets in our areas of
focus.
Fluctuations
in revenue also occur due to the overall level of market activity, which, among
other things, affects the flow of investment dollars and the size, number and
timing of investment banking transactions. In addition, a downturn in the level
of market activity can lead to a decrease in brokerage commissions. Therefore,
revenue in any particular period may vary significantly from year to
year.
Results
of Operations
The
following table sets forth a summary of financial highlights for the three
months ended March 31, 2009 and 2008:
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
9,117,928
|
|
|
$
|
8,468,710
|
|
Principal
transactions
|
|
|
(842,536
|
)
|
|
|
(1,315,076
|
)
|
Investment
banking
|
|
|
1,216,417
|
|
|
|
3,376,411
|
|
Advisory
and other
|
|
|
558,813
|
|
|
|
(303,534
|
)
|
Total
revenue
|
|
|
10,050,622
|
|
|
|
10,211,455
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
9,265,167
|
|
|
|
12,227,174
|
|
Brokerage
and clearing fees
|
|
|
312,959
|
|
|
|
775,301
|
|
Professional
services
|
|
|
1,112,750
|
|
|
|
794,884
|
|
Occupancy
and equipment
|
|
|
576,390
|
|
|
|
453,413
|
|
Communications
and technology
|
|
|
721,265
|
|
|
|
909,914
|
|
Depreciation
and amortization
|
|
|
147,242
|
|
|
|
123,918
|
|
Travel
and business development
|
|
|
235,124
|
|
|
|
922,001
|
|
Other
|
|
|
696,623
|
|
|
|
776,990
|
|
Total
operating expenses
|
|
|
13,067,520
|
|
|
|
16,983,595
|
|
Operating
loss
|
|
|
(3,016,899
|
)
|
|
|
(6,772,140
|
)
|
Other
income
|
|
|
1,200,000
|
|
|
|
—
|
|
Interest
income
|
|
|
6,488
|
|
|
|
96,404
|
|
Interest
expense
|
|
|
(15,365
|
)
|
|
|
(17,768
|
)
|
Loss
before provision for tax
|
|
|
(1,825,777
|
)
|
|
|
(6,693,504
|
)
|
Provision
for income tax
|
|
|
(3,216
|
)
|
|
|
—
|
|
Loss
from continued operations
|
|
|
(1,828,992
|
)
|
|
|
(6,693,504
|
)
|
Loss
from discontinued operations
|
|
|
(94,894
|
)
|
|
|
(356,468
|
)
|
Net
loss
|
|
$
|
(1,923,886
|
)
|
|
$
|
(7,049,973
|
)
|
Our net
loss for the three months ended March 31, 2009 and 2008 included the
following non-cash items:
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Stock-based
compensation expense
|
|
$ |
89,616 |
|
|
$ |
662,786 |
|
Depreciation
and amortization
|
|
|
157,852 |
|
|
|
259,759 |
|
Provision
for uncollectible accounts receivable
|
|
|
— |
|
|
|
166,784 |
|
Loss
on disposal of equipment and fixtures
|
|
|
294,379 |
|
|
|
— |
|
Securities
received for services
|
|
|
(168,193
|
) |
|
|
— |
|
Amortization
of discounts on debt
|
|
|
— |
|
|
|
2,584 |
|
Total
|
|
$ |
373,654 |
|
|
$ |
1,091,913 |
|
Investment
Banking Revenue
Our
investment banking activity includes the following:
|
•
|
Capital Raising -
Capital raising includes private placements of equity and debt
instruments.
|
|
|
Financial Advisory -
Financial advisory includes advisory assignments with respect to mergers
and acquisitions, divestures, restructurings and
spin-offs.
|
The
following table sets forth our revenue and transaction volumes from our
investment banking activities for the three months ended March 31, 2009 and
2008:
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
Capital
raising
|
|
$ |
322,883 |
|
|
$ |
1,556,161 |
|
Financial
advisory
|
|
|
893,534 |
|
|
|
1,820,250 |
|
Total
investment banking revenue
|
|
$ |
1,216,417 |
|
|
$ |
3,376,411 |
|
Transaction
Volumes:
|
|
|
|
|
|
|
|
|
Public
offerings:
|
|
|
|
|
|
|
|
|
Capital
underwritten participations
|
|
$ |
— |
|
|
$ |
— |
|
Number
of transactions
|
|
|
— |
|
|
|
— |
|
Private
placements:
|
|
|
|
|
|
|
|
|
Capital
raised
|
|
$ |
1,753,000 |
|
|
$ |
32,424,000 |
|
Number
of transactions
|
|
|
1 |
|
|
|
5 |
|
Financial
advisory:
|
|
|
|
|
|
|
|
|
Transaction
amounts
|
|
$ |
27,600,000 |
|
|
$ |
— |
|
Number
of transactions
|
|
|
3 |
|
|
|
— |
|
Our
investment banking revenue was $1,216,000, or 12% of our revenue during the
first quarter 2009, representing a 64% decrease compared to $3,376,000
recognized in the same period 2008. As a result of the extremely difficult
market environment, particularly for small-cap companies, we closed only private
placement transactions during the first quarter 2009. The public markets were
effectively closed during the first quarter.
