DIRECT MARKETS HOLDINGS CORP. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - DIRECT MARKETS HOLDINGS CORP.	Financial_Report.xls
EX-32.2 - DIRECT MARKETS HOLDINGS CORP.	c67546_ex32-2.htm
EX-31.1 - DIRECT MARKETS HOLDINGS CORP.	c67546_ex31-1.htm
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EX-32.1 - DIRECT MARKETS HOLDINGS CORP.	c67546_ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30, 2011

	or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from ________________________ to ________________________________

001-33737

(Commission File Number)

RODMAN & RENSHAW CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware		84-1374481
(State or Other Jurisdiction of Incorporation		(I.R.S. Employer Identification No.)
Or Organization)

1251 Avenue of the Americas

New York, New York 10020

(Address of principal executive offices)

Registrant’s telephone number: (212) 356-0500

(Former Name, Former Address and Former Fiscal Year, if Changes Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer o Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 9, 2011, there were 34,392,699 shares of the registrant’s common stock outstanding.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect the current view about future events and financial performance based on certain assumptions. They include opinions, forecasts, projections, assumptions, guidance, expectations, beliefs or other statements that are not statements of historical fact. In some cases, forward-looking statements can be identified by words such as “may,” “can,” “will,” “should,” “could,” “expects,” “hopes,” “believes,” “plans,” “anticipates,” “estimates,” “predicts,” “projects,” “potential,” “intends,” “approximates” or the negative or other variation of such terms and other comparable expressions. Forward-looking statements in this report may include statements about:


	•	future financial and operating results, including projections of revenues, income, expenditures, cash balances and

	•	our capital requirements and the need for additional financing;

	•	our ability to secure new client engagements;

	•	our ability to successfully consummate financing and merger and acquisition transactions on behalf of our clients;

	•	our ability to execute our growth, expansion and acquisition strategies;

	•	the outcome of various regulatory and legal proceedings in which we are currently involved;

	•	the performance of any of our financial products and their potential to generate revenues;

	•	development of new financial products;

	•	current and future economic and political conditions;

	•	overall industry and market performance and trends;

	•	competition;

	•	management’s goals and plans for future operations;

	•	the impact of increased regulatory scrutiny on future operations;

	•	the revenue and profit volatility stemming from our operations;

	•	the performance of service providers upon which our operations rely;

	•	the additional risks and uncertainties stemming from entry into new businesses;

	•	our ability to protect our intellectual property rights and secure the right to use other intellectual property that we deem to be essential to the conduct of our business;

	•	the impact of expanded corporate governance on the number of available business opportunities;

	•	the impact of legal liability on future operations;

	•	the impact of employee misconduct on future operations;

	•	the increased risk of financial liability and reputational harm resulting from adverse regulatory action;

	•	the impact of the Investment Company Act of 1940 on future operations; and

	•	other assumptions described in this prospectus underlying or relating to any forward-looking statements.

The forward-looking statements in this report are only predictions. Actual results could, and likely will, differ materially from these forward-looking statements for many reasons, including the risks described under “Risk Factors” and elsewhere in this report. No guarantee about future results, performance or achievements can be made. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


		Page

Part I. Financial Information

Item 1.	Consolidated Financial Statements (Unaudited)	1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	32

Part II. Other Information

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 6.	Exhibits	34

	Signatures	35

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES

PART I
FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements


		Page

Consolidated Statements of Financial Condition as of September 30, 2011 (unaudited) and December 31, 2010		2

Consolidated Statements of Operations for the three month and nine month periods ended September 30, 2011 and 2010		3

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Loss for the nine month period ended September 30, 2011 (unaudited) and for the year ended December 31, 2010		4

Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2011 and 2010 (unaudited)		5

Notes to Consolidated Financial Statements (unaudited)		6

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition as of September 30, 2011 (Unaudited) and December 31, 2010
Dollars in Thousands, Except Per Share Amounts


	September 30, 2011			December 31, 2010


Assets
Cash and cash equivalents:
Unrestricted	$	12,048		$	13,350
Restricted		1,200			1,448

