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EX-3.6 - Merriman Holdings, Incv202328_ex3-6.htm
EX-3.5 - Merriman Holdings, Incv202328_ex3-5.htm
EX-32.1 - Merriman Holdings, Incv202328_ex32-1.htm
EX-31.1 - Merriman Holdings, Incv202328_ex31-1.htm
EX-31.2 - Merriman Holdings, Incv202328_ex31-2.htm


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 September 30, 2010
 
¨
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 HOLDINGS, 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 November 10, 2010 was 2,157,575.
 




Merriman Holdings, Inc.
 
Index
 
   
Page No.
 
PART I FINANCIAL INFORMATION
     
ITEM 1. Financial Statements (unaudited)
     
Consolidated Statements of Operations For the Three Months and Nine Months Ended September 30, 2010 and 2009
   
3
 
Consolidated Statements of Financial Condition as of September 30, 2010 and December 31, 2009
   
4
 
Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2010 and 2009
   
5
 
Notes to Consolidated Financial Statements
   
7
 
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
   
31
 
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   
48
 
ITEM 4. Controls and Procedures
   
49
 
         
PART II OTHER INFORMATION
       
ITEM 1. Legal Proceedings
   
50
 
ITEM 1A. Risk Factors
   
51
 
ITEM 6. Exhibits
   
52
 
Signatures
   
53
 
Certifications
       
 
 
2

 
 

ITEM 1.   Financial Statements (unaudited)
 
MERRIMAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Revenue:
                       
Commissions
  $ 3,959,937     $ 3,137,232     $ 11,402,663     $ 8,818,247  
Principal transactions
    (309,422 )     (35,522 )     (133,261 )     (128,732 )
Investment banking
    537,187       3,127,596       8,099,497       5,411,463  
Advisory and other
    49,124       411,602       413,465       1,618,282  
                                 
Total revenue
    4,236,826       6,640,908       19,782,364       15,719,260  
                                 
Operating expenses:
                               
Compensation and benefits
    4,863,982       4,003,208       15,462,360       11,167,490  
Brokerage and clearing fees
    361,413       193,880       1,131,584       745,678  
Professional services
    456,533       495,905       1,195,094       1,718,046  
Occupancy and equipment
    479,205       534,130       1,451,045       1,575,742  
Communications and technology
    476,941       736,755       1,563,417       2,065,139  
Depreciation and amortization
    99,746       109,922       302,600       372,913  
Travel and entertainment
    303,956       281,860       955,525       532,113  
Legal services and litigation settlement expense
    855,286       5,837,699       1,867,878       6,616,311  
Cost of underwriting capital
    8,000       -       968,576       -  
Other
    874,232       248,293       1,587,580       1,342,094  
                                 
Total operating expenses
    8,779,294       12,441,652       26,485,659       26,135,526  
                                 
Operating loss
    (4,542,468 )     (5,800,744 )     (6,703,295 )     (10,416,266 )
                                 
                                 
Other income
    -       -       29,319       2,000,000  
Interest income
    3,941       4,425       10,408       13,591  
Change in fair value of warrant liability
    -       (9,628,460 )     -       (9,628,460 )
Interest expense
    (7,471 )     (1,289,401 )     (40,167 )     (1,333,569 )
                                 
Loss from continuing operations before income taxes
    (4,545,998 )     (16,714,180 )     (6,703,735 )     (19,364,704 )
                                 
Income tax benefit
    33,302       235,727       4,285       230,528  
                                 
Loss from continuing operations
    (4,512,696 )     (16,478,453 )     (6,699,450 )     (19,134,176 )
                                 
Income (loss) from discontinued operations
    -       (90,192 )     95,104       78,904  
                                 
Net loss
  $ (4,512,696 )   $ (16,568,645 )   $ (6,604,346 )   $ (19,055,272 )
Preferred stock deemed dividend
    -       (5,066,702 )     -       (5,066,702 )
Preferred stock cash dividend
    (146,400 )     (39,100 )     (446,100 )     (39,100 )
                                 
Net loss attributable to common shareholders
  $ (4,659,096 )   $ (21,674,447 )   $ (7,050,446 )   $ (24,161,074 )
                                 
Basic and diluted net loss per share:
                         
Loss from continuing operations
  $ (2.22 )   $ (9.11 )   $ (3.47 )   $ (10.55 )
Income (loss) from discontinued operations
    -       (0.05 )     0.05       0.04  
                                 
Net loss
  $ (2.22 )   $ (9.16 )   $ (3.42 )   $ (10.51 )
                                 
Net loss attributable to common shareholders
  $ (2.29 )   $ (11.98 )   $ (3.65 )   $ (13.33 )
                                 
Weighted average number of common shares:
                 
Basic and diluted
    2,030,584       1,809,724       1,931,781       1,813,144  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
3

 
 
MERRIMAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)

   
September 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
               
Cash and cash equivalents
  $ 7,514,726     $ 5,656,750  
Securities owned:
               
Marketable, at fair value
    2,199,404       4,728,940  
Not readily marketable, at estimated fair value
    432,878       272,463  
Other
    43,792       67,448  
Restricted cash
    965,000       1,072,086  
Due from clearing broker
    185,560       2,546,581  
Accounts receivable, net
    765,539       470,992  
Prepaid expenses and other assets
    655,935       801,946  
Equipment and fixtures, net
    235,452       506,535  
                 
Total assets
  $ 12,998,286     $ 16,123,741  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Liabilities:
               
Accounts payable
  $ 419,998     $ 346,220  
Commissions and bonus payable
    2,428,515       4,133,924  
Accrued expenses
    2,240,671       2,755,831  
Due to clearing and other brokers
    4,577       7,185  
Securities sold, not yet purchased
    121,354       161,461  
Deferred revenue
    53,533       304,334  
Notes payable to related party - short term
    4,000,000       -  
Capital lease obligation
    191,342       397,958  
Subordinated loan to related parties - long term, net
    793,735       -  
 
               
Total liabilities
    10,253,725       8,106,913  
                 
                 
Stockholders’ equity:
               
