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 2007
audited consolidated financial statements and notes thereto included
in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
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 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
Company owns (long positions) are marked to bid prices, and instruments
that the
Company has sold, but not yet purchased (short positions), are marked
to offer
prices. Fair value measurements are not adjusted for transaction costs.
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
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
1.
Significant Accounting Policies - Continued
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.
adopted FIN No. 48 on January 1, 2007.
Segment
Reporting
The
Company organizes its operations into three operating segments for the
purpose
of making operating decisions and assessing performance. These operating
segments are organized along operating subsidiaries, Merriman Curhan
Ford & Co., MCF Asset Management, LLC and Panel Intelligence, LLC.
Accordingly, the Company operated in three reportable operating segments
in the
United States during 2008.
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.
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
1.
Significant Accounting Policies - Continued
New
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. The Company is evaluating the impact of adoption
on its
consolidated financial statements.
2.
Fair Value of Assets and Liabilities
Securities
owned, and securities sold but not yet purchased, are presented at fair
value.
Fair value is defined as the price at which an asset 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). 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 in the table
below
based upon the lowest level of significant input to the valuations.
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
2.
Fair Value of Assets and Liabilities (continued)
|
|
Assets
at Fair Value at June 30, 2008
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
Corporate
equities
|
|
$
|
11,372,856
|
|
$
|
25,000
|
|
$
|
712,811
|
|
$
|
12,110,667
|
|
Stock
warrants
|
|
|
—
|
|
|
—
|
|
|
5,441,043
|
|
|
5,441,043
|
|
Underwriters’
purchase option
|
|
|
—
|
|
|
—
|
|
|
283,714
|
|
|
283,714
|
|
Preferred
stock
|
|
|
3,000
|
|
|
—
|
|
|
—
|
|
|
3,000
|
|
|
|
$
|
11,375,856
|
|
$
|
25,000
|
|
$
|
6,437,568
|
|
$
|
17,838,424
|
|
|
|
Assets
at Fair Value at December 31, 2007
|
|
|
|
Level
1
|
|
Level 2
|
|
Level
3
|
|
Total
|
|
Corporate
equities
|
|
$
|
13,696,019
|
|
$
|
—
|
|
$
|
489,453
|
|
$
|
14,185,472
|
|
Stock
warrants
|
|
|
—
|
|
|
—
|
|
|
1,756,580
|
|
|
1,756,580
|
|
Underwriters’
purchase option
|
|
|
—
|
|
|
—
|
|
|
194,957
|
|
|
194,957
|
|
Convertible
notes
|
|
|
228,456
|
|
|
—
|
|
|
—
|
|
|
228,456
|
|
Preferred
stock
|
|
|
225
|
|
|
—
|
|
|
—
|
|
|
225
|
|
|
|
$
|
13,924,700
|
|
$
|
—
|
|
$
|
2,440,990
|
|
$
|
16,365,690
|
|
Liabilities
measured at fair value on a recurring basis consisted of Securities sold,
not
yet purchased which are categorized as Level 1. The fair value of Securities
sold, not yet purchased as of June 30, 2008 and December 31, 2007 was
approximately $1,513,000 and $3,805,000, respectively.
The
following summarizes the change in carrying values associated with Level
3
financial instruments for the six months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
Equities
|
|
Stock
Warrants
|
|
Underwriters’
Purchase Option
|
|
Total
|
|
Balance
at December 31, 2007
|
|
$
|
489,453
|
|
$
|
1,756,580
|
|
$
|
194,957
|
|
$
|
2,440,990
|
|
Purchases,
issuances and settlements
|
|
|
551,809
|
|
|
1,110,586
|
|
|
—
|
|
|
1,662,395
|
|
Net
transfers in / (out)
|
|
|
(339,453
|
)
|
|
—
|
|
|
—
|
|
|
(339,453
|
)
|
Gains
/ (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Unrealized
|
|
|
11,002
|
|
|
2,573,877
|
|
|
88,757
|
|
|
2,673,636
|
|
Balance
at June 30, 2008
|
|
$
|
712,811
|
|
$
|
5,441,043
|
|
$
|
283,714
|
|
$
|
6,437,568
|
|
Gains/(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)
3.
Goodwill
and Intangible Assets
Goodwill
is related to the acquisition of MedPanel, Inc. Goodwill, totaling $3,130,000,
was allocated to the Primary Research segment pursuant to SFAS No. 142,
“Goodwill and Other Intangible Assets”. Goodwill represents the excess cost of a
business acquisition over the fair value of the net assets acquired at
the
acquisition date. Identifiable intangible assets capitalized in connection
with
the acquisition of MedPanel included customer relationships, customer
backlog,
technology platform and the database of registered panelists. The estimated
fair
market value of these amortizable intangible assets at the date of acquisition
amounting to $1,990,000 is being amortized over periods ranging from
8 months to
56 months. In addition, an indefinite lived intangible asset was recorded
for
the acquired tradename in the amount of $710,000.
In
accordance with SFAS No. 142, indefinite-life intangible assets and goodwill
are
not amortized. Rather, they are subject to impairment testing on an annual
basis, or more often if events or circumstances indicate there may be
impairment. This test involves assigning tangible assets and liabilities,
identified intangible assets and goodwill to reporting units and comparing
the
fair value of each reporting unit to its carrying amount. If the fair
value is
less than the carrying amount, a further test is required to measure
the amount
of the impairment.