During
the first quarters 2009 and 2008, no investment banking customer accounted for
more than 10% of our 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.
|
|
•
|
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:
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
9,117,928
|
|
|
$
|
8,468,710
|
|
Principal
transactions:
|
|
|
|
|
|
|
|
|
Customer
principal transactions, proprietary trading and market
making
|
|
$
|
(372,795
|
)
|
|
$
|
(3,784,742
|
)
|
Investment
portfolio
|
|
|
(469,741
|
)
|
|
|
2,469,666
|
|
Total
principal transactions revenue
|
|
$
|
(842,536
|
)
|
|
$
|
(1,315,076
|
)
|
Transaction
Volumes:
|
|
|
|
|
|
|
|
|
Number
of shares traded
|
|
|
289,586,917
|
|
|
|
232,116,182
|
|
Number
of active clients
|
|
|
182
|
|
|
|
369
|
|
Commissions
amounted to $9,118,000, or 91%, of our revenue during the first quarter 2009,
representing an 8% increase from $8,469,000 recognized during the similar period
in 2008. The higher commissions revenue during the first quarter 2009 was
attributed to growth in our Institutional Cash Distributors (ICD) money fund
business. The Company entered into an agreement to sell its ICD
assets to a group of its employees in mid-January. When the sale is
completed, expected for the second quarter 2009, the Company will no longer
include ICD commission revenue in its Consolidated Statements of
Operations. The Company recorded $6,074,000 of revenues and expenses
related to ICD for the three-month period ended March 31, 2009.
Principal
transactions improved to a loss of $843,000 for the three months ended March 31,
2009 compared to a loss of $1,315,000 during the same period 2008 mainly due to
the partial stabilization in the fair value of positions in our proprietary
trading account and a managed reduction of our portfolio through the sales of
both stock and warrant securities. 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 value each day. Returns from market making and
proprietary trading activities tend to be more volatile than acting as agent or
principal for customers.
Although
the number of shares we traded increased from first quarter 2008 to the same
period 2009, the number of active clients declined significantly. The
reduced number of clients is a result of (1) reduced research coverage we offer,
and (2) a significant reduction in business from hedge funds, a substantial
component of our client base. Due to the tough economic environment,
many hedge funds have either gone out of business, reduced their assets under
management and/or pared back the broker-dealers they do business with, all of
which impacts our business adversely.
During
the first quarter of 2009 and 2008, no single brokerage customer accounted for
more than 10% of our revenue.
Compensation
and Benefits Expenses
Compensation
and benefits expense represents the majority of our operating expenses and
includes incentive compensation paid to sales, trading, research and investment
banking professionals, as well as discretionary bonuses, salaries and wages, and
stock-based compensation. Incentive compensation varies primarily based on
revenue production. Discretionary bonuses paid to research analysts also vary
with commissions revenue production but includes other qualitative factors as
well. Salaries, payroll taxes and employee benefits tend to vary based on
overall headcount.
The
following table sets forth the major components of our compensation and benefits
for the three months ended March 31, 2009 and 2008:
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Incentive
compensation and discretionary bonuses
|
|
$
|
6,463,327
|
|
|
$
|
6,098,089
|
|
Salaries
and wages
|
|
|
2,012,652
|
|
|
|
3,613,973
|
|
Stock-based
compensation
|
|
|
89,616
|
|
|
|
662,785
|
|
Payroll
taxes, benefits and other
|
|
|
699,572
|
|
|
|
1,852,327
|
|
Total
compensation and benefits
|
|
$
|
9,265,167
|
|
|
$
|
12,227,174
|
|
Total
compensation and benefits as a percentage of revenue
|
|
|
92
|
%
|
|
|
120
|
%
|
Cash
compensation and benefits as a percentage of revenue
|
|
|
91
|
%
|
|
|
113
|
%
|
The
decrease in compensation and benefits expense of $2,962,000 or 24%, from the
first quarter of 2008 to the first quarter of 2009 was due to (i) lower
headcount and reduced salaries, (ii) lower investment banking revenue and
corresponding bonuses, and (iii) reduced brokerage revenue and
corresponding reduced commissions payable, mostly offset by increased ICD
revenues and corresponding commissions.
Cash
compensation is equal to total compensation and benefits expense excluding
stock-based compensation. Cash compensation and benefits expense as a percentage
of revenue decreased to 91% of revenues during first quarter 2009 as compared to
106% in 2008. This decrease was primarily the result of the reductions in force
and the voluntary reductions in salaries of most employees.
One sales
professional accounted for 11% of our revenue in the first quarters of 2009 and
2008.
Stock-based
compensation expense decreased by 86% in first quarter 2009 as compared to the
same period 2008. The decline in stock-based compensation expense can be
attributed to fewer stock options outstanding as a result of the Company’s Stock
Options Give-Back Program in October 2008. This program resulted in
about 3 million shares of stock options given back. The program was
open to all employees. Executive management gave back the large majority
of all stock options.
Other
Operating Expenses
Brokerage
and clearing fees include trade processing expenses that we pay to our clearing
broker and execution fees that we pay to floor brokers and electronic
communication networks. Merriman Curhan Ford & Co. is a fully-disclosed
broker-dealer, which has engaged a third party clearing broker to perform all of
the clearance functions. The clearing broker-dealer processes and settles the
customer transactions for Merriman Curhan Ford & Co. and maintains the
detailed customer records. Additionally, security trades are executed by
third-party broker-dealers and electronic trading systems. These expenses are
almost entirely variable with commission revenue and the volume of brokerage
transactions. Our brokerage and clearing fees decreased by $462,000, or 60%,
during the first quarter of 2009 as compared to the first quarter of 2008. This
decrease reflected reduced volume of trades partially offset by higher costs
associated with execution of foreign securities for our clients during first
quarter 2009 as compared to first quarter 2008. Execution fees for foreign
securities are higher than they are for domestic securities.