Convertible preferred stock, Series A–$0.0001 par value; 2,000,000 shares  authorized; 2,000,000 shares issued and 0 shares outstanding as of  September 30, 2010 and December 31, 2009; aggregate liquidation preference of $0
    -       -  
Convertible preferred stock, Series B–$0.0001 par value; 12,500,000 shares  authorized; 8,750,000 shares issued and 0 shares outstanding as of  September 30, 2010 and December 31, 2009; aggregate liquidation  preference of $0
    -       -  
Convertible preferred stock, Series C–$0.0001 par value; 14,200,000 shares  authorized; 11,800,000 shares issued and 0 shares outstanding as of  September 30, 2010 and December 31, 2009; aggregate liquidation preference of $0
    -       -  
Convertible preferred stock, Series D–$0.0001 par value; 24,000,000 shares authorized; 23,720,916 and 23,720,916 shares issued and 22,697,662 and 23,720,916 shares outstanding as of September 30, 2010 and December 31, 2009, respectively; aggregate liquidation preference of $9,759,995 prior to conversion, and pari passu with common stock on conversion
    2,269       2,372  
Common stock, $0.0001 par value; 300,000,000 shares authorized; 2,185,632 and 1,855,439 shares issued and 2,156,296 and  1,826,643 shares outstanding as of September 30, 2010 and December 31, 2009, respectively
    216       187  
Additional paid-in capital
    134,387,457       133,055,304  
Treasury stock
    (225,613 )     (225,613 )
Accumulated deficit
    (131,419,768 )     (124,815,422 )
                 
Total stockholders’ equity
    2,744,561       8,016,828  
                 
Total liabilities and stockholders’ equity
  $ 12,998,286     $ 16,123,741  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
4

 
MERRIMAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
Net loss
  $ (6,604,345 )   $ (19,055,272 )
Adjustments to reconcile net loss to net cash used in operating activities:
         
Gain on sale of Institutional Cash Distributors
    -       (2,000,000 )
Depreciation and amortization
    302,600       383,523  
Stock-based compensation
    1,277,656       429,986  
Amortization of discounts on debt
    168       -  
Amortization of discount on convertible note
    -       552,639  
Amortizatino of debt issue costs
    -       346,995  
Amortization of beneficial conversion feature
    -       180,639  
Change in fair value of warrant liability
    -       9,628,460  
Non-cash legal settlement expense
    -       1,230,953  
Non-cash professional services
    -       35,000  
Loss (gain) on disposal of equipment and fixtures
    (2,987 )     294,378  
Provision for uncollectible accounts receivable
    434,783       58,074  
Securities received for services
    (944,188 )     (290,331 )
Unrealized loss on securities owned
    1,069,415       480,292  
Changes in operating assets and liabilities:
               
Securities owned and sold, not yet purchased
    2,227,441       (132,567 )
Restricted cash
    107,086       58,411  
Due from clearing broker
    2,361,021       (360,768 )
Accounts receivable
    (729,330 )     (1,261,782 )
Prepaid expenses and other assets
    146,012       172,601  
Accounts payable
    75,977       (80,174 )
Commissions and bonus payable
    (1,705,409 )     738,270  
Accrued expenses
    (508,591 )     (2,436,032 )
Due to clearing and other brokers
    (2,608 )     (18,845 )
                 
Net cash used in operating activities
    (2,495,299 )     (11,045,550 )
                 
Cash flows from investing activities:
               
Purchase of equipment and fixtures , net
    (28,529 )     -  
Sale of Panel Intelligence
    -       702,966  
Sale of Institutional Cash Distributors
    -       2,000,000  
                 
Net cash (used in) provided by investing activities
    (28,529 )     2,702,966  
                 
Cash flows from financing activities:
               
Proceeds from the issuance of Series D Convertible Preferred Stock, net of reinvestments of previous bridge financing and expenses
    -       8,808,256  
Proceeds from the exercise of stock options
    36,720       -  
Issuance of bridge note
    -       500,000  
Payments on convertible notes payable
    -       (125,000 )
Proceeds from issuance of convertible notes payable
    -       625,000  
Proceeds from issuance of notes payable - short term
    -       300,000  
Payments on notes payable - short term
    -       (300,000 )
Proceeds from subordinated loan
    22,000,000       -  
Payments on subordinated loan
    (18,000,000 )     -  
Proceeds from long term subordinated loan
    1,000,000       -  
Preferred stock dividend
    (448,300 )     -  
Debt service principal payments
    (206,616 )     (520,774 )
                 
Net cash provided by financing activities
    4,381,804       9,287,482  
                 
Increase in cash and cash equivalents
    1,857,976       944,898  
                 
Cash and cash equivalents at beginning of year
    5,656,750       6,358,128  
                 
Cash and cash equivalents, assets held for sale
    -       222,892  
                 
Cash and cash equivalents at end of the period
  $ 7,514,726     $ 7,525,918  

The accompanying notes are an integral part of these consolidated financial statements.
 
5

 
MERRIMAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(unaudited)

   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
 
Supplementary disclosure of cash flow information:
           
Cash paid during the year:
           
Interest
  $ 31,615     $ 252,252  
Income taxes
  $ 35,000     $ 5,200  
Noncash investing and financing activities:
               
Warrant issued for legal settlement
  $ 257,370     $ -  
Stocks issued in connection with issuance of debt
  $ 206,433          
Stock received as part of Panel sale
  $ -     $ 100,000  
Conversion of note payable and accrued interest into Series D Convertible Preferred Stock
  $ -     $ 1,060,717  
Conversion of legal settlement into Series D Convertible Preferred Stock
  $ -     $ 296,027  
Conversion of professional services into Series D Convertible Preferred Stock
  $ -     $ 35,000  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
6

 
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Significant Accounting Policies

Basis of Presentation

The interim unaudited consolidated financial statements included herein for Merriman Holdings, Inc. (formerly Merriman Curhan Ford Group, Inc. and MCF Corporation), or the Company, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, the consolidated financial statements included in this report reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of the consolidated results of operations for the interim periods covered and the consolidated financial position of the Company at the date of the interim statement of financial condition. Certain information and footnote disclosures normally included in annual consolidated 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 consolidated financial statements should be read in conjunction with the Company’s 2009 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, 2009.