When
available, the Company uses recent, comparable transactions to estimate
the fair
value of the respective reporting unit. The Company calculates an estimated
fair
value based on multiples of revenue, earnings, and book value of comparable
transactions. However, when such comparable transactions are not available
or
have become outdated, the Company uses discounted cash flow scenarios
to
estimate the fair value of the reporting units. As of April 30, 2008,
the Company performed its annual impairment testing and recorded an impairment
loss of $2,602,000 in its consolidated statement of operations for the
three and
six months ended June 30, 2008 related to goodwill and
tradename.
4.
Share-Based Compensation Expense
Stock
Options
As
of
June 30, 2008, there were 6,961,430 shares authorized for issuance under
the
Option Plans, and 612,858 shares authorized for issuance outside of the
Option
Plans. As of June 30, 2008, 1,302,108 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 and six months ended June 30, 2008 was $402,000
and
$784,000, respectively. Compensation expense for stock options during
the three
months and six months ended June 30, 2007 was $329,000 and $649,000,
respectively.
The
following table is a summary of the Company’s stock option activity for the six
months ended June 30, 2008:
|
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Balance
as of December 31, 2007
|
|
|
4,066,259
|
|
$
|
6.00
|
|
Granted
|
|
|
608,385
|
|
|
3.75
|
|
Exercised
|
|
|
(64,628
|
)
|
|
(2.36
|
)
|
Canceled
|
|
|
(300,119
|
)
|
|
(6.87
|
)
|
Balance
as of June 30, 2008
|
|
|
4,309,897
|
|
$
|
5.68
|
|
Exercisable
as of June 30, 2008
|
|
|
3,069,672
|
|
$
|
6.
17
|
|
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
4.
Share Based Compensation Expense (continued)
The
following table summarizes information with respect to stock options
outstanding
at June 30, 2008:
|
|
Options
Outstanding
|
|
Vested
Options
|
|
Range
of Exercise Price
|
|
Number
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Number
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
$
0.00 - $ 3.50
|
|
|
2,007,309
|
|
|
4.86
|
|
$
|
2.98
|
|
$
|
─
|
|
|
1,909,777
|
|
$
|
3.02
|
|
$
|
─
|
|
$
3.51 - $ 7.00
|
|
|
1,592,700
|
|
|
8.11
|
|
$
|
4.45
|
|
|
─
|
|
|
506,212
|
|
|
4.43
|
|
|
─
|
|
$
7.01 - $14.00
|
|
|
414,220
|
|
|
6.06
|
|
$
|
9.24
|
|
|
─
|
|
|
358,015
|
|
|
9.37
|
|
|
─
|
|
$14.01
- $28.00
|
|
|
256,381
|
|
|
2.35
|
|
$
|
22.04
|
|
|
─
|
|
|
256,381
|
|
|
22.04
|
|
|
─
|
|
$28.01
- $49.00
|
|
|
39,287
|
|
|
1.66
|
|
$
|
49.00
|
|
|
─
|
|
|
39,287
|
|
|
49.00
|
|
|
─
|
|
|
|
|
4,309,897
|
|
|
6.00
|
|
$
|
5.68
|
|
$
|
─
|
|
|
3,069,672
|
|
$
|
6.17
|
|
$
|
─
|
|
As
of
June 30, 2008, total unrecognized compensation expense related to unvested
stock
options was $3,461,340. This amount is expected to be recognized as expense
over
a weighted-average period of 1.48 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 and six months ended June 30,
2008 was
$251,000 and $533,000, respectively. Compensation expense for non-vested
stock
during the three months and six months ended June 30, 2007 was $327,000
and
$688,000, respectively.
The
following table is a summary of the Company's non-vested stock activity
for the
six months ended June 30, 2007:
|
|
Non-Vested
Stock
Outstanding
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
Intrinsic
Value
at
June
30, 2007
|
|
Balance
as of December 31, 2007
|
|
|
180,620
|
|
$
|
7.51
|
|
|
|
|
Granted
|
|
|
30,346
|
|
|
1.92
|
|
|
|
|
Vested
|
|
|
(85,307
|
)
|
|
(6.86
|
)
|
|
|
|
Canceled
|
|
|
(670
|
)
|
|
(10.97
|
)
|
|
|
|
Balance
as of June 30, 2008
|
|
|
124,989
|
|
$
|
7.41
|
|
$
|
158,736
|
|
As
of
June 30, 2008, total unrecognized compensation expense related to non-vested
stock was $539,000. This expense is expected to be recognized over a
weighted-average period of 0.78 year.
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
4.
Share-Based Compensation Expense (continued)
2002
Employee Stock Purchase Plan
The
Company issued all shares previously available under the Employee Stock
Purchase
Plan, or ESPP, to its employees through August 15, 2007. As of June 30,
2008, there are no shares available under the ESPP plan and the Company
has no
plan to request additional shares from the stockholders for this program.
Compensation expense for ESPP during each of the three months and six
months
ended June 30, 2008 was $0. Compensation expense for the ESPP during
the three
months and six months ended June 30, 2007 were $58,000 and $115,700,
respectively.