Professional
services expense includes legal, audit, consulting fees, as well as expenses
related to investment banking transactions. The increase of $318,000 or 40%,
from the first quarter of 2008 to the first quarter of 2009 was primarily
attributed to higher legal fees associated with the Company’s legal matters, a
large majority associated with the litigation related to Del Biaggio and
Cacchione (see Legal Proceedings in Item 1 of Part II).
Occupancy
and equipment includes rental costs for our office facilities and equipment, as
well as equipment, software and leasehold improvement expenses. These expenses
are largely fixed in nature. The increase of $123,000, or 27%, from the first
quarter of 2008 to the first quarter of 2009 was in part due to higher costs
associated with a lease for our New York office, which commenced in March 2008,
partially offset by the sublease of excess space in San Francisco beginning in
February 2009, and to the one-time expense of exiting our Newport Beach
lease.
Communications
and technology expense includes market data and quote services, voice, data and
Internet service fees, and data processing costs. Historically, these costs have
increased as we hired additional employees. The decrease of $189,000, or 21%,
from the first quarter of 2008 to the first quarter of 2009 was primarily due
reduced work force and the cancellation of subscription services.
Depreciation
and amortization expense primarily relate to the depreciation of our computer
equipment and leasehold improvements. The increase of $23,000, or 19%, from the
first quarter of 2008 to the first quarter of 2009 was due to an increase in
leasehold improvement expenses related to the New York office move in April
2008, partially offset by a decrease in book value of computer equipment and
furniture as they reached the end of their useful lives.
Travel
and entertainment expense results from business development activities across
our various businesses. The decrease of $687,000, or 75%, from the first quarter
of 2008 to the first quarter of 2009 was due mostly to reduced costs associated
with lower volume of business and selective business development
expenses.
Other
operating expense includes company events, recruiting fees, professional
liability and property insurance, marketing, business licenses and taxes, office
supplies and other miscellaneous office expenses. The decrease of approximately
$80,000, or 10%, from the first quarter of 2008 to the first quarter of 2009 was
partly due to the write-off of bad debts related to uncollectible receivables in
2008 and lower recruiting fees, somewhat offset by higher insurance
premiums.
Income
Tax Expense
At the
end of each interim reporting period we calculate an effective tax rate based on
our best estimate of the tax provision that will be provided for the full year,
stated as a percentage of estimated annual pre-tax income (loss). The tax
provision for the interim period is determined using this estimated annual
effective tax rate. For the three months ended March 31, 2009 and 2008, we
recorded zero tax expense. The effective tax rate for the quarter ended March
31, 2009 is zero because we are operating at a loss.
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 future.
We do not
have any material accrued interest or penalties associated with any unrecognized
tax benefits. We are subject to taxation in the US and various state and foreign
jurisdictions. The tax years 2001-2008 remain open to examination by the federal
and most state tax authorities. The Company’s tax years 2000-2008
will remain open for all tax years with loss carryforwards for examination by
state tax authorities from the date the state corporation tax returns were
filed. Net operating losses deducted are subject to review and adjustment for
three to four years after the net operating losses are deducted on the U.S. and
state returns filed.
Other
Income
Other
income, shown in our Consolidated Statements of Operations, consists of
$1,200,000 recognized as revenue in the first quarter 2009 related to the sale
of our ICD assets.
Off-Balance
Sheet Arrangements
We were
not a party to any off-balance sheet arrangements during the three months ended
March 31, 2009 and 2008. In particular, we do not have any interest in
so-called limited purpose entities, which include special purpose entities and
structured finance entities.
Commitments
The
following is a table summarizing our significant commitments as of
March 31, 2009, consisting of debt and interest payments related to capital
leases and future minimum lease payments under all non-cancelable operating
leases with initial or remaining terms in excess of one year.
|
|
Operating
Leases
|
|
|
Capital
Leases
|
|
2009
|
|
$ |
1,291,456 |
|
|
$ |
419,122 |
|
2010
|
|
|
1,720,897 |
|
|
|
268,852 |
|
2011
|
|
|
1,658,148 |
|
|
|
146,648 |
|
2012
|
|
|
1,095,440 |
|
|
|
— |
|
2013
|
|
|
616,000 |
|
|
|
— |
|
Thereafter
|
|
|
— |
|
|
|
— |
|
Total
commitments
|
|
$ |
6,381,941 |
|
|
$ |
834,622 |
|
Interest
|
|
|
— |
|
|
|
(45,195
|
) |
Net
commitments
|
|
$ |
6,381,941 |
|
|
$ |
789,427 |
|
Loss
from Discontinued Operations
On April
17, 2007, we acquired 100 percent of the outstanding common shares of MedPanel
Corp. which we subsequently renamed Panel Intelligence LLC (“Panel”) and made
into a subsidiary of the Merriman Curhan Ford Group, Inc. The results of Panel’s
operations have been included in our consolidated financial statements since
that date. As a result of the acquisition, we began providing independent market
data and information to clients in the biotechnology, pharmaceutical, medical
device, and financial industries by leveraging Panel's proprietary methodology
and vast network of medical experts.