Under Accounting Standards Codification Topic (“ASC”) 855, “Subsequent Events”, the Company has evaluated all subsequent events through the date these consolidated financial statements were issued.


At the stockholders’ annual meeting on August 10, 2010, the stockholders approved the adoption of an amendment to the Company’s Amended Certificate of Incorporation changing the Company’s name from Merriman Curhan Ford Group, Inc. to Merriman Holdings, Inc.  In September 2010, the Company also changed the name of its subsidiary from Merriman Curhan Ford & Co. to Merriman Capital, Inc. (hereafter “MC”).

Reverse Stock Split
 
At the stockholders’ annual meeting on August 10, 2010, the stockholders also voted to approve the amendment to the Company’s Amended Certificate of Incorporation to affect a one-for-seven reverse stock split.  The reverse stock split became effective at 12:01 am, Eastern Time, on August 16, 2010. Pursuant to the reverse stock split, each seven shares of authorized and outstanding common stock was reclassified and combined into one share of new common stock. In addition, upon the effectiveness of the reverse stock split, seven shares of Series D Convertible Preferred Stock will be convertible into one share of common stock of the Company. The reverse stock split did not change the number of authorized shares or the par value per share of common stock or preferred stock designated by the Company's Certificate of Incorporation. Currently, the Company has authorized 300,000,000 shares of common stock. All references to share and per share data for all periods presented have been retroactively adjusted to give effect to the one-for-seven reverse stock split.

Securities Owned and Securities Sold, Not Yet Purchased

Securities owned and securities sold, not yet purchased in the consolidated statements of financial condition consist of financial instruments carried at fair value with related unrealized gains or losses recognized in 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 our 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.
 
7


MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
 
1. Significant Accounting Policies - continued

Fair Value Measurement—Definition and Hierarchy

The Company follows the provisions of ASC 820, “Fair Value Measurement and Disclosures,” for our financial assets and liabilities. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. Assets and liabilities recorded at fair value in the consolidated statement of financial condition are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The Company’s financial assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

Fair Value Measurement—Definition and Hierarchy - continued

Level 1 —Unadjusted, quoted prices are available in active markets for identical assets or liabilities at the measurement date. The types of assets and liabilities carried at Level 1 fair value generally are G-7 government and agency securities, equities listed in active markets, investments in publicly traded mutual funds with quoted market prices and listed derivatives.

Level 2 — Pricing inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.  Fair valued assets which are generally included in this category are stock warrants for which market-based implied volatilities are available, and unregistered common stock.

Level 3 — Pricing inputs are both significant to the fair value measurement and unobservable.  These inputs generally reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Fair valued assets which are generally included in this category are stock warrants for which market-based implied volatilities are not available.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level of 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 basis, and a description of valuation techniques, see Note 5, Fair Value of Assets and Liabilities.

Investment Banking Revenue

Investment banking revenue includes underwriting and private placement agency fees earned through the Company’s participation in public offerings, 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.

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.
 
8

 
MERRIMAN HOLDINGS, 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 trades in stock exchange-listed securities, over-the- counter securities and other transactions as agent for the Company’s clients. Principal transactions consist of a portion of dealer spreads attributed to the Company’s securities trading activities as principal in exchange-listed and other securities, and include transactions derived from activities as a market-maker. Additionally, principal transactions include gains and losses resulting from market price fluctuations that occur while holding positions in trading security inventory. 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.

Stock-based Compensation Expense

The Company measures and recognizes compensation expense based on estimated fair values for all stock-based awards made to employees and directors, including stock options, restricted stock and warrants. The Company estimates fair value of stock-based awards on the date of grant using the Black-Scholes option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company’s consolidated statements of operations over the requisite service periods. Stock-based compensation expense recognized in the Company’s consolidated statement of operations includes compensation expense for stock-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 stock-based awards subsequent to December 31, 2005 is recognized using the straight-line single-option method. Because stock-based compensation expense is based on awards that are ultimately expected to vest, stock-based compensation expense has been reduced to account for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

To calculate stock-based compensation resulting from the issuance of options, and warrants, the Company uses the Black-Scholes option pricing model, which is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. No tax benefits were attributed to the stock-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 determined based on temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which temporary differences are expected to reverse. A valuation allowance is recorded to reduce deferred tax assets to an amount whose realization is more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.
 
9


MERRIMAN HOLDINGS, 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 Capital, Inc. (formerly 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 September 30, 2010 and December 31, 2009, and consolidated total revenues for the three months and nine months period ended September 30, 2010 and 2009.   

New Accounting Pronouncements
 
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) No. 2010-06, "Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements," which amends the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance also clarifies the existing disclosure requirements in ASC 820-10 regarding: i) the level of disaggregation of fair value measurements; and ii) the disclosures regarding inputs and valuation techniques. The guidance became effective for the Company with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the Company with the reporting period beginning January 1, 2011, with early adoption permitted.  Comparative disclosure for earlier reporting periods that ended before initial adoption is encouraged but not required. Effective April 1, 2010, the Company early adopted the guidance in ASC 820-10 related to the disclosure on the roll forward activities for Level 3 fair value measurements.  Other than requiring additional disclosures, the adoption of this new guidance did not have an impact on our consolidated financial statements. (See Note 5 - Fair Value of Assets and Liabilities.)

In July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”). The objective of ASU 2010-20 is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. Under ASU 2010-20, an entity is required to provide disclosures so that financial statement users can evaluate the nature of the credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed to arrive at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. ASU 2010-20 is applicable to all entities, both public and non-public and is effective for interim and annual reporting periods ending on or after December 15, 2010. Comparative disclosure for earlier reporting periods that ended before initial adoption is encouraged but not required. However, comparative disclosures are required to be disclosed for those reporting periods ending after initial adoption. Other than requiring additional disclosures, the adoption of this new guidance will not have an impact on our consolidated financial statements. 