Fair
Value and Assumptions Used to Calculate Fair Value
The
weighted average fair value of each stock option granted for the three
months
and six months ended June 30, 2008 was $2.31 and $2.49, respectively. The
weighted average fair value of each stock option granted for the three
months
and six months ended June 30, 2007 was $2.53 and $2.56, respectively. The
fair value of each option award is estimated on the date of grant using
the
Black-Scholes stock option pricing model, with the following assumptions
for the
six months ended June 30, 2008 and 2007:
|
|
Six
months Ended
June
30,
|
|
|
|
2008
|
|
2007
|
|
Expected
volatility
|
|
|
70.42
|
%
|
|
65.83
|
%
|
Expected
life (years)
|
|
|
6.43
|
|
|
4.17
|
|
Risk-free
interest rate
|
|
|
3.11
|
%
|
|
4.75
|
%
|
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 and six months ended June 30,
2008 was
$3.84 and $4.50 per share, respectively. The weighted average fair value
of the
non-vested stock granted under the Company's stock option plans for the
three
months and six months ended June 30, 2007 was $4.44 and 4.80 per share,
respectively. The fair value of the non-vested stock award is estimated
on the
date of grant using the intrinsic value method.
5.
Income Taxes
Income
tax expense is a result of applying the estimated annual effective tax
rate to
cumulative income before taxes adjusted for certain discrete items which
are
fully recognized in the period they occur. For the three months and six
months ended June 30, 2008, the Company recorded an income tax benefit
of
($1,839,000). The Company’s tax rate is affected by recurring items, which
it expects to be fairly consistent in the near term, and by discrete
items that
are not consistent from year to year. The effective tax rate for the six
months ended June 30, 2008 is (12.64)%, which is mainly attributable
to the
release of the FIN 48 liability due to the approval of an accounting
method
change for federal tax purposes.
Historically
and currently, the Company has recorded a valuation allowance on the
deferred
tax assets, a significant component of which relates to net operating
loss
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 adopted Interpretation No. 48 on January 1, 2007. Upon
the adoption of FIN 48, the Company recognized no adjustment in the
liability for unrecognized income tax benefits and no corresponding change
in
retained earnings. At the end of the fiscal year 2007, the Company
recorded a liability for an uncertain tax position related to certain
investments in the amount of $1,839,000. This entire amount has been
derecognized as of June 30, 2008 due to an Internal Revenue service approved
accounting method change.
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
5.
Income Taxes (continued)
The
Company’s tax years 2005-2007 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 2003-2007 will remain open for
three to four years 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.
6.
(Loss)/Earnings per Share
The
following is a reconciliation of the basic and diluted net (loss) income
available to common stockholders and the number of shares used in the
basic and
diluted net (loss) income per common share computations for the periods
presented:
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net
(loss) income available to stockholders - basic
|
|
$
|
(5,113,845
|
)
|
$
|
2,320,373
|
|
$
|
(12,163,818
|
)
|
$
|
2,389,629
|
|
Interest
on dilutive securities
|
|
|
500
|
|
|
4,084
|
|
|
4,584
|
|
|
8,168
|
|
Net
(loss) income available to stockholders - diluted
|
|
$
|
(5,113,345
|
)
|
$
|
2,324,457
|
|
$
|
(12,159,234
|
)
|
$
|
2,397,797
|
|
Weighted-average
number of common shares - basic
|
|
|
12,562,120
|
|
|
11,657,775
|
|
|
12,425,851
|
|
|
11,000,702
|
|
Weighted-average
number of common shares - diluted
|
|
|
12,562,120
|
|
|
12,856,306
|
|
|
12,425,851
|
|
|
12,208,965
|
|
Basic
net income (loss) per common share:
|
|
$
|
(0.41
|
)
|
$
|
0.20
|
|
$
|
(0.98
|
)
|
$
|
0.22
|
|
Diluted
net loss per common share:
|
|
$
|
(0.41
|
)
|
$
|
0.18
|
|
$
|
(0.98
|
)
|
$
|
0.20
|
|
Basic
(loss) earnings per share is computed by dividing net (loss) income by
the
weighted average number of common shares outstanding, excluding shares
of
non-vested stock. Diluted earnings 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 and six months ended June 30, 2008 because the addition
of
common shares that would be issued assuming exercise or conversion would
be
anti-dilutive.
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
6.
(Loss)/Earnings per Share (continued)
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 earnings 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 and six months ended June 30, 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)
income per share computation when their effect would be anti-dilutive.
The
following common stock equivalents were excluded from the earnings per
share
computation, as their inclusion would have been anti-dilutive:
|
|
Three Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Stock
options and warrants excluded due to the exercise price exceeding
the
average fair value of the Company's common stock during the
period
|
|
|
4,198,770
|
|
|
1,682,257
|
|
|
2,226,464
|
|
|
1,637,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
348,754
|
|
|
─
|
|
|
740,477
|
|
|
─
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares issuable for the period prior to the conversion
of the
convertible notes payable
|
|
|
45,526
|
|
|
─
|
|
|
94,192
|
|
|
─
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
common stock equivalents excluded from diluted net (loss) income
per
share
|
|
|
4,593,050
|
|
|
1,682,257
|
|
|
3,061,133
|
|
|
1,637,949
|
|
7.
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 June 30, 2008,
Merriman
Curhan Ford & Co. had regulatory net capital, as defined, of $6,398,982,
which exceeded the amount required by $5,398,982. 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.
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
8.
Business Segments
The
Company’s business results are categorized into the following three segments:
investment bank / broker-dealer, primary research and asset management.
The
investment bank / broker-dealer segment includes a broad range of services,
such
as capital raising and financial advisory services for corporate clients,
and
brokerage and equity research services for our institutional investor
clients.
Our primary research segment offers custom, independent primary research
services to health care and CleanTech companies, as well as financial
services
firms that invest in these companies. Our asset management segment manages
investment products for investors.