We paid
$6.1 million in common stock for Panel. The value of the 1,547,743 shares of
common shares issued was determined based on the average market price of the our
common stock over the period including three days before and after the terms of
the acquisition were agreed to and announced. The selling stockholders were also
entitled to additional consideration on the third anniversary from the closing
which is based upon Panel Intelligence achieving specific revenue and
profitability milestones.
In
December 2008, we determined that the sale of Panel would reduce investments
required to develop Panel’s business. Its sale would also generate
capital necessary for our core business. The sale of Panel was
completed in January 2009. We determined that the plan of sale
criteria in FASB Statement No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets,” had been met. As a result, the revenue and expenses of
Panel have been reclassified and included in discontinued operations in the
consolidated statements of operations. Accordingly, the carrying value of
the Panel assets was adjusted to their fair value less costs to
sell. As a result, an impairment loss in the amount of $1,937,000 was
recorded and is included in “Other expenses” for the year ended December 31,
2008. In January 2009, we sold Panel to Panel Intelligence, LLC
(Newco) for $1,000,000 and shares of our common stock in the amount of
$100,000.
Critical
Accounting Policies and Estimates
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to the valuation of securities owned and deferred tax assets. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ
from those estimates. We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements.
Securities Owned
Corporate
Equities –are comprised primarily of exchange-traded equity securities that the
Company takes selective proprietary positions based on expectations of future
market movements and conditions. They are generally valued based on quoted
prices from the exchange. To the extent these securities are actively traded,
valuation adjustments are not applied and they are categorized in Level 1 of the
fair value hierarchy.
Stock
Warrants –represent warrants to purchase equity in a publicly traded
company. Such positions are considered illiquid and do not have
readily determinable fair values, and therefore require significant management
judgment or estimation. For these securities, the Company uses the Black-Scholes
valuation methodology or similar techniques. They are classified within Level 3
of the fair value hierarchy.
Underwriters’
Purchase Options – represent the overallotment of units for a publicly traded
company for which the Company acted as an underwriter. Such positions
are considered illiquid and do not have readily determinable fair values, and
therefore require significant management judgment or estimation. For these
securities, the Company uses the Black-Scholes valuation methodology. They are
classified within Level 3 of the fair value hierarchy.
Valuation
of Securities Owned
“Securities
owned” and “Securities sold, but not yet purchased” are reflected in the
consolidated statements of financial condition on a trade-date basis. Related
unrealized gains or losses are generally recognized in “Principal transactions
revenue” in the consolidated statements of operations. The use of fair value to
measure financial instruments is fundamental to our financial statements and is
one of our most critical accounting policies.
The fair
value of a financial instrument is the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (the exit price). Instruments that the firm
owns (long positions) are marked to bid prices, and instruments that the firm
has sold, but not yet purchased (short positions), are marked to offer prices.
Fair value measurements are not adjusted for transaction costs. Fair values of
our financial instruments are generally obtained from quoted market prices in
active markets, broker or dealer price quotations, or alternative pricing
sources with reasonable levels of price transparency. To the extent certain
financial instruments trade infrequently or are non-marketable securities and,
therefore, have little or no price transparency, we value these instruments
based on management’s estimates.
Substantially
all of the Company's financial instruments are recorded at fair value or
contract amounts that approximate fair value. Securities owned and securities
sold, not yet purchased are stated at fair value, with any related changes in
unrealized appreciation or depreciation reflected in Principal Transactions in
the consolidated statements of operations. Financial instruments carried at
contract amounts include cash and cash equivalents and amounts due from and to
brokers, dealers and clearing brokers.
Fair
Value Measurement—Definition and Hierarchy
The
Company adopted the provisions of SFAS No. 157, Fair Value Measurements
(SFAS No. 157), effective January 1, 2008. Under this standard, fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability (
i.e., the “exit price”) in an orderly transaction between market
participants at the measurement date.
Where
available, fair value is based on observable market prices or parameters or
derived from such prices or parameters. Where observable prices or inputs are
not available, valuation models are applied. These valuation techniques involve
some level of management estimation and judgment, the degree of which is
dependent on the price transparency for the instruments or market and the
instruments’ complexity. Assets and liabilities recorded at fair value in the
consolidated statement of financial condition are categorized based upon the
level of judgment associated with the inputs used to measure their fair value.
Hierarchical levels, defined by SFAS 157 and directly related to the amount of
subjectivity associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
Level 1 —
Inputs are unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date. The types of assets and liabilities carried
at Level 1 fair value generally are G-7 government and agency securities,
equities listed in active markets, investments in publicly traded mutual funds
with quoted market prices and listed derivatives.
Level 2 —
Inputs (other than quoted prices included in Level 1) are either directly or
indirectly observable for the asset or liability through correlation with market
data at the measurement date and for the duration of the instrument’s
anticipated life. Fair valued assets that are generally included in this
category are stock warrants for which there are market-based implied
volatilities, unregistered common stock and thinly traded common
stock.
Level 3 —
Inputs reflect management’s best estimate of what market participants would use
in pricing the asset or liability at the measurement date. Consideration is
given to the risk inherent in the valuation technique and the risk inherent in
the inputs to the model. Generally, assets carried at fair value and included in
this category include stock warrants for which market-based implied volatilities
are not available.
Assets
measured at fair value on a recurring basis are categorized into a Level based
upon the lowest level of significant input to the valuations.