On July 21, 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Wall Street Reform Act).  The Wall Street Reform Act permanently exempts small public companies with less than $75 million in market capitalization (nonaccelerated filers) from the requirement to obtain an external audit on the effectiveness of internal financial reporting controls provided in Section 404(b) of the Sarbanes-Oxley Act of 2002 (SOX). Section 404(b) requires a registrant to provide an attestation report on management’s assessment of internal controls over financial reporting by the registrant’s external auditor.  As a result, the Company is not required and is not planning to obtain an attestation report on management’s assessment of internal controls over financial reporting from the Company’s external auditor as of December 31, 2010. Disclosure of management attestations on internal control over financial reporting under existing Section 404(a) continues to be required for smaller companies.
 
10

 
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

2. Liquidity

We incurred substantial losses and negative cash flows from operations in 2009 and 2008. We had net losses of $5,462,000 and $30,274,000 in 2009 and 2008, respectively, and negative operating cash flows of $12,648,000 and $24,945,000 for the same respective years. For the nine months ended September 30, 2010, we also incurred net losses of $6,604,000 and negative operating cash flows of $2,495,000.  Furthermore, as of September 30, 2010, we had an accumulated deficit of $131,420,000. While we believe our current funds will be sufficient to enable us to meet our current expenditures, if anticipated operating results are not achieved, management has the intent and believes it has the ability to delay or reduce expenditures and/or to raise additional capital. We plan to raise additional permanent capital to ensure our operating flexibility and to reduce our cost of underwriting capital.  Failure to generate sufficient cash flows from operations, raise additional capital or reduce certain discretionary spending could have a material adverse effect on our ability to achieve our intended business objectives.

3. Issuance of Notes and Warrants

Convertible Notes

On May 29, 2009, the Company sold and issued $525,000 in principal amount of Secured Convertible Promissory Notes (each a “Note,” and collectively, the “Notes”).  On June 1, 2009, the Company issued an additional $100,000 of Notes. The investor group included eight individuals, comprised of certain officers and employees of the Company as well as an outside investor.  The Notes were issued in a private placement exempt from registration requirements.  There were no underwriters, underwriting discounts or commissions involved in the transactions.  The Notes were converted into Series D Convertible Preferred Stock on September 8, 2009 (see Note 4).  No Notes remain outstanding as of September 30, 2010.

The Notes were issued with warrants to purchase additional shares of common stock of the Company at $3.50 per share on a post-reverse split basis for a number of shares of common stock equal to 75% of the principal amount of the Notes purchased, divided by $3.50.  The warrants issued in connection with the Notes remain outstanding as of September 30, 2010 and are exercisable at any time.

Bridge Note

Ronald L. Chez is a member of the Company’s Board of Directors.  Prior to Mr. Chez joining the Board, he received a secured promissory note (the “Chez Note”) in the principal amount of $500,000 from the Company in July 2009.  The Chez Note was issued in a private placement to Mr. Chez as an accredited investor exempt from registration requirements.  The Chez Note carried an interest rate of 9% per annum, payable on maturity.  The Chez Note was issued with ten-year warrants to purchase 166,113 shares of the Company’s common stock at $4.55 per share on a post-reverse split basis.  The principal and interest accrued under the Chez Note was converted into Series D Convertible Preferred Stock on September 8, 2009.  As of September 30, 2010, no portion of the Chez Note remains outstanding.  The warrants remain outstanding and may be exercised at the discretion of the holder.  The Chez Note was personally guaranteed by Messrs. Merriman and Coleman.

As compensation for their personal guarantees, D. Jonathan Merriman, the Company’s Chief Executive Officer, and Peter V. Coleman, the Chief Financial Officer, each originally received ten-year warrants to purchase 83,056 shares of the Company’s common stock at $4.55 per share on a post-reverse split basis.  Subsequent to issuance, Messrs. Merriman and Coleman each transferred ownership of 32,618 warrants to Mr. Chez and retained ownership of 41,528 warrants each.  The balance of 8,910 warrants was transferred by each of Messrs. Merriman and Coleman to third parties in connection with investments in the Company’s Series D Preferred Convertible Stock strategic transaction of September 2009.
 
11

 
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

3. Issuance of Notes and Warrants — continued

XL Settlement Warrants

On February 12, 2010, the Company settled its lawsuit with XL Specialty Insurance Company.  As part of its settlement agreement dated September 8, 2009 with DGB Investment, Inc., Craig Leipold, Heritage Bank of Commerce, Modern Bank, Valley Community Bank, AEG Facilities and the Federal Deposit Insurance Company (“FDIC”) as receiver for Security Pacific Bank (the “Litigants”), the Company assigned certain rights of recovery to the Litigants.  The settlement was for $5,750,000, of which the Company’s portion, pursuant to the settlement agreement, was $325,000 less expenses.  As a result of the receipt of the proceeds as insurance recovery on the legal settlement, the Company was obligated to issue 53,366 warrants to purchase shares of the Company’s common stock at a price per share of $6.09 on a post-reverse split basis.  As of December 31, 2009, the Company had accrued for the $325,000 liability that was paid out as warrants during the first quarter of 2010.

As of September 30, 2010 and December 31, 2009, the Company had 4,229,081 and 4,146,235 of total warrants outstanding, respectively.
 
Long Term Subordinated Loan

On September 29, 2010, the Company borrowed $1,000,000 from nine individual lenders, all of whom are directors, officers or employees of the Company, pursuant to a series of Unsecured Promissory Notes.  The Unsecured Promissory Notes are for a term of three years and provide for interest comprising two components: (i) Six Percent (6.0%) per annum to be paid in cash monthly (the “Current Interest”); and (ii) Eight (8.0%) per annum to be accrued and paid in cash upon maturity.  Additional consideration was paid to the lenders at closing comprising a number of shares of common stock of the Company equal to: (A) 30% of the principal amount lent; divided by (B) $3.01 per share.  The total effective interest on the note is approximately 21.73%.  Proceeds were used to supplement underwriting capacity and working capital for our broker dealer subsidiary, Merriman Capital, Inc.

The total proceeds of $1,000,000 raised in the transaction above is accounted for as an issuance of debt with stocks.  The total proceeds of $1,000,000 have been allocated to these individual instruments based on the relative fair values of each instrument.  Based on such allocation method, the value of the stocks issued in connection with the Unsecured Promissory Notes was $206,000, which was recorded as a discount on the debt and applied against the Unsecured Promissory Notes.