Total cash and cash equivalents		13,248			14,798
Financial instruments owned, at fair value:
Corporate equity securities		7,824			7,497
Merchant banking investments		8,998			10,557
Warrants and options		6,865			15,570
Notes		—			2,197
Investments in shell companies		1,484			1,654
Fixed income securities		469			—
Other investments		372			505

Total financial instruments owned, at fair value		26,012			37,980
Private placement and other fees receivable		1,596			3,598
Receivable from brokers, dealers & clearing agencies		765			7,706
Prepaid expenses		1,142			2,549
Property and equipment, net		3,533			3,263
Other assets		19,201			10,608
Goodwill and other intangible assets, net		882			601

Total Assets	$	66,379		$	81,103


Liabilities and Stockholders’ Equity
Accrued compensation payable	$	10,418		$	19,287
Accounts payable and accrued expenses		8,769			4,947
Payable to brokers, dealers & clearing agencies		4,654			—
Acquisitions related payables		—			690
Financial instruments sold, not yet purchased, at fair value		2,299			3,918

Total Liabilities		26,140			28,842


Commitments and contingencies (See Note 6)

Stockholders’ Equity
Common stock, $0.001, par value; 100,000,000 shares authorized; 34,392,699 and 33,484,098 issued as of September 30, 2011 and December 31, 2010, respectively		34			33
Preferred stock, $0.001 par value; 1,000,000 authorized; none issued		—			—
Additional paid-in capital		74,430			69,654
Treasury stock, no shares in 2011, 97,500 shares in 2010		—			(260	)
Accumulated deficit		(34,225	)		(17,166	)

Total Stockholders’ Equity		40,239			52,261

Total Liabilities and Stockholders’ Equity	$	66,379		$	81,103

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

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations for the
Three Month and Nine Month Periods Ended September 30, 2011 and 2010 (Unaudited)
Amounts in Thousands, Except Per Share Amounts


	Three Months Ended September 30,						Nine Months Ended September 30,

	2011			2010			2011			2010

Revenues:
Investment banking	$	7,896			15,101			50,074			65,152
Merchant banking		298			76			837			1,316
Brokerage		7,084			919			14,699			2,905
Conference fees		2,716			2,279			3,162			3,158
Principal transactions		(6,836	)		(1,044	)		(14,396	)		(11,204	)
Interest and other income		19			31			44			151

Total revenues		11,177			17,362			54,420			61,478


Operating expenses:
Compensation and benefits		12,132			13,530			45,226			40,546
Conference expense		3,849			3,916			6,795			9,932
Professional and consulting		1,785			1,464			5,888			5,165
Occupancy and equipment rentals		1,075			778			2,916			2,332
Advertising and marketing		132			179			589			1,256
Communication and market research		2,086			969			4,980			2,600
Execution and clearing		937			49			2,155			167
Depreciation and amortization		387			377			1,181			1,231
Business development		1,302			1,095			3,985			3,630
Impairment of other intangibles		—			—			—			933
Bad debt expense		110			181			158			666
Other		2,248			851			6,251			2,679

Total operating expenses		26,043			23,389			80,124			71,137


Operating loss		(14,866	)		(6,027	)		(25,704	)		(9,659	)
Income tax benefit		(5,876	)		(1,754	)		(8,645	)		(2,909	)

Net loss	$	(8,990	)		(4,273	)		(17,059	)		(6,750	)


Net loss per common share:
Basic	$	(0.24	)		(0.12	)		(0.46	)		(0.19	)

Diluted	$	(0.24	)		(0.12	)		(0.46	)		(0.19	)


Weighted average common shares outstanding:
Basic		37,325			36,113			36,729			36,338

Diluted		37,325			36,113			36,729			36,338

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

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Loss for the
Nine Month Period Ended September 30, 2011 (Unaudited) and the Year Ended December 31, 2010
Dollars in Thousands


	Nine Months Ended September 30, 2011			Year Ended December 31, 2010

Common stock:
Balance, beginning of the period	$	33			36
Acquisition related issuance		3			—
Treasury stock retirement		(2	)		(3	)