The
accounting policies of the segments are consistent with those described
in the
Significant Accounting Policies in Note 2. Revenue generating activities
between
segments are eliminated from the segments results for reporting purposes.
These
activities include fees paid by the Asset Management segment to the Primary
Research segment for the management of its investment portfolio.
|
|
|
Revenue
and expenses directly associated with each segment are included
in
determining income.
|
|
|
|
Each
segment’s operating expenses include compensation and benefits expenses
and other operating expenses that are incurred directly in
support of the
segments. These other operating expenses, include brokerage
and clearing
fees, cost of primary research services, professional services,
occupancy
and equipment, communications and technology, depreciation
and
amortization, amortization of intangible assets, travel and
business
development and other operating expenses.
|
|
|
|
Corporate
operating expenses include compensation and benefits for corporate
support
employees as well as operating expenses that are not incurred
directly in
support of our three segments.
|
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
Management
believes that the following information provides a reasonable representation
of
each segment’s contribution to revenue, income and assets:
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Broker-Dealer
|
Revenue
|
|
$
|
14,175,678
|
|
$
|
19,156,231
|
|
$
|
24,913,877
|
|
$
|
33,304,549
|
|
|
Operating
expenses
|
|
|
13,127,656
|
|
|
16,027,623
|
|
|
27,074,716
|
|
|
29,797,608
|
|
|
Operating
(loss) income
|
|
$
|
(1,084,022
|
)
|
$
|
3,128,608
|
|
$
|
(2,160,838
|
)
|
$
|
3,506,941
|
|
|
Segment
assets
|
|
$
|
34,334,205
|
|
$
|
33,634,010
|
|
$
|
34,334,205
|
|
$
|
33,634,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary
Research
|
Revenue
|
|
|
1,498,144
|
|
|
973,062
|
|
$
|
3,039,938
|
|
$
|
973,062
|
|
|
Operating
expenses
|
|
|
4,587,493
|
|
|
1,445,117
|
|
|
6,497,873
|
|
|
1,445,117
|
|
|
Operating
(loss) income (1)
|
|
$
|
(3,089,349
|
)
|
$
|
(472,055
|
)
|
$
|
(3,457,935
|
)
|
$
|
(472,055
|
)
|
|
Segment
assets
|
|
$
|
3,987,090
|
|
$
|
7,806,048
|
|
$
|
3,987,090
|
|
$
|
7,806,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Management
|
Revenue
|
|
|
125,652
|
|
|
243,056
|
|
$
|
(386,036
|
)
|
$
|
417,882
|
|
|
Operating
expenses
|
|
|
590,472
|
|
|
218,986
|
|
|
1,017,562
|
|
|
448,690
|
|
|
Operating
(loss) income
|
|
$
|
(464,820
|
)
|
$
|
24,070
|
|
$
|
(1,403,598
|
)
|
$
|
(30,808
|
)
|
|
Segment
assets
|
|
$
|
2,436,001
|
|
$
|
2,345,761
|
|
$
|
2,436,001
|
|
$
|
2,325,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
Support
|
Operating
loss
|
|
|
(4,462,157
|
)
|
|
(385,845
|
)
|
|
(7,071,602
|
)
|
|
(708,195
|
)
|
|
Assets
|
|
|
1,156,330
|
|
|
874,154
|
|
|
1,156,330
|
|
|
874,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Entity
|
Revenue
|
|
|
15,799,474
|
|
|
20,372,349
|
|
|
27,567,779
|
|
|
34,695,493
|
|
|
Operating
expenses
|
|
|
22,767,
778
|
|
|
18,077,573
|
|
|
41,661,753
|
|
|
32,399,610
|
|
|
Operating
(loss) income
|
|
$
|
(6,968,304
|
)
|
$
|
2,294,776
|
|
$
|
(14,093,973
|
)
|
$
|
2,295,883
|
|
|
Total
assets
|
|
$
|
41,913,626
|
|
$
|
44,659,973
|
|
$
|
41,913,626
|
|
$
|
44,659,974
|
|
|
(1)
|
Note:
The operating loss includes $2.6 million of non-cash based
impairment of
goodwill and an intangible asset associated with the acquisition
which is
a non-cash expense.
|
9.
Contingencies
Several
lawsuits have recently been filed against our subsidiary, Merriman Curhan
Ford
& Co. (including one which also names the parent company as the defendant)
in connection with the alleged actions of a former client of the Company
(the
"Customer"), and a former retail broker of Merriman Curhan Ford & Co.
The total amount of damages sought under such lawsuits is over $40
million. The Company anticipates at least one additional lawsuit will
be filed
against Merriman Curhan Ford & Co. by a lender to the Customer on similar
facts to the lawsuits described below, with a claim believed to be approximately
$10 million. The Company denies any involvement and will vigorously
contest the lawsuits, which are in their early stages. Due to the early
stages of these legal matters, we cannot estimate the amount of damages
if they
are resolved unfavorably and accordingly, we have not provided an accrual
for
these lawsuits.
MERRIMAN
CURHAN FORD GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
10.
Subsequent Events
Restructuring
and Severance Charges
In
order
to better align its cost structure with its current revenue expectations,
market
demand, and areas of focus, the Company implemented a restructuring plan
in
August 2008. When the effects are fully reflected in our results by the
end of
the third quarter 2008, the plan will reduce operating expenses by $7
million
annually. Among other measures, the plan involved the elimination of
approximately 20% of the company’s workforce, bringing the headcount to about
150 employees company-wide. Severance and related costs are estimated
to be
about $300,000 which will largely be expensed in the third quarter. The
Company
will continue to focus on growing its recurring revenue business lines,
as well
as strengthen its core institutional brokerage and investment banking
business
units.