Revenue
Recognition
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.
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. Management fees are recorded on
the offering date, selling concessions on settlement date, and underwriting fees
at the time the underwriting is completed and the related income is reasonably
determinable. 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. Merger and acquisition fees and other advisory
service revenue are generally earned and recognized only upon successful
completion of the engagement. Underwriting revenue is presented net of related
expenses. Unreimbursed expenses associated with private placement and advisory
transactions are recorded as expenses as incurred.
As
co-manager for registered equity underwriting transactions, management must
estimate our share of transaction related expenses incurred by the lead manager
in order to recognize revenue. Transaction related expenses are deducted from
the underwriting fee and therefore reduces the revenue that is recognized as
co-manager. Such amounts are adjusted to reflect actual expenses in the period
in which we receive the final settlement, typically 90 days following the
closing of the transaction.
OTCQX
revenue is recognized in two parts – Due Diligence and Listing
Fees. Due Diligence Fees are recognized at the completion of the Due
Diligence process. The Listing Fees are pro-rated monthly from the
time the end of the Due Diligence period until the end of the engagement
term.
Stock-Based
Compensation
On
January 1, 2006, we adopted SFAS 123(R), “Share-Based Payment,” which
requires the measurement and recognition of compensation expense, based on
estimated fair values, for all share-based awards, made to employees and
directors, including stock options, non-vested stock, and participation in our
employee stock purchase plan. Share-based compensation expense recognized in our
consolidated statement of operations 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. Because share-based compensation expense is
based on awards that are ultimately expected to vest, share-based compensation
expense has been reduced to account for estimated forfeitures. Forfeitures are
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.
We
estimate the fair value of stock options granted using the Black-Scholes option
pricing method. This option pricing model requires the input of highly
subjective assumptions, including the option’s expected life and the price
volatility of the underlying stock. The expected life of employee stock options
represents the weighted-average period the stock options are expected to remain
outstanding. The Company calculated the expected term using the lattice model
with specific assumptions about the suboptimal exercise behavior, post-vesting
termination rates and other relevant factors. The expected stock price
volatility was determined using the historical volatility of our common stock.
The fair value is then amortized on a straight-line basis over the requisite
service periods of the awards, which is generally the vesting
period.
Because
share-based compensation expense is based on awards that are ultimately expected
to vest, it has been reduced to account for estimated forfeitures. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Changes in these inputs and assumptions can materially affect the
measure of estimated fair value of our share-based compensation.
Deferred
Tax Valuation Allowance
We
account for income taxes in accordance with the provision of SFAS
No. 109, Accounting for
Income Taxes, which requires the recognition of deferred tax assets and
liabilities at tax rates expected to be in effect when these balances reverse.
Future tax benefits attributable to temporary differences are recognized to the
extent that the realization of such benefits is more likely than not. We have
concluded that it is more likely than not that our deferred tax assets as of
March 31, 2009 and 2008 will not be realized based on the scheduling of
deferred tax liabilities and projected taxable income. The amount of the
deferred tax assets actually realized, however, could vary if there are
differences in the timing or amount of future reversals of existing deferred tax
liabilities or changes in the actual amounts of future taxable income. Should we
determine that we will be able to realize all or part of the deferred tax asset
in the future, an adjustment to the deferred tax asset will be recorded in the
period such determination is made.
Liquidity
and Capital Resources
As of
March 31, 2009, liquid assets consisted primarily of cash and cash
equivalents of $3,139,000 and marketable securities of $5,207,000, for a total
of $8,346,000, which is $2,635,000 lower than $10,981,000 in liquid assets
as of December 31, 2008.
Merriman
Curhan Ford & Co., as a broker-dealer, is subject to Rule 15c3-1 of the
Securities Exchange Act of 1934, which specifies uniform minimum net capital
requirements, as defined, for their registrants. As of March 31, 2009,
Merriman Curhan Ford & Co. had regulatory net capital of $1,051,000
which exceeded the required amount by $616,000.
Please
see also disclosure under caption “Going Concern” in this Management’s
Discussion and Analysis of Financial Condition and Results of Operations section
beginning on page 15.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk
The
following discussion about market risk disclosures involves forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements. We may be exposed to market risks related to changes
in equity prices, interest rates and foreign currency exchange rates. We do not
use derivative financial instruments for speculative, trading or any other
purpose.
Equity
Price Risk
The
potential for changes in the market value of our trading positions is referred
to as “market risk.” Our trading positions result from proprietary trading
activities. These trading positions in individual equities and equity indices
may be either long or short at any given time. Equity price risks result from
exposures to changes in prices and volatilities of individual equities and
equity indices. We seek to manage this risk exposure through diversification and
limiting the size of individual positions within the portfolio. The effect on
earnings and cash flows of an immediate 10% increase or decrease in equity
prices generally is not ascertainable and could be positive or negative,
depending on the positions we hold at the time. We do not establish hedges in
related securities or derivatives. From time to time, we also hold equity
securities received as compensation for our services in investment banking
transactions. These equity positions are always long, on a net basis. As we mark
our securities to market, a decrease in equity prices generally could be
expected to have a negative effect on earnings.
Interest
Rate Risk
Our
exposure to market risk resulting from changes in interest rates relates
primarily to our investment portfolio. Our interest income and cash
flows may be impacted by changes in the general level of U.S. interest rates. We
do not hedge this exposure because we believe that we are not subject to any
material market risk exposure due to the short-term nature of our investments.