Balance, end of the period	$	34			33


Additional paid-in-capital:
Balance, beginning of the period	$	69,654			75,989
Stock based compensation		2,354			(73	)
Treasury stock retirement		(2,758	)		(6,031	)
Acquisition related issuance		5,260			—
Other		(80	)		(231	)

Balance, end of the period	$	74,430			69,654


Accumulated deficit:
Balance, beginning of the period	$	(17,166	)		(11,609	)
Net loss		(17,059	)		(5,557	)

Balance, end of the period	$	(34,225	)		(17,166	)


Treasury stock, at cost:
Balance, beginning of the period	$	(260	)		(1,034	)
Treasury stock purchases		(2,500	)		(5,260	)
Treasury stock retirement		2,760			6,034

Balance, end of the period	$	—			(260	)


Non-controlling interest:
Balance, beginning of the period	$	—			12,059
Deconsolidation of Aceras BioMedical		—			(12,059	)

Balance, end of the period	$	—			—


Total stockholders’ equity	$	40,239			52,261


Comprehensive loss:
Net loss	$	(17,059	)		(5,557	)

Total comprehensive loss	$	(17,059	)		(5,557	)

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

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows for the
Nine month periods ended September 30, 2011 and 2010 (Unaudited)
Dollars in Thousands


	Nine Months Ended September 30,

	2011			2010

Cash flows from operating activities:
Net loss	$	(17,059	)		(6,750	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,181			1,231
Restricted cash		248			1,496
Stock based compensation		2,354			(517	)
Impairment of goodwill and other intangible assets		—			933
Changes in operating assets and liabilities:
Financial instruments owned, at fair value		11,968			5,439
Private placement and other fees receivable		2,002			1,066
Receivable from brokers, dealers & clearing agencies		6,941			4,251
Prepaid expenses		1,407			(85	)
Other assets		(8,298	)		(4,868	)
Financial instruments sold not yet purchased, at fair value		(1,619	)		(269	)
Accrued compensation payable		(8,869	)		2,209
Accounts payable and accrued expenses		13,605			(1,272	)

Net cash provided by operating activities		3,861			2,864


Cash flows used in investing activities:
Purchases of property and equipment		(1,637	)		(1,372	)
Acquisitions related earn-out payments		(690	)		(2,141	)
Merchant banking investments		—			(200	)
Acquisition, net of cash received		(336	)		—

Net cash used in investing activities		(2,663	)		(3,713	)


Cash used in financing activities:
Purchase of treasury stock		(2,500	)		(3,526	)

Net cash used in financing activities		(2,500	)		(3,526	)


Net decrease in cash and cash equivalents		(1,302	)		(4,375	)
Cash and cash equivalents – beginning of period		13,350			12,603

Cash and cash equivalents – end of period	$	12,048			8,228


Supplemental disclosures of cash flow information:
Income taxes paid	$	321			3,600

Interest paid	$	271			—

Change in fair value of financial instruments owned due to the deconsolidation of Aceras BioMedical	$	—			12,059


Supplemental non-cash information:
Share issuance for acquisition of Hudson Holding Corporation (see Note 3)	$	5,263			—

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

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - Organization, Nature of Operations and Basis of Presentation

General

Rodman & Renshaw Capital Group, Inc. (“RRCG”) is a Delaware holding company that is engaged in investment banking, sales and trading, and merchant banking activities through its various subsidiaries. The Company’s principal operating subsidiary is Rodman & Renshaw, LLC (“R&R”), a Delaware limited liability company formed on June 20, 2002. R&R is a registered broker-dealer with the Financial Industry Regulatory Authority, Inc. (“FINRA”). RRCG and its subsidiaries, including R&R, are collectively referred to herein as the “Company”.

On April 8, 2011, the Company completed its acquisition of Hudson Holding Corporation (“Hudson”). The transaction was valued at approximately $5.3 million, based upon the $2.06 per share closing price of the Company’s common stock on that date.