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 32 and elsewhere herein. We undertake no obligation
to revise or update publicly any forward-looking statements for any reason.
Numbers expressed herein may be rounded to thousands of dollars.
Overview
We
are a
financial services holding company that provides investment research,
capital
markets services, corporate and executive services, investment banking,
venture
services, asset management and primary research through our operating
subsidiaries, Merriman Curhan Ford & Co., MCF Asset Management, LLC and
Panel Intelligence, LLC.
Merriman
Curhan Ford & Co. is an investment bank and securities broker-dealer
focused on fast growing companies and institutional investors. Our mission
is to
become a leader in the researching, advising, financing, trading and
investing
in fast growing companies under $2 billion in market capitalization.
We provide
equity research, brokerage and trading services primarily to institutions,
as
well as investment banking and advisory services to corporate clients.
We are
gaining market share by originating differentiated research for our
institutional investor clients and providing specialized and integrated
services
for our fast-growing corporate clients. Institutional Cash Distributors
(ICD), a
division of Merriman Curhan Ford & Co., 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.
Panel
Intelligence, LLC provides custom and published primary research to industry
clients and investment professionals through online panel discussions,
quantitative surveys and an extensive research library. Panel Intelligence
is
positioned to provide greater access, compliance, insights and productivity
to
clients in the CleanTech, Consumer/Internet/Media, Health Care and Tech/Telecom
industries.
MCF
Asset
Management, LLC manages absolute return investment products for institutional
and high-net worth clients. As of June 30, 2008, assets under management
across
our two fund products were approximately $49 million.
Executive
Summary
Revenue
declined by 23% in the latest quarter relative to the second quarter
2007 during
one of the most tumultuous capital market environments in recent history.
Our
commission revenue grew 2% year-over-year, supported by continued growth
with
our Institutional Cash Distributors money fund business. Investment banking
revenue grew 32% sequentially from the first quarter but declined by
21%
year-over year as very few companies have come to market during the first
half
of 2008. Principal Transactions recovered from posting a loss in the
first
quarter 2008 to a gain of $1,419,000 during second quarter 2008. The
performance
was driven by solid customer principal transactions and an increase in
value of
stock warrants that we own in our investment portfolio.
Business
Environment
Stocks
declined sharply during the first and second quarters of 2008, reflecting
growing evidence that a U.S. recession was either imminent or already
in
progress. The active interventions by the Federal Reserve Board, including
engineering the sale of embattled broker Bear Stearns to JPMorgan Chase,
multiple reductions of key target short-term interest rates as well as
the
government’s willingness to intervene aggressively did not help stabilize stock
or bond prices toward the end of the second quarter. The overall credit
market,
which had staged a slight recovery in April and May, rolled over as prices
of
mortgage securities and corporate bonds fell. The second quarter brought
continued bad macroeconomic news, most of it courtesy of the depressed
U.S.
housing market and high oil prices. Market sentiment took a big hit as
the Dow
dropped 3% in one trading session two days before the close of the quarter.
Among the widely followed benchmarks, the broad-based S&P 500® Index, a
widely followed large-cap benchmark, declined 6% and the technology-sensitive
NASDAQ Composite® Index (“NASDAQ”) suffered some of the worst damage, falling
11.27%. The Russell 2000® Index, comprised of small-cap stocks, posted a 3% loss
for the first quarter. For the first half of 2008 the Russell 2000 was
down over
8%. Overall, the environment for small and micro cap stocks in the first
half
was perceived by many market participants as the most difficult they
had seen
since 2002.
Our
securities broker-dealer and investment banking activities are linked
to the
capital markets. In addition, our business activities are focused in
the
CleanTech, healthcare, consumer growth, specialty growth and telecommunications
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 the results of operations for the three months
and
six months ended June 30, 2008 and 2007:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
2008
|
|
June
30,
2007
|
|
June
30,
2008
|
|
June
30,
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
7,892,372
|
|
$
|
7,717,573
|
|
$
|
16,361,082
|
|
$
|
14,883,280
|
|
Principal
transactions
|
|
|
1,418,829
|
|
|
5,712,652
|
|
|
103,753
|
|
|
8,325,776
|
|
Investment
banking
|
|
|
4,446,995
|
|
|
5,631,556