As of September 30, 2010, the Unsecured Promissory Notes of $794,000, net of $206,000 discount, remain outstanding and is included in subordinated loan to related parties – long term in the Company’s consolidated statement of financial condition.  The discount on the note is amortized over the term of the loan using the effective interest method.  For the three and nine-months ended September 30, 2010, the Company incurred less than $500 as fees on the Unsecured Promissory Notes, which also remain outstanding as of September 30, 2010 and is included in accrued expenses in the consolidated statements of financial position.

Temporary Subordinated Loan

During the year, the Company issued several loans in the form of temporary subordinated loans to supplement the Company’s net capital and enable it to underwrite initial public offerings, in accordance with Rule 15c3-1 of the Securities Exchange Act of 1934.  All temporary subordinated loan transactions are disclosed separately in Note 13, Related Party Transactions.
 
12

 
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

4.  Series D Convertible Preferred Stock

On September 8, 2009, the Company issued 23,720,916 shares of Series D Convertible Preferred Stock along with 5-year warrants to purchase 3,388,702 shares of the Company’s common stock with an exercise price of $4.55 per share on a post-reverse split basis.  The investor group consisted of 56 individuals and entities, including certain officers, directors and employees of the Company, as well as outside investors.

The Series D Convertible Preferred Stock was issued in a private placement exempt from registration requirements pursuant to Regulation D of the Securities Act of 1933.  Effective upon the reverse-stock split as mentioned in Note 1, seven shares of Series D Convertible Preferred Stock are convertible into one share of common stock of the Company.  The Series D Convertible Preferred Stock carries a dividend rate of 6% per annum, payable in cash monthly.  For the three and nine months ended September 30, 2010, total Series D Convertible Preferred Stock dividends were $146,400 and $446,100, respectively.  As of September 30, 2010, the Company has an outstanding cash dividends payable of $48,800 which are included in accounts payable in the consolidated statements of financial position.

The warrants issued in connection with the Series D Convertible Preferred Stock will expire five years from the date of the transaction.  Holders of the Series D Convertible Preferred Stock may convert them into shares of the Company’s common stock at any time in amounts no less than $100,000 unless all of the shares held by the holder are for a lesser amount.  The Series D Convertible Preferred Stock will automatically convert at the discretion of the Company upon 10-day notice given when the average closing price of the Company’s common stock over a 30-day period is at or above $21.00 per share on a post-reverse split basis and when the average trading volume for the immediately prior four-week period is 4,285 shares or more, provided that the shares have been effectively registered with the Securities and Exchange Commission or all of the Series D Convertible Preferred Stock may be sold under Rule 144 of the 1933 Exchange Act.

The Company has accounted for this transaction as issuance of convertible preferred stock with detachable stock warrants.  The total value of the Series D Convertible Preferred Stock strategic transaction was $10,200,000, which consists of $8,808,000 of cash proceeds and $1,392,000 of noncash proceeds from conversions of prior notes and legal services.  Of the total cash proceeds, $4,300,000 was used to settle certain legal claims which were in the aggregate amount of $43,577,000.  The remaining cash of $4,508,000 was used for working capital.
 
13

 
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

5. 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 parameters 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 the market on which they are primarily traded, and the instruments’ complexity. Assets and liabilities recorded at fair value in the consolidated statements 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.

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.

Also, as compensation for investment banking services, the Company frequently receives common stock of the client as an additional compensation to cash fees.  The common stock is typically issued prior to a registration statement is effective.  The Company classifies these securities as “not-readily marketable securities” as they are restricted stock and may be freely traded only upon the effectiveness of a registration statement covering them or upon the satisfaction of the requirements to qualify under the exemption to the Federal Securities Act of 1933 provided by SEC Rule 144 (“Rule 144”), including the requisite holding period.  Once a registration statement covering the securities is declared effective by the SEC or the securities have satisfied the Rule 144 requirements, the Company classifies them as “marketable securities.”
 
Typically, the common stock is traded on stock exchanges and most are classified as Level 1 securities.  The fair value is based on observed closing stock price at the measurement date.
 
Certain securities are traded infrequently and therefore do not have observable prices based on actively traded markets.  These securities are classified as Level 3 securities, if pricing inputs or adjustments are both significant to the fair value measurement and unobservable.  The Company determines the fair value of infrequently trading securities using the observed closing price at measurement date, discounted for the put option value calculated through the Black-Scholes model or similar valuation techniques.  Valuation inputs used in the Black-Scholes model include interest rate, stock volatility, expected term and market price of the underlying stock.

Stock Warrants
 
Also as partial compensation for investment banking services, the Company may receive stock warrants issued by the client.  Stock warrants provide their holders with the right to purchase equity in a company.  If the underlying stock of the warrants is freely tradable, the warrants are considered to be marketable.  If the underlying stock is restricted, subject to a registration statement or to satisfying the requirements for a Rule 144 exemption, the warrants are considered to be non-marketable.  Such positions are considered illiquid and do not have readily determinable fair values, and therefore require significant management judgment or estimation.
 
The fair value of the stock warrants is determined using the Black-Scholes model or similar valuation techniques. Valuation inputs used in the Black-Scholes model include interest rate, stock volatility, expected term and market price of the underlying stock. As these require significant management assumptions, they are classified as Level 3 securities.
 
14


MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

5. Fair Value of Assets and Liabilities – continued

Underwriters’ Purchase Options
 
The Company may receive partial compensation for its investment banking services also in the form underwriters’ purchase options (“UPOs”).  UPOs are identical to warrants other than with respect to the securities for which they are exercisable. UPOs grant the holder the right to purchase a “bundle” of securities, including common stock and warrants to purchase common stock.  UPOs grant the right to purchase securities of companies for which the Company acted as an underwriter to account for any overallotment of these securities in a public offering.  Such positions are considered illiquid and do not have readily determinable fair values, and therefore require significant management judgment or estimation.
 