NOTE 2 - Summary of Significant Accounting Policies

Interim Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of September 30, 2011, the results of operations for the three months and nine months ended September 30, 2011 and 2010, the changes in stockholders’ equity and comprehensive income (loss) for the nine months ended September 30, 2011 and the year ended December 31, 2010 and cash flows for the nine months ended September 30, 2011 and 2010. The results for the three months and nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for any subsequent quarter or the full fiscal year ending December 31, 2011.

Certain information and footnote disclosures normally included in financial statements that are prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”).

These unaudited Consolidated Financial Statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2010 as filed with the SEC.

Principles of Consolidation

The Company’s policy is to consolidate all entities in which it owns more than 50% of the outstanding voting stock and has control. In addition, the Company consolidates entities which lack characteristics of an operating entity or business for which it is the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. In situations where the Company has significant influence but not control of an entity that does not qualify as a variable interest entity, the Company applies the equity method of accounting. In those cases where its investment is less than 20% and significant influence does not exist, the investments are carried at fair value. Significant influence generally is deemed to exist when the Company owns 20% to 50% of the voting equity of an entity or when it holds at least 3% of a limited partnership interest. If the Company does not consolidate an entity or applies the equity method of accounting, it accounts for the investment at fair value.

All material intercompany accounts and transactions are eliminated in consolidation.

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Financial Instruments at Fair Value

Fair value generally is based on quoted market prices. If quoted market prices are not available, fair value is determined based on other relevant factors, including dealer price quotations, price activity for equivalent instruments and valuation pricing models. Among the factors considered in determining the fair value of financial instruments are discount margins, weighted average spreads, discounted anticipated cash flows, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, as well as other measurements. Certain financial instruments have bid and ask prices that can be observed in the marketplace. For financial instruments whose inputs are based on bid-ask prices, such financial instruments are adjusted to the point within the bid-ask range that meets the Company’s best estimate of fair value. For offsetting positions in the same financial instrument, the same price within the bid-ask spread is used to measure both the long and short positions.

The valuation process for financial instruments may include the use of valuation models and other techniques. Adjustments to valuations derived from valuation models may be made when, in management’s judgment, either features of the financial instrument such as its complexity, or the market in which the financial instrument is traded require that an adjustment be made to the value derived from the models. An adjustment may be made if a financial instrument is subject to sales restrictions that would result in a price less than the quoted market price. Adjustments from the price derived from a valuation model reflect management’s judgment that other participants in the market for the financial instrument being measured at fair value would also consider in valuing that same financial instrument and are adjusted for assumptions about risk uncertainties and market conditions. Results from valuation models and valuation techniques in one period may not be indicative of future period fair value measurements.

Financial instruments owned and financial instruments sold, not yet purchased are stated at fair value, with related changes in unrealized appreciation or depreciation reflected in principal transactions, net in the accompanying Consolidated Statements of Operations. Equity interests in certain private equity securities and limited partnership interests are reflected in the Consolidated Financial Statements at fair value, which is often represented at initial cost until significant transactions or developments indicate that a change in the carrying value of the securities is appropriate. This represents the Company’s best estimate of exit price. Generally, the carrying values of these securities will be increased or decreased based on company performance in those instances where market values are readily ascertainable by reference to substantial transactions occurring in the marketplace or quoted market prices.

Fair value is the price 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. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company utilizes assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial instrument assets and liabilities carried at fair value have been classified and disclosed in one of the following three categories:

Level I includes those financial instruments whose valuations are based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level II includes those financial instruments that are valued using models or other valuation methodologies calibrated to observable market inputs. These models are primarily industry-standard models that consider various assumptions, including discount margins, credit spreads, discounted anticipated cash flows, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, default rates, as well as other measurements. In order to be classified as Level II, substantially all of these assumptions would need to be observable in the marketplace or able to be derived from observable data or supported by observable levels at which transactions are executed in the marketplace.

Level III is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are unobservable from objective sources. Included in this category are warrants, private securities, restricted securities, convertible notes and loans receivable received in conjunction with our investment banking and

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

merchant banking activities and limited partnership interests.