|
|
|
7,823,406
|
|
|
9,864,027
|
|
Primary
research
|
|
|
1,498,144
|
|
|
951,062
|
|
|
3,039,938
|
|
|
951,062
|
|
Advisory
and other fees
|
|
|
543,134
|
|
|
359,506
|
|
|
239,600
|
|
|
671,348
|
|
Total
revenue
|
|
|
15,799,474
|
|
|
20,372,349
|
|
|
27,567,779
|
|
|
34,695,493
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
12,102,568
|
|
|
12,767,087
|
|
|
25,273,210
|
|
|
23,577,374
|
|
Brokerage
and clearing fees
|
|
|
709,183
|
|
|
662,056
|
|
|
1,484,484
|
|
|
1,294,697
|
|
Cost
of primary research services
|
|
|
609,129
|
|
|
395,218
|
|
|
1,194,293
|
|
|
395,218
|
|
Professional
services
|
|
|
2,475,016
|
|
|
703,640
|
|
|
3,302,501
|
|
|
1,085,118
|
|
Occupancy
and equipment
|
|
|
689,428
|
|
|
453,061
|
|
|
1,226,610
|
|
|
895,589
|
|
Communications
and technology
|
|
|
1,010,869
|
|
|
884,010
|
|
|
1,950,847
|
|
|
1,696,946
|
|
Depreciation
and amortization
|
|
|
162,946
|
|
|
182,027
|
|
|
306,170
|
|
|
363,048
|
|
Amortization
of intangible assets
|
|
|
116,536
|
|
|
220,643
|
|
|
233,071
|
|
|
220,643
|
|
Travel
and entertainment
|
|
|
1,012,210
|
|
|
685,416
|
|
|
1,971,804
|
|
|
1,154,618
|
|
Other
|
|
|
1,278,377
|
|
|
1,124,415
|
|
|
2,117,247
|
|
|
1,716,359
|
|
Impairment
of goodwill
|
|
|
2,601,516
|
|
|
—
|
|
|
2,601,516
|
|
|
|
|
Total
operating expenses
|
|
|
22,767,778
|
|
|
18,077,573
|
|
|
41,661,753
|
|
|
32,399,610
|
|
Operating
(loss) income
|
|
|
(6,968,304
|
)
|
|
2,294,776
|
|
|
(14,093,974
|
)
|
|
2,295,883
|
|
Interest
income
|
|
|
34,016
|
|
|
107,461
|
|
|
130,420
|
|
|
229,954
|
|
Interest
expense
|
|
|
(18,301
|
)
|
|
(26,864
|
)
|
|
(39,008
|
)
|
|
(81,208
|
)
|
(Loss)
income before taxes
|
|
|
(6,952,589
|
)
|
|
2,375,373
|
|
|
(14,002,562
|
)
|
|
2,444,629
|
|
Income
tax expense
|
|
|
1,838,744
|
|
|
(55,000
|
)
|
|
1,838,744
|
|
|
(55,000
|
)
|
Net
(loss) income
|
|
$
|
(5,113,845
|
)
|
$
|
2,320,373
|
|
$
|
(12,163,818
|
)
|
$
|
2,389,629
|
|
Our
net
(loss) income for the three months and six months ended June 30, 2008
and 2007
included the following non-cash expenses:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
2008
|
|
June
30,
2007
|
|
June
30,
2008
|
|
June
30,
2007
|
|
Stock-based
compensation
|
|
$
|
653,281
|
|
|
714,159
|
|
$
|
1,316,606
|
|
$
|
1,451,862
|
|
Depreciation
and amortization
|
|
|
162,946
|
|
|
182,028
|
|
|
306,171
|
|
|
363,048
|
|
Amortization
of intangible assets
|
|
|
116,535
|
|
|
220,643
|
|
|
233,070
|
|
|
220,643
|
|
Provision
for uncollectible accounts receivable
|
|
|
113,758
|
|
|
217,922
|
|
|
280,543
|
|
|
228,167
|
|
Impairment
of goodwill and intangible assets
|
|
|
2,601,516
|
|
|
|
|
|
2,601,516
|
|
|
|
|
Amortization
of discounts on debt
|
|
|
|
|
|
2,583
|
|
|
2,584
|
|
|
5,166
|
|
Total
|
|
$
|
3,648,036
|
|
|
1,337,335
|
|
$
|
4,740,490
|
|
$
|
2,268,886
|
|
Investment
Banking Revenue
Our
investment banking activity includes the following:
|
·
|
Capital
Raising
-
Capital raising includes private placements of equity and debt
instruments
and underwritten public offerings.
|
|
·
|
Financial
Advisory
-
Financial advisory includes advisory assignments with respect
to mergers
and acquisitions, divestures, restructurings and
spin-offs.
|
The
following table sets forth our revenue and transaction volumes from our
investment banking activities for the three months and six months ended
June 30,
2008 and 2007:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
2008
|
|
June
30,
2007
|
|
June
30,
2008
|
|
June
30,
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Capital
raising
|
|
$
|
4,252,495
|
|
$
|
5,126,556
|
|
$
|
7,482,685
|
|
$
|
9,146,527
|
|
Financial
advisory and other
|
|
|
194,500
|
|
|
505,000
|
|
|
340,721
|
|
|
717,500
|
|
Total
investment banking revenue
|
|
$
|
4,446,995
|
|
$
|
5,631,556
|
|
$
|
7,823,406
|
|
$
|
9,864,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
Volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
offerings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
underwritten participations
|
|
$
|
8,153,000
|
|
$
|
72,750,000
|
|
$
|
8,153,000
|
|
$
|
105,250,000
|
|
Number
of transactions
|
|
|
2
|
|
|
4
|
|
|
2
|
|
|
7
|
|
Private
placements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
raised
|
|
$
|
43,276,000
|
|
$
|
22,985,000
|
|
$
|
75,700,000
|
|
$
|
86,585,000
|
|
Number
of transactions
|
|
|
6
|
|
|
3
|
|
|
10
|
|
|
6
|
|
Our
investment banking revenue was $4,447,000 or 28% of our revenue during
second
quarter 2008, representing a 21% decrease from the similar quarter in
2007.
Second quarter of 2008 represented a different operating environment
where the
ability to execute larger transactions was more difficult than what we
have
experienced in the same period in 2007. However, banking revenue for
the three
months ended June 30, 2008 has rebounded versus the first quarter 2008
up 32%
sequentially driven by an increased number of deals. We participated
in two
secondary public offerings during the latest quarter and acted as placement
agent for five private placements during the quarter.