The fair value of the UPO is determined using the Black-Scholes model or similar technique, applied in two stages.  The first stage is to determine the value of the warrants contained within the “bundle” which is then added to the fair value of the stock within the bundle.  Once the fair value of the underlying “bundle” is established, the Black-Scholes model is used again to estimate a value for the UPO.  The fair value of the “bundle” as estimated by Black-Scholes in the first stage is used instead of the price of the underlying stock as one of the inputs in the second stage of the Black-Scholes.  The use of the valuation techniques requires significant management assumptions and therefore UPOs are classified as Level 3 securities.

Preferred Stock

Preferred stock represents preferred equity in companies.  The preferred stock owned by the Company is convertible at the Company’s discretion. For these securities, the Company uses the exchange-quoted price of the common stock equivalents to value the securities. They are classified within Level 2 or Level 3 of the fair value hierarchy depending on the availability of an observable stock price on actively traded markets.

Securities Sold, Not Yet Purchased

Securities sold, not yet purchased are comprised primarily of exchange-traded equity securities that the Company sold short based on expectations of future market movements and conditions. They are generally valued based on quoted prices from the exchange. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized in Level 1 liability of the fair value hierarchy.
 
15

 
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

5. Fair Value of Assets and Liabilities — continued

Assets and liabilities measured at fair value on a recurring basis are summarized below:

   
Assets and Liabilities at Fair Value at September 30, 2010
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Corporate equities
  $ 1,157,216     $ -     $ 143,955     $ 1,301,171  
Stock warrants
    -       -       984,443       984,443  
Underwriters' purchase option
    -       -       346,430       346,430  
Preferred stock
    -       -       238       238  
                                 
Total securities owned
  $ 1,157,216     $ -     $ 1,475,066     $ 2,632,282  
                                 
Liabilities:
                               
Securities sold, not yet purchased
    121,354       -       -       121,354  
                                 
Total fair value liabilities
  $ 121,354     $ -     $ -     $ 121,354  
 
   
Assets and Liabilities at Fair Value at December 31, 2009
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Corporate equities
  $ 3,403,757     $ -     $ 21,731     $ 3,425,488  
Stock warrants
    -       -       1,575,481       1,575,481  
Underwriters' purchase option
    -       -       -       -  
Preferred stock
    434       -       -       434  
                                 
Total securities owned
  $ 3,404,191     $ -     $ 1,597,212     $ 5,001,403  
                                 
Liabilities:
                               
Securities sold, not yet purchased
    161,461       -       -       161,461  
                                 
Total fair value liabilities
  $ 161,461     $ -     $ -     $ 161,461  
 
16

 
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

5. Fair Value of Assets and Liabilities — continued

The following summarizes the change in carrying values associated with Level 3 financial instruments for the nine months ended September 30, 2010 and 2009:

                 
Underwriters'
               
   
Corporate
     
Stock
   
Purchase
   
Preferred
         
   
Equities
     
Warrants
   
Options
   
Stock
     
Total
 
Balance at December 31, 2009
  $ 21,731       $ 1,575,481     $ -     $ -       $ 1,597,212  
Purchases or receipt (a)
    96,890         316,184       462,399       -         875,473  
Sales or exercises
    -         (409,528 )     -       -         (409,528 )
Transfers into
    248,637  
 (b)
    -       -       434  
 (b)
    249,071  
Transfers out of
    (21,731 )
 (c)
    -       -       -         (21,731 )
Losses:
                                           
Realized
    -         -       -       -         -  
Unrealized
    (201,572 )       (497,694 )     (115,969 )     (196 )       (815,430 )
Balance at September 30, 2010
  $ 143,955       $ 984,443     $ 346,430     $ 238       $ 1,475,066  
                                             
Change in unrealized losses
                                           
relating to instruments still held
                                           
at September 30, 2010
  $ (201,572 )     $ (497,694 )   $ (115,969 )   $ (196 )     $ (815,430 )
 

(a)
Includes purchases of securities and securities received for services
 
(b)
Principally reflects transfers from Level 1, due to reduced trading activity, and therefore price transparency, on the underlyinginstruments.
 
(c)
Principally reflects transfer to Level 1, due to availability of market data and therefore more price transparency.
 
               
Underwriters'
             
   
Corporate
   
Stock
   
Purchase
   
Preferred
       
   
Equities
   
Warrants
   
Option
   
Stock
   
Total
 
Assets:
                             
Balance at December 31, 2008
  $ 695     $ 1,605,451     $ 27,995     $ -     $ 1,634,141  
Purchases, issuances, settlements
                                       
 and sales
    50,998       254,298       -       -       305,296  
Net transfers in (out)
    (51,693 )     (108,900 )     -       -       (160,593 )
Gains (losses):
                                       
Realized
    -       (79,093 )     (91,058 )     -       (170,151 )
Unrealized
    -       284,699       63,063       -       347,762  
Balance at September 30, 2009
  $ -     $ 1,956,455     $ -     $ -     $ 1,956,455  
                                         
Change in unrealized gains
                                       
relating to instruments still held
                                       
at September 30, 2009
  $ -     $ 284,699     $ 63,063     $ -     $ 347,762  
                                         
                                         
Liabilities:
                                       
Balance at December 31, 2008
  $ -     $ -     $ -     $ -     $ -  
Value at issuance
    -       16,893,251       -       -       16,893,251  
Change in value
    -       9,628,460       -       -       9,628,460  
Balance at September 30, 2009
  $ -     $ 26,521,711     $ -     $ -     $ 26,521,711  
 
17



 
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)


5. Fair Value of Assets and Liabilities — continued

The following summarizes the change in carrying values associated with Level 3 financial instruments for the three months ended September 30, 2010 and 2009:
 
               
Underwriters'
             
   
Corporate
   
Stock
   
Purchase
   
Preferred
       
   
Equities
   
Warrants
   
Options
   
Stock
   
Total
 
Balance at June 30, 2010
  $ 42,791     $ 1,348,710     $ 408,941     $ 619     $ 1,801,061  
Purchases or receipt
    -       -       -       -       -  
Sales or exercises
    -       -       -       -       -  
Transfers into
    37,890
(a)
    -       -       -       37,890  
Transfers out of
    -       -       -       -       -  
Gains (losses)
                                       
Realized
    -       -       -       -       -  
Unrealized
    63,274       (364,267 )     (62,511 )     (381 )     (363,885 )
Balance at September 30, 2010
  $ 143,955     $ 984,443     $ 346,430     $ 238     $ 1,475,066  
                                         
Change in unrealized gains
                                       
(losses) relating to instruments still held
                                       
at September 30, 2010
  $ 63,274     $ (364,267 )   $ (62,511 )   $ (381 )   $ (363,885 )
 

(a)
Principally reflects transfers from Level 1, due to reduced trading activity, and therefore price transparency, on the underlyinginstruments.
 