Value of Underwriter and Placement Agent Warrants

As a part of the Company’s compensation for its activities as underwriter or placement agent, it may receive warrants exercisable to purchase securities similar to those that are offered and sold in the financing transaction. The Company values such warrants using the Black-Scholes Option Pricing Model (“Black-Scholes”). The model requires management to use five inputs: price, risk-free interest rate, exercise price, time remaining on the warrant and expected price volatility. When the Company initially receives a warrant in connection with, or prior to an initial public offering, its calculated volatility factor is based on the volatility of an index of comparable companies, since there is no price history for new publicly traded or private companies. As each warrant approaches its expiration date, its volatility factor is derived primarily from the implied volatility of traded options or warrants, when available, or the historical prices of its underlying common stock. Management cannot assure that it ultimately will be able to liquidate any of the warrants received in a way that will realize the value attributed to the warrants in the financial statements through the application of Black-Scholes.

The fair value of warrants is recorded in financial instruments owned, at fair value on the Company’s Consolidated Statements of Financial Condition. When a warrant is received, its fair value is included in investment banking revenue as of the close of the date on which it is earned. Subsequently, any change in fair value is recorded as principal transactions. When a warrant is exercised, the fair value is adjusted to reflect the value of the securities purchased, net of the exercise price, and the adjustment amount is recorded as income or loss for the relevant period. If a warrant expires unexercised, the fair value is adjusted to zero and the decrease is recorded as a loss in the relevant period.

Value of Merchant Banking Assets

The Company’s Merchant Banking segment is primarily comprised of operating activities related to Aceras BioMedical, LLC (“Aceras Biomedical”). On May 12, 2008, the Company formed Aceras BioMedical, a joint venture through which it, in partnership with Aceras Partners, LLC, makes principal investments in early-stage biotechnology and life sciences companies. The value of the Company’s investment in Aceras BioMedical’s assets was determined based on a valuation which takes into consideration, when applicable, cash received, cost of the investment, market participant inputs, estimated cash flows based on entity specific criteria, purchase multiples paid in other comparable third-party transactions, market conditions, liquidity, operating results and other qualitative and quantitative factors. The values at which the Company’s investments are carried on its books are adjusted to estimated fair value at the end of each quarter taking into account general economic and stock market conditions and those characteristics specific to the underlying investments.

Cash and Cash Equivalents

The Company generally invests its excess cash in money market funds. Restricted cash relates to letters of credit issued in connection with the Company’s office lease agreement and cash held at financial institutions for capital purposes.

Revenue Recognition

Investment Banking. Underwriting and placement agent revenues and fees from mergers and acquisitions and other financial advisory assignments are recognized in the Consolidated Statements of Operations when the services related to the underlying transaction are completed under the terms of the engagement. Expenses associated with such transactions are estimated and recorded when the related revenue is recognized or the engagement is otherwise concluded. Underwriting and placement agent revenues are presented net of related expenses. When the Company is not the lead manager for an underwriting transaction, 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 reduce the revenue the Company recognizes as co-manager. Such amounts are adjusted to reflect actual expenses in the period in which the Company receives the final settlement, typically within 90 days following the closing of the transaction.

In connection with some underwritten transactions, the Company may hold in inventory, for a period of time, securities positions to facilitate the completion of the underwritten transactions. Realized and unrealized net gains and losses on these positions are recorded in investment banking revenues.

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

When the Company receives warrants as a component of its compensation for investment banking services, revenue is recognized based on the fair value of those instruments. Revenue from the receipt of warrants is recognized, as of the close of the date on which it is earned, based on the estimated fair value of the securities received using Black-Scholes, which takes into account the exercise price, remaining life of the warrant, the current price and expected price volatility of the underlying stock, expected dividends on the stock and the risk-free interest rate for the remaining term of the warrant. The following provides details of the Company’s investment banking revenue for the three month and nine month periods ended September 30, 2011 and 2010 (in thousands of dollars):


	Three Months Ended September 30,				Nine Months Ended September 30,

	2011		2010		2011		2010


Private placements	$	3,601		3,613		20,849		32,095
Warrants		1,260		498		9,145		9,313
Strategic advisory		1,248		9,105		4,754		11,810
Underwriting		1,787		1,885		15,326		11,934