During
the six months ended June 30, 2008, we had one investment banking client
that
accounted for 18% of our revenue, while no single investment banking
client
accounted for more than 10% of our revenue during the first half of
2007.
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
|
|
Six
Months Ended
|
|
|
|
June
30,
2008
|
|
June
30,
2007
|
|
June
30,
2008
|
|
June
30,
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
7,892,372
|
|
$
|
7,717,573
|
|
$
|
16,361,082
|
|
$
|
14,883,280
|
|
Principal
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
principal transactions, proprietary trading and market
making
|
|
$
|
112,637
|
|
$
|
4,669,144
|
|
$
|
(3,672,105
|
)
|
$
|
7,354,753
|
|
Investment
portfolio
|
|
|
1,306,192
|
|
|
1,043,508
|
|
|
3,775,858
|
|
|
971,023
|
|
Total
principal transactions revenue
|
|
$
|
1,418,829
|
|
$
|
5,712,652
|
|
$
|
103,753
|
|
$
|
8,325,776
|
|
Transaction
Volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares traded
|
|
|
329,419,357
|
|
|
247,476,532
|
|
|
561,535,539
|
|
|
477,147,878
|
|
Number
of active clients
|
|
|
343
|
|
|
408
|
|
|
444
|
|
|
488
|
|
Commissions
amounted to $7,892,000, or 50%, of our revenue during the second quarter
2008,
representing a 2% increase from the similar period in 2007. Lower brokerage
commissions were offset by higher revenue for brokering institutional
money
funds by our Institutional Cash Distributors division.
Principal
transactions produced modest gains of $112,637 during the second quarter
2008
versus our record gains experienced in 2007. The 2008 gain included increased
profitability in our market making activities, as well as realized and
unrealized gains in our investment portfolio. As of June 30, 2008, we
made
markets in 1,361 stocks, which has increased from 1,100 stocks as of
June 30,
2007. We view “intelligent market making” in small cap stocks as a key element
to differentiating ourselves from our competition. Principal transactions
revenue consists of four different activities - customer principal trades,
market making, trading for our proprietary account, and realized and
unrealized
gains and losses in our investment portfolio. As a broker-dealer, we
account for
all of our marketable security positions on a trading basis and as a
result, all
security positions are marked to fair market value each day. Returns
from market
making and proprietary trading activities tend to be more volatile than
acting
as agent or principal for customers.
During
2008 and 2007, no single brokerage customer accounted for more than 10%
of our
revenue from continuing operations.
Primary
Research Revenue
Panel
Intelligence provides primary market research to corporate and financial
clients
in the healthcare and CleanTech industries. The predecessor business
which was
called MedPanel was acquired April 17,
2007. For the quarter ended June 30, 2008, Panel revenues were up 58%
to
$1,498,000 versus the same period in 2007. The growth has been primarily
driven
by increased business in the healthcare industry. However, we have not
seen the
acceleration in the financial services industry that was originally estimated
when we acquired the business. We believe this is more related to the
current
challenging market environment and not a reduction in opportunity. That
said,
the current revised outlook for this segment of the business was a contributing
factor in our impairment analysis of the balance sheet assets for Panel
Intelligence. See Other
Operating Expenses
below
for further information.
Compensation
and Benefits Expenses
Compensation
and benefits expense represents the largest component 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 vary based
on
overall headcount.
The
following table sets forth the major components of our compensation and
benefits
for the three months ended June 30, 2008 and 2007:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
2008
|
|
June
30,
2007
|
|
June
30,
2008
|
|
June
30,
2007
|
|
Incentive
compensation and discretionary bonuses
|
|
$
|
6,139,517
|
|
$
|
7,708,451
|
|
$
|
12,355,067
|
|
$
|
13,383,686
|
|
Salaries
and wages
|
|
|
4,242,553
|
|
|
3,559,646
|
|
|
8,552,376
|
|
|
6,599,791
|
|
Stock-based
compensation
|
|
|
653,821
|
|
|
714,159
|
|
|
1,316,606
|
|
|
1,451,862
|
|
Payroll
taxes, benefits and other
|
|
|
1,066,677
|
|
|
784,831
|
|
|
3,049,161
|
|
|
2,142,035
|
|
Total
compensation and benefits
|
|
$
|
12,102,568
|
|
$
|
12,767,087
|
|
$
|
25,273,210
|
|
$
|
23,577,374
|
|
Total
compensation and benefits as a percentage of revenue
|
|
|
77
|
%
|
|
63
|
%
|
|
92
|
%
|
|
68
|
%
|
Cash
compensation and benefits as a percentage of revenue
|
|
|
72
|
%
|
|
59
|
%
|
|
87
|
%
|
|
64
|
%
|
The
decrease in compensation and benefits expense of $664,519 or 5%, from
the second
quarter 2007 to the second quarter 2008 represents lower incentive compensation,
which is directly correlated to revenue production. Cash compensation
is equal
to total compensation and benefits expense excluding stock-based compensation,
which is a non-cash expense. Cash compensation and benefits expense as
a
percentage of revenue increased to 77% during the three months ended
June 30,
2008 as compared to 63% during the similar period in 2007. The increase
was
largely attributed to lower than anticipated revenues especially in our
proprietary trading account during the three months ended June 30, 2008
versus
same period in 2007. We do not historically pay commissions on gains
in this
account, driving higher gross profits. During the second quarter of 2007
proprietary trading contributed $3,709,000 in trading gains versus a
loss of
$436,378 in the same period in 2008. In addition, as revenues decrease,
the
fixed portion of the compensation base becomes a larger impact on the
percentage
of total revenues.