We would not expect an immediate 10% increase or decrease in current interest
rates to have a material effect on the fair market value of our investment
portfolio.
Foreign
Currency Risk
We do not
have any foreign currency denominated assets or liabilities or purchase
commitments and have not entered into any foreign currency contracts.
Accordingly, we are not exposed to fluctuations in foreign currency exchange
rates.
Item 4. Controls
and Procedures
Evaluation of Disclosure Controls and
Procedures -
We have established disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to the officers who certify the Company’s financial reports and to
other members of senior management and the Board of Directors.
Based on
their evaluation of the Company’s disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934), the Principal Executive Officer and Principal Financial Officer of the
Company have concluded that the disclosure controls and procedures are effective
as of March 31, 2009.
Changes in internal
controls - There was no change in the Company’s internal control
over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) of the
Exchange Act) that occurred during the quarter ended March 31, 2009, that
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
PART
II. OTHER INFORMATION
Item 1. Legal
Proceedings
The
Company is the subject of a formal investigation commenced by the Securities and
Exchange Commission (“SEC”). The SEC investigation is focused in large
part on the activities of a former retail broker of the Company’s subsidiary,
MCF, David Scott Cacchione (“Cacchione”), and one of his customers, William Del
Biaggio III (“Del Biaggio”). The activities relate primarily to the misuse of
various client accounts as collateral for loans to Del Biaggio from third party
lenders. Cacchione signed “account control agreements” in which he
purported to act on behalf of the Company to authorize the use of various client
accounts as security for loans to Del Biaggio from various third-party
lenders. Cacchione did not have the authority to do so.
Cacchione
also improperly provided client account statements to third-party lenders or to
Del Biaggio for the purpose of representing to the lenders that the accounts
belonged to Del Biaggio. The retail client account statements were altered
so that the accounts appeared to belong to Del Biaggio when in fact some of the
accounts belonged to other MCF retail clients. Del Biaggio is no longer a
customer of MCF, and Cacchione’s employment was terminated in June
2008.
The
Company’s internal investigation found no evidence that any of Cacchione’s
supervisors or any member of the Company or MCF management was aware of the
actions of Del Biaggio and Cacchione as described above until shortly before
Cacchione’s employment was terminated. MCF has been phasing out its
retail business and will concentrate on strengthening its core investment
banking and institutional brokerage businesses. Both Cacchione and Del
Biaggio have recently pleaded guilty to securities fraud in the United States
District Court, Northern District of California and have been named as
defendants in separate SEC enforcement actions.
The SEC
staff has indicated that it intends to recommend to the Commission an
enforcement action arising out of Cacchione’s actions and the failure to
adequately supervise him. The Company is cooperating fully with the SEC in
its investigation and is presently engaged in settlement discussions with the
SEC Staff.
As noted
above, a number of lawsuits and other claims have been filed (or asserted
against) MCF and in at least one instance, the Company, in connection with the
alleged actions of Del Biaggio and Cacchione. The total amount of damages
sought under such lawsuits and other claims is approximately $57.5 million. The
Company and MCF deny any wrongdoing and will defend themselves and attempt to
obtain the most favorable possible outcome of these lawsuits for themselves and
the Company’s shareholders.
In
December 2008, the Company and MCF entered into settlement discussions with most
of the plaintiffs in the account control agreement cases representing a
substantial portion of the $57.5 million in civil claims arising out of the
actions of Cacchione and Del Biaggio. Through the settlement
discussions, the Company and MCF seek to resolve potential liability in these
legal proceedings and eliminate the continuing cost of defending these
proceedings. In addition, the Company seeks to free up valuable
management resources needed to face challenging market and economic
conditions. Whether a settlement can be reached that will serve the
Company’s aims is not yet estimable. Should the Company’s settlement
efforts ultimately prove unsuccessful, the Company believes it has meritorious
defenses and intends to contest these claims vigorously.
The
lawsuits against the Company and MCF that result from Cacchione’s activities are
as follows:
DGB
Investments, Inc. v. Merriman Curhan Ford & Co.
In May
2008, Merriman Curhan Ford & Co. (“MCF”) was served with a complaint filed
in the Santa Clara County, California Superior Court by DGB Investments, Inc.
which loaned money to William Del Biaggio III, the former customer of
MCF. The complaint names as defendants Del Biaggio, David Scott
Cacchione, a former retail broker of MCF, and MCF. Plaintiff alleges that Del
Biaggio defaulted on a multi-million dollar loan obtained from Plaintiff.
Effective June 4, 2008, MCF terminated Cacchione’s employment. The
complaint further alleges that Cacchione, while still employed with MCF, signed
an account control agreement purporting to pledge a retail client stock account
as collateral for the Del Biaggio loan. On the basis of these allegations,
Plaintiff asserts various claims against MCF and others. Plaintiff seeks
$3 million in damages. We believe that MCF has meritorious defenses and it
intends to contest this claim vigorously. MCF successfully opposed
Plaintiff's petition for pre-judgment writ of attachment.
Heritage
Bank of Commerce v. Merriman Curhan Ford & Co.
In May
2008, Merriman Curhan Ford & Co. (“MCF”) was served with a complaint filed
in the Santa Clara County Superior Court by Heritage Bank of Commerce, which
loaned money to Del Biaggio, naming as defendants Del Biaggio and MCF.