Total investment banking revenue	$	7,896		15,101		50,074		65,152

Merchant Banking Revenue. Merchant banking revenue, consisting of gains and losses on investments by the Company’s Aceras BioMedical joint venture and other principal investments activity, was $0.3 million. The value of Aceras BioMedical’s assets was determined based on a valuation which takes into consideration, when applicable, cash received, cost of the investment, market participant inputs, estimated cash flows based on entity specific criteria, purchase multiples paid in other comparable third-party transactions, market conditions, liquidity, operating results and other qualitative and quantitative factors. The values at which the Company’s investments are carried on its books are adjusted to estimated fair value at the end of each quarter taking into account, factors including, general economic and stock market conditions.

Principal Transactions. Investment related financial instruments owned and financial instruments sold, but not yet purchased (all of which are recorded on a trade-date basis) are carried at fair value with gains and losses reflected in principal transactions on a trade-date basis.

Brokerage. Brokerage revenues consist of (a) commissions resulting from securities transactions executed as agent or principal and recorded on a trade date basis, net of soft dollar expenses of $0.4 million and $1.5 million for the three months and nine months ended September 30, 2011, respectively and (b) related net trading gains and losses from market making activities.

The Company permits institutional customers to allocate a portion of their gross commissions to pay for third party research products and other services (commonly referred to as soft dollar arrangements). The Company accounts for the cost of these arrangements on an accrual basis and since the Company is not the primary obligor, expenses relating to soft dollars arrangements are netted against brokerage revenues.

Conference Fees. The Company may receive conference deposits from presenters, which are recorded as a liability and then recognized as revenue when the fees are non-refundable. The Company also makes advance payments for conference facilities, entertainment and related costs, which are recorded as prepaid expenses and then recognized as expenses when the conference is conducted.

Property and Equipment

Property and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to ten years). Leasehold improvements are amortized using the straight-line method over the term of related leases or the estimated useful lives of the assets, whichever is shorter.

Goodwill and Other Intangible Assets

Goodwill is not amortized; instead, it is reviewed for impairment at least annually and written down when deemed impaired. Goodwill is deemed impaired when the carrying amount of the reporting unit exceeds the implied fair value of the reporting unit.

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Intangible assets consist of customer relationships and a trade name. Customer relationships and a trade name acquired in business combinations under the purchase method of accounting are recorded at fair value net of accumulated amortization since the acquisition date. Customer relationships are recorded at cost net of accumulated amortization. Intangible assets are amortized over their useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used. Amortization is calculated using the straight line method over the estimated useful lives at the following annual rates:


Customer relationships	33%
Trade name	10%

The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of finite-lived intangible asset may not be recoverable. Recoverability of a finite-lived intangible asset is measured by a comparison of its carrying amount to the undiscounted future cash flows expected to be generated by the asset. If the asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is determined based on discounted cash flows.

Earnings Per Share

Basic EPS is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding, which includes restricted stock and restricted stock units (“RSUs”) for which service has been provided. Diluted EPS includes the components of basic EPS and also includes the dilutive effects of restricted stock and RSUs for which service has not yet been provided and employee stock options.

Income Taxes

Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. 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. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

Management evaluates the realizability of its deferred tax assets quarterly. In determining the possible future realization of deferred tax assets, the future taxable income from the following sources is taken into account: (a) the reversal of taxable temporary differences; (b) future operations exclusive of reversing temporary differences; and (c) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into years in which net operating losses might otherwise expire.

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Management does not believe that the Company has any material uncertain tax position requiring recognition or measurement in accordance with the provisions of ASC 740-10.

The Company’s policy is to classify penalties and interest associated with uncertain tax positions, if required, as a component of its income tax provision. As a result of having no material uncertain tax positions, the Company has no material amounts for associated interest and penalties recorded on the Consolidated Statements of Financial Condition or the Consolidated Statements of Operations.

Legal Reserves

The Company recognizes a liability for a contingency when it is probable that a liability has been incurred and when the amount of loss can be reasonably estimated. When a range of probable loss can be estimated, the Company accrues the most likely amount of such loss, and if such amount is not determinable, then the Company accrues the minimum of the range of probable loss.