No
single
sales professional accounted for more than 10% of our revenue during
the six
months ended June 30, 2008 and 2007.
Stock-based
compensation expense decreased by $60,000 during the second quarter 2008,
as
compared to the similar quarter in 2007. The decline in stock-based compensation
expense was due in part to fewer non-vested restricted shares outstanding
in
2008.
Other
Operating Expenses
Brokerage
and clearing fees include trade processing expenses that we pay to our
clearing
broker and execution fees that we pay to floor brokers and electronic
communication networks. 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 increased by $47,000, or
7%,
during the second quarter of 2008 as compared to the second quarter of
2007.
This increase reflected higher costs associated with execution of foreign
securities for our clients during second quarter 2008 as compared to
second
quarter 2007. Execution fees for foreign securities are higher than they
are for
domestic securities.
Cost
of
primary research revenue principally consists of panelist honorarium
and
recruitment costs. Technical experts (mostly in the medical field but
including
those in the CleanTech and technology fields) receive cash honoraria
for
participating in qualitative panels and quantitative surveys. We pay
the
honoraria to the panelists when the panel or survey has been completed
and
record this expense as incurred. We closed the acquisition of MedPanel
on
April 17, 2007 and began recognizing primary research revenue and related
expenses since that date.
Professional
services expense includes legal, audit, consulting fees, as well as expenses
related to investment banking transactions. The increase of $1,771,000
or 252%,
from the second quarter of 2007 to the second quarter of 2008 was primarily
attributed to higher legal fees associated with defending the Company
in the
litigations in which it is involved and with various projects, as well
as higher
business development costs associated with investment banking transactions.
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 $236,000 or 52%, from the
second
quarter of 2007 to the second quarter of 2008 was in part due to inclusion
of
expenses from Panel Intelligence and a subsequent move to a new office
location
in August of 2007, as well as higher costs associated with a new lease
for our
New York office, which commenced in March 2008.
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 hire additional employees. The increase of $127,000,
or 14%,
from the second quarter of 2007 to the second quarter of 2008 was primarily
due
to the new lease in New York and Boston as well as increased investment
in data
services for the Asset Management business.
Depreciation
and amortization expense primarily relate to the depreciation of our
computer
equipment and leasehold improvements. The decrease of $19,000, or 10%,
from the
second quarter of 2007 to the second quarter of 2008 was due to a decrease
in
book value of computer equipment and furniture as they become fully depreciated.
As
of
April 30, 2008, the Company determined there was an impairment to the
goodwill
and intangible assets related to the acquisition of MedPanel, Inc. (currently
its subsidiary Panel Intelligence, LLC). The Company calculates an estimated
fair value based on multiples of revenue, earnings, and book value of
comparable
transactions. However, when such comparable transactions are not available
or
have become outdated, the Company uses discounted cash flow scenarios
to
estimate the fair value of the reporting units. As of April 30, 2008,
the Company performed its annual impairment testing and recorded an impairment
loss of $2,600,000 in its consolidated statement of operations for the
three
months and six months ended June 30, 2008 related to the goodwill and
tradename.
This is a non-cash expense item.
Travel
and entertainment expense results from business development activities
across
our various businesses. The increase of $327,000 or 48%, from the second
quarter
of 2007 to the second quarter of 2008 was due mostly to increased costs
associated with non-deal related roadshows, client visits, and business
development.
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 increase of approximately
$153,000 or 14%, from the second quarter of 2007 to the second quarter
of 2008
was partly due to increased marketing expenses somewhat offset by lower
recruiting fees.
Income
Tax Expense
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
and six
months ended June 30, 2008, the Company recorded $0 and $1,839,000 of
income tax
benefit, respectively. The
effective tax rate for the six months ended June 30, 2008 is (12.64)%,
which is
mainly attributable to the release of the FIN 48 liability due to the
approval
of an accounting method change for federal tax purposes.
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 adopted Interpretation No. 48 on January 1, 2007. Upon the
adoption of FIN 48, the Company recognized no adjustment in the liability
for unrecognized income tax benefits and no corresponding change in retained
earnings. At the end of the fiscal year 2007, the Company recorded a
liability
for an uncertain tax position related to certain investments in the amount
of
$1,839,000. This
entire amount has been derecognized as of June 30, 2008 due to an Internal
Revenue service approved accounting method change.
The
Company’s tax years 2005-2007 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 2003-2007 will remain open for three
to four years 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.
Off-Balance
Sheet Arrangements
We
were
not a party to any off-balance sheet arrangements during the six months
ended
June 30, 2008 and 2007. 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 table summarizes our significant commitments as of June 30,
2008,
consisting of debt payments related to convertible notes payable,
non-convertible notes payable, 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
|
|
2008
|
|
$
|
1,377,663
|
|
$
|
280,338
|
|
2009
|
|
|
2,624,011
|
|
|
407,369
|
|
2010
|
|
|
2,019,930
|
|
|
268,853
|
|
2011
|
|
|
1,923,516
|
|
|
146,647
|
|
2012
|
|
|
1,174,323
|
|
|
—
|
|
Thereafter
|
|
|
572,000
|
|
|
—
|
|
Total
commitments
|
|
$
|
9,691,443
|
|
$
|
1,103,207
|
|
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.