Plaintiff alleges that Del Biaggio defaulted on a multi-million dollar loan
obtained from Plaintiff. The complaint further alleges that Cacchione,
while still employed with MCF, signed an account control agreement purporting to
pledge various retail client stock accounts as collateral for the Del Biaggio
loan. On the basis of these allegations, Plaintiff asserts various claims
against MCF and others. Plaintiff seeks $ 4 million in damages. We
believe that MCF has meritorious defenses and it intends to contest this claim
vigorously. MCF successfully opposed Plaintiff's petition for
pre-judgment writ of attachment.
Modern
Bank, N.A. v. Merriman Curhan Ford & Co.
In June
2008, Merriman Curhan Ford & Co. (“MCF”) was served with a complaint filed
in the Santa Clara County Superior Court by Modern Bank, N.A., which loaned
money to Del Biaggio, naming as defendants Del Biaggio, MCF, and
Cacchione. Plaintiff alleges that Del Biaggio defaulted on a multi-million
dollar loan obtained from Plaintiff. The complaint further alleges that
Cacchione, while still employed with MCF, signed an account control agreement
purporting to pledge a retail client stock account as collateral for the Del
Biaggio loan. On the basis of these allegations, Plaintiff asserts various
claims against MCF and others. Plaintiff seeks $10 million in
damages. We believe that MCF has meritorious defenses and it intends to
contest this claim vigorously. MCF successfully opposed Plaintiff's
petition for pre-judgment writ of attachment.
Security
Pacific Bank v. Merriman Curhan Ford & Co.
In June
2008, Merriman Curhan Ford & Co. (“MCF”) was served with a complaint filed
in the Los Angeles County, California Superior Court by Security Pacific Bank,
which loaned money to Del Biaggio, naming as defendants Del Biaggio, MCF, and
Cacchione. Plaintiff alleges that Del Biaggio defaulted on a multi-million
dollar loan obtained from Plaintiff. The complaint further alleges that
Cacchione, while still employed with MCF, signed an account control agreement
purporting to pledge retail client stock accounts as collateral for the Del
Biaggio loan. On the basis of these allegations, Plaintiff asserts various
claims against MCF and others. Plaintiff seeks $5 million in
damages. We believe that MCF has meritorious defenses and it intends to
contest this claim vigorously. MCF successfully opposed Plaintiff's
petition for pre-judgment writ of attachment.
AEG
Facilities, Inc. v. Merriman Curhan Ford & Co.
In June
2008, Merriman Curhan Ford & Co. was served with a complaint filed in the
Santa Clara County Superior Court by AEG Facilities, Inc. which loaned money to
Del Biaggio, naming as defendants Del Biaggio, MCF, and Cacchione.
Plaintiff alleges that Del Biaggio defaulted on a multi-million dollar loan
obtained from Plaintiff. The complaint further alleges that Cacchione,
while still employed with MCF, signed an account control agreement purporting to
pledge various retail client stock accounts as collateral for the Del Biaggio
loan. On the basis of these allegations, Plaintiff asserts various claims
against MCF and others. Plaintiff seeks $7 million in damages. We
believe that MCF has meritorious defenses and it intends to contest this claim
vigorously.
Valley
Community Bank v. Merriman Curhan Ford & Co.
In June
2008, Merriman Curhan Ford & Co. was served with a complaint filed in the
Santa Clara County Superior Court by Valley Community Bank, which loaned money
to Del Biaggio, naming as defendants Del Biaggio, MCF, and Cacchione.
Plaintiff alleges that Del Biaggio defaulted on a multi-million dollar loan
obtained from Plaintiff. The complaint further alleges that Cacchione,
while still employed with MCF, signed account control agreements purporting to
pledge various retail client stock accounts as collateral for the Del Biaggio
loan. On the basis of these allegations, Plaintiff asserts various claims
against MCF and others. Plaintiff seeks over $4 million in damages.
We believe that MCF has meritorious defenses and it intends to contest this
claim vigorously.
United
American Bank v. Merriman Curhan Ford & Co.
In July
2008, Merriman Curhan Ford & Co. 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 has brought claims for, among other things, fraud arising out of the
failure to disclose the alleged previous pledge. Plaintiff alleges damages
in the amount of $1.75 million. We believe that MCF has meritorious
defenses and it intends to contest this claim vigorously.
The
Company anticipates at least one additional lawsuit may be filed in the San
Mateo County California Superior Court against MCF by a lender to Del Biaggio,
on similar facts to the lawsuits described above, with a claim believed to be
approximately $10 million.
David
Hengehold v. Merriman Curhan Ford & Co.
In June
2008, Merriman Curhan Ford & Co. was served with a complaint filed in the
San Mateo County, California Superior Court by David Hengehold. Plaintiff
alleges, among other things, fraud based on Cacchione’s inducing plaintiff into
making loans to an entity associated with Del Biaggio. This plaintiff is a
former client of MCF. This matter does not involve account control
agreements. Plaintiff in this lawsuit alleges damages of over $500,000. We
believe that MCF has meritorious defenses and it intends to contest this claim
vigorously.
Don
Arata, et al. v. Merriman Curhan Ford & Co.
In July
2008, the Company and Merriman Curhan Ford & Co. (“MCF”) 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, the Company and MCF were served with an amended
consolidated complaint on behalf of 38 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. This matter does
not involve account control agreements. Plaintiffs in this lawsuit seek damages
of over $9 million. We believe that we and MCF meritorious defenses and
intend to contest these claims vigorously. (The previously disclosed
Davis, Cook and Bachelor cases now are part of the consolidated
cases.)