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Reserves related to legal proceedings are established and maintained. The determination of these reserve amounts requires significant judgment on the part of management. The Company’s management considers many factors including, but not limited to: the amount of the claim; the basis and validity of the claim; previous results in similar cases; and legal precedents and case law. Each legal proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management. As of September 30, 2011, there were no material legal reserves accrued in the Consolidated Statements of Financial Condition.

Use of Estimates

The preparation of financial statements is in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Concentrations of Credit Risk

R&R is engaged in trading and provides a broad range of securities brokerage and investment services to institutional clients as well as private placement services to business entities. Counterparties to the R&R’s business activities include broker-dealers, clearing organizations, banks, investment banking clients, and other financial institutions.

R&R uses clearing brokers to process transactions and maintain client accounts on a fee basis. R&R permits the clearing firms to extend credit to a client secured by cash and securities in the client’s account. R&R’s exposure to credit risk associated with the non-performance by its clients and counterparties in fulfilling their contractual obligations can be directly impacted by volatile or illiquid trading markets, which may impair the ability of clients and counterparties to satisfy their obligations to R&R. R&R has agreed to indemnify its clearing brokers for losses incurred while extending credit to R&R’s clients. R&R’s policy is to review, as necessary, the credit standing of its clients and counterparties. Amounts due from clients that are considered uncollectible are charged back to R&R by the clearing brokers when such amounts become determinable.

Financial instruments sold but not yet purchased commit R&R to deliver specified securities at predetermined prices. The transactions may result in market risk since, to satisfy the obligation, R&R must acquire the financial instruments at market prices, which may exceed the values reflected on the Consolidated Statements of Financial Condition.

Forgivable Loans

The Company issues forgivable loans as a retention vehicle to certain new and existing employees. These loans are subject to a substantive service requirement by the employees and are amortized over the service period on a straight-line basis. As of September 30, 2011, the net unamortized balance of forgivable loans was $0.4 million, which is included in other assets on the Consolidated Statements of Financial Condition. The Company recorded $0.2 million and $0.7 million of compensation expense related to the amortization of these loans during the three months ended September 30, 2011 and 2010, respectively. The Company recorded $1.1 million and $1.9 million of compensation expense related to the amortization of these loans during the nine months ended September 30, 2011 and 2010, respectively.

Stock-Based Compensation

The Company measures its compensation cost for all stock-based awards at fair value on the date of grant, taking into account any post vesting selling restrictions, and recognizes the compensation expense over the requisite service period. Expenses associated with such grants are generally recognized on a straight-line basis over the requisite service period, net of estimated forfeitures.

Deferred stock based compensation costs with respect to shares of restricted stock, RSUs and stock options granted are presented as part of additional paid in capital in the Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Loss.

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 3 - Hudson Acquisition

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations.” Accordingly, goodwill was measured as the excess of the acquisition-date fair value of the consideration transferred over the amount of acquisition-date identifiable assets acquired net of assumed liabilities. Goodwill of $0.4 million was recorded as an asset in the consolidated statement of financial condition, which has been allocated to our company’s Capital Markets segment. The allocation of the purchase price is preliminary and will be finalized upon completion of the analysis of the fair values of the net assets of Hudson. The final goodwill and intangible assets recorded on the consolidated statement of financial condition may differ from that reflected herein as a result of future measurement period adjustments. In management’s opinion, the goodwill represents the value expected from the synergies created through the operational enhancement benefits that will result from the integration of Hudson’s business and the reputation and expertise of Hudson in the equity trading business. Preliminarily, no intangible assets have been identified. Under ASC 805, merger-related transaction costs (such as advisory, legal, valuation and other professional fees) are not included as components of consideration transferred but are accounted for as expenses in the periods in which the costs are incurred. Transaction costs of approximately $0.3 million and $1.5 million were incurred during the three and nine months ended September 30, 2011, respectively, and are included in “other operating expenses” on the consolidated statement of operations.

The following table summarizes the fair value of assets acquired and liabilities assumed at