               
Underwriters'
       
   
Corporate
   
Stock
   
Purchase
       
   
Equities
   
Warrants
   
Options
   
Total
 
Assets:
                       
Balance at June 30, 2009
  $ 25,033     $ 1,306,930     $ -     $ 1,331,963  
Purchases, issuances and settlements
                               
and sales
    -       121,418       -       121,418  
Net transfers out
    (25,033 )     -       -       (25,033 )
Gains
                            -  
Realized
    -       -       -       -  
Unrealized
    -       528,107       -       528,107  
Balance at September 30, 2009
  $ -     $ 1,956,455     $ -     $ 1,956,455  
                                 
Change in unrealized gains
                               
relating to instruments still held
                               
at September 30, 2009
  $ -     $ 528,107     $ -     $ 528,107  
                                 
                                 
Liabilities:
                               
Balance at June 30, 2009
  $ -     $ -     $ -     $ -  
Value at issuance
    -       16,893,251       -       16,893,251  
Change in value
    -       9,628,460       -       9,628,460  
Balance at September 30, 2009
  $ -     $ 26,521,711     $ -     $ 26,521,711  
 
18


MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

5. Fair Value of Assets and Liabilities — continued
The amounts of unrealized losses for the nine months ended September 30, 2010 included in the table above are all attributable to those assets held as of September 30, 2010. Net gains and losses (both realized and unrealized) for Level 3 financial assets are a component of principal transactions in the consolidated statements of operations.  
 
Transfers within the Fair Value Hierarchy
 
We assess our financial instruments on a quarterly basis to determine the appropriate classification within the fair value hierarchy, as defined by ASC Topic 820. Transfers between fair value classifications occur when there are changes in pricing observability levels. Transfers of financial instruments among the levels occur at the end of the reporting period. There were no significant transfers between our Level 1 and Level 2 classified instruments during the nine months ended September 30, 2010.

6. Stock-Based Compensation Expense

Stock Options

 As of September 30, 2010, there were 2,155,915 shares authorized for issuance under the Option Plans, and 87,551 shares authorized for issuance outside of the Option Plans. As of September 30, 2010, 517,398 shares were available for future option grants under the Option Plans. There were no shares available for future option grants outside of the Option Plans. Compensation expense for stock options during the three and nine months ended September 30, 2010 was $258,000 and $1,254,000, respectively.  Of the total stock compensation expense for the nine months ended September 30, 2010, $138,000 was incurred due to acceleration of vesting terms of stock options of three employees upon their termination. Compensation expense for stock options during the three months and nine months ended September 30, 2009 was $119,000 and $329,000, respectively.

The following table is a summary of the Company’s stock option activity for the nine months ended September 30, 2010:

         
Weighted-
 
         
Average
 
         
Exercise
 
   
Shares
   
Price
 
             
Outstanding at December 31, 2009
    1,364,236     $ 8.68  
Granted
    204,228       4.86  
Exercised
    (15,428 )     (2.38 )
Cancelled
    (247,268 )     (12.54 )
                 
Outstanding at September 30, 2010
    1,305,768     $ 7.43  
                 
Exercisable at September 30, 2010
    336,480     $ 8.43  

19

 
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

 6. Stock-based Compensation Expense — continued

The following table summarizes information with respect to stock options vested and outstanding at September 30, 2010:
 
     
Options Outstanding at September 30, 2010
         
Vested Options at September 30, 2010
 
           
Weighted-
                               
           
Average
   
Weighted-
               
Weighted-
       
           
Remaining
   
Average
   
Aggregate
         
Average
   
Aggregate
 
Range of
         
Contractual
   
Exercise
   
Intrinsic
         
Exercise
   
Intrinsic
 
Exercise Price
   
Number
   
Life (Years)
   
Price
   
Value
   
Number
   
Price
   
Value
 
                                             
$ 0.0000 - $3.4999       496,747       8.36     $ 2.96     $ -       268,591     $ 2.92     $ -  
$ 3.5000 - $6.9999       204,071       9.36       5.84       -       6,371       3.80       -  
$ 7.0000 - $10.4999       509,817       9.11       8.42       -       1,274       9.52       -  
$ 10.5000 - $13.9999       24,385       7.29       11.43       -       10,457       12.01       -  
$ 14.0000 - $27.9999       37,720       4.31       23.51       -       20,579       20.70       -  
$ 28.0000 - $48.9999       18,940       6.10       32.52       -       15,120       32.84       -  
$ 49.0000 - $84.4999       13,925       1.46       68.18               13,925       68.18          
$ 85.5000 - $110.0000       163       0.25       107.31       -       163       107.31       -  
          1,305,768       8.56     $ 7.43     $ -       336,480     $ 8.43     $ -  
 
As of September 30, 2010, total unrecognized compensation expense related to unvested stock options was $3,448,000. This amount is expected to be recognized as expense over a weighted-average period of 2.98 years.