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. This matter does not involve account control agreements.
Plaintiff in this lawsuit alleges damages of $916,666.65. We believe that
MCF has meritorious defenses and it 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. This matter
does not involve account control agreements. Plaintiff in this lawsuit alleges
damages of $1.84 million. We believe that MCF has meritorious defenses and
it intends to contest this claim vigorously.
Irving
Bronstein et. al. v. Merriman Curhan Ford & Co.
In January 2009, Merriman Curhan Ford
& Co. and David Jonathan Merriman were served with a FINRA arbitration claim
filed by Irving Bronstein and several 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 matter does not involve account control
agreements. Claimants seek damages in a range of $2.7 to $10 million. We
believe that MCF and Mr. Merriman have meritorious defenses and they intend to
contest these claims vigorously.
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 has been served and a response is due in
May 2009. The statement seeks $265,000 in compensatory damages plus
punitive damages of $200,000 and 10% interest beginning January 2,
2008. 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. We believe that MCF has
meritorious defenses and it intends to contest this claim
vigorously.
In addition, MCF received a demand
letter from a former client of MCF alleging similar claims to those asserted in
the Zarich matter above. We believe that MCF has meritorious defenses
to the claims and it intends to contest them vigorously. We believe it is
unlikely to result in an adverse outcome. However, in the event MCF
does not prevail, we do not believe that the outcome will have a material effect
on our financial position, financial results or cash flows.
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, but has not yet been
served, 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. This matter does
not involve account control agreements. Plaintiffs in this lawsuit seek damages
of $230,000. We believe that we and MCF have meritorious defenses and
intend to contest these claims vigorously.
Lawsuits
against MCF unrelated to the Del Biaggio/Cacchione matters are as
follows:
Spare
Backup v. Merriman Curhan Ford & Co.
Unrelated
to the Del Biaggio/Cacchione matters, in April 2008, MCF entered into an
engagement to provide investment banking services to Spare Backup, Inc.
MCF was able to close a round of bridge financing in June 2008. 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. MCF was successful in raising $1,300,000 in capital for Spare
Backup.
Wesley
Rusch v. Merriman Curhan Ford & Co.
Unrelated
to the Del Biaggio/Cacchione matters, in October 2008, our broker-dealer
subsidiary, MCF, was served with a claim in FINRA Arbitration by Wesley Rusch.
Mr. Rusch is a former at-will employee of Merriman Curhan Ford &
Co. and worked in the compliance department. We have not been presented with a
demand for quantified damages. Mr. Rusch was terminated by Merriman Curhan
Ford & Co. in July 2007. Mr. Rusch alleges theories of
discrimination and lack of cause for termination. Mr. Rusch filed a
Statement of Claim seeking damages of over $1 million. We believe
that MCF has meritorious defenses and it contested this claim vigorously at the
arbitration before a FINRA arbitration panel in March 2009. MCF has
not yet received a decision from the arbitration panel. However, in
the event that we do not prevail, based upon the facts as we know them to date,
we do not believe that the outcome will have a material effect on our financial
position, financial results or cash flows.
Joy
Ann Fell v. Merriman Curhan Ford & Co.
Unrelated to the Del Biaggio/Cacchione
matters, in November 2008, 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
it intends to contest this claim vigorously. MCF has responded to the
claim but there has been no discovery to date. An arbitration panel has
not yet been selected, nor has a hearing date been assigned.
Peter
Marcil v. Merriman Curhan Ford & Co.
Unrelated
to the Del Biaggio/Cacchione matters, in January 2009, our broker-dealer
subsidiary, MCF, was served with a claim in FINRA Arbitration by Peter Marcil.
Mr. Marcil is a former at-will employee of Merriman Curhan Ford &
Co. and worked in the investment banking department. Mr. Marcil resigned
from Merriman Curhan Ford & Co. in March of 2007. Mr. Marcil
alleges breach of an implied employment contract, wrongful termination, and
intentional infliction of emotional distress. Damages are not specified in the
arbitration claim. MCF has not replied to the claim and an
arbitration hearing date has not been set. 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.
We
believe that these cases are either unlikely to result in adverse rulings or are
in early stages and the amount of a likely adverse ruling cannot be estimated at
present.
Additionally,
from time to time, we are involved in ordinary routine litigation incidental to
our business.
Item 1a. Risk
Factors
In
addition to the other information set forth in this report, you should carefully
consider the risk factors previously disclosed in response to Item 1A to Part 1
of our Annual Report on Form 10-K for the year ended December 31,
2008.
Item 6. Exhibits
31.1
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Certification
of Principal Executive Officer Pursuant To Section 302 of the
Sarbanes-Oxley Act of 2002.
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31.2
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Certification
of Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley
Act of 2002.
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32.1
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Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002.
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SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
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MERRIMAN
CURHAN FORD GROUP, INC.
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May 15, 2009
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By:
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/s/ D.
JONATHAN MERRIMAN
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D.
Jonathan Merriman,
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Chief
Executive Officer
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(Principal
Executive Officer)
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May 15, 2009
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By:
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/s/ PETER
V. COLEMAN
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Peter
V. Coleman
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Chief
Financial Officer
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(Principal
Financial Officer)
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