The weighted average fair value of each stock option granted for the three and nine months ended September 30, 2010 was $4.25 and $2.63, respectively. The weighted average fair value of each stock option granted for the three months and nine months ended September 30, 2009 was $5.53 and $2.38, 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 nine months ended September 30, 2010 and 2009:
 
   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
             
Expected Volatility
    135.55 %     117.67 %
Average expected term (years)
    2.67       2.35  
Risk-free interest rate
    1.43 %     1.17 %
Dividend yield
    -       -  
 
20

 
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

6. Stock-based Compensation Expense — continued
 
Restricted Stock

At the date of grant, the recipients of restricted stock have most of the rights of a stockholder other than voting rights, subject to certain restrictions on transferability and a risk of forfeiture. The fair value of restricted stock is equal to the market value of the shares on the date of grant. The Company recognizes the compensation expense for restricted stock on a straight-line basis over the requisite service period. Compensation expense for restricted stock during the three months and nine months ended September 30, 2010 was $164,000 and ($80,000), respectively. We had a negative stock compensation expense for the nine months ended September 30, 2010 due to cancellation of restricted stock that had been granted to an employee who was terminated during the three months ended March 31, 2010.  Compensation expense for restricted stock during the three and nine months ended September 30, 2009 was $30,000 and $80,000, respectively.

The following table is a summary of the Company's restricted stock activity for the nine months ended September 30, 2010:
 
             
Weighted-
         
     
Restricted
     
Average
     
Aggregate
 
     
Stock
     
Grant Date
     
Intrinsic
 
     
Outstanding
     
Fair Value
     
Value
 
Balance as of December 31, 2009
    5,522     $ 74.07        
Granted
    173,305       2.87          
Vested
    (163,182 )     3.10          
Cancelled
    (4,725 )     79.53          
                         
Balance as of September 30, 2010
    10,920     $ 6.91     $ 26,863  
 
 The weighted average fair value of the restricted stock granted under the Company's stock option plans for the three months and nine months ended September 30, 2010 was $2.77 and $2.87 per share, respectively. The weighted average fair value of the restricted stock granted under the Company's stock option plans for the three and nine months ended September 30, 2009 was $1.50 per share.  The fair value of the restricted stock award is estimated on the date of grant using the intrinsic value method.

As of September 30, 2010, total unrecognized compensation expense related to restricted stock was $61,000. This expense is expected to be recognized over a weighted-average period of 3.27 years.

Warrants Issued as Compensation

Starting September 2009, the Company has been issuing five-year warrants to purchase shares of the Company’s common stock at $4.55 on a post-reverse split basis to the Chairman of the Strategic Advisory Committee, a committee of the Board of Directors, as compensation for serving in that capacity.  For the three months and nine months ended September 30, 2010, the Company issued 8,099 and 29,525 warrants on a post-reverse split basis, respectively.  For the three months and nine months ended September 30, 2010, the Company recorded stock compensation expense of $21,000 and $103,000, respectively, based on the calculated fair value of the warrants using the Black-Scholes option valuation model.  As of September 30, 2010, a total of 42,857 warrants have been issued and remain outstanding.
 
21

 
MERRIMAN HOLDINGS, 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 and nine months ended September 30, 2010, we recorded a $33,000 and $4,000 income tax benefit, respectively.  This relates primarily to additional interest received from IRS for refund claimed in previous year.  For the three and nine months ended September 30, 2009, the Company recorded an income tax benefit of $235,000 and $230,000, respectively.  The tax benefit for the nine months ended September 30, 2009 is primarily related to a state tax benefit recorded upon filing of the Company's 2008 tax returns.
 
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 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.

8. Compliance with Listing Requirements

On March 4, 2010, the Company received notice from the NASDAQ Stock Market that the Company is not currently in compliance with the requirements of NASDAQ Listing Rule 5550(a)(2), which requires listed securities to maintain a minimum bid price of $1.00 per share. 

On August 10, 2010, at the stockholders’ annual meeting, a one-for-seven reverse stock split was approved.  On August 30, 2010, Merriman Holdings, Inc. received notice from the NASDAQ Stock Market that the company is currently in compliance with the requirements of NASDAQ Listing Rule 5550(a)(2).  Thus, the delisting proceedings which were instituted by NASDAQ on March 4, 2010 have been terminated.

9. Discontinued Operations

Panel Intelligence LLC

On April 17, 2007, the Company 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 Merriman Holdings, Inc. The results of Panel’s operations had been included in the Company’s 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 221,106 shares of common shares issued on a post-reverse split basis 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, management determined that the sale of Panel would reduce investments required to develop Panel’s business and generate capital necessary for the Company’s core business.   The sale of Panel was completed in January 2009.  Management determined that the plan of sale criteria in ASC 360, “Property, Plant and Equipment”, 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, the Company sold Panel to Panel Intelligence, LLC (Newco) for $1,000,000 and shares of its common stock in the amount of $100,000.

For the three and nine months ended September 30, 2010, income from discontinued operations related to Panel was $0 and $33,340, respectively.  For the three and nine months ended September 30, 2009, the Company incurred loss from discontinued operations of $0 and $94,894, respectively.
 
22

 
MERRIMAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

9. Discontinued Operations - continued

Institutional Cash Distributors

On January 16, 2009, the Company entered into an agreement to sell the assets of Institutional Cash Distributors (ICD), a division of MC, for $2,000,000 to a group of investors who were also its employees in order to raise capital. The assets sold included MC’s rights in trademark, copyright, and other intellectual property used in the business, customer lists, marketing materials, and books and records, which did not have any carrying values.  In accordance with SEC Staff Accounting Bulletin (SAB) 104, “Revenue Recognition”, the Company recognized $2,000,000 as other income in the consolidated statement of operations during the six months ended June 30, 2009.  In the second quarter of 2010, ICD, LLC, formed by the new group of investors, started supporting its operations fully and as such, did not require significant assistance from MC.  The Company terminated all employees supporting ICD business, and will not have significant involvement going forward. The Company determined that the criteria for discontinued operations under guidance ASC Topic 205, “Discontinued Operations”, have been met as of June 30, 2010. As a result, the revenue and expenses of ICD have been included in discontinued operations in the consolidated statements of operations.

As of December 31, 2009 and September 30, 2010, there were no assets or liabilities held for sale by the Company that related to ICD that were included in the Company’s consolidated statements of financial condition.

The following revenue and expenses related to ICD have been reclassified as discontinued operations for the three and nine months ended September 30, 2010 and 2009:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 2010
   
September 2009
   
September 2010
   
September 2009
 
Total revenue
  $ -     $ 6,667,486     $ 9,167,983     $ 20,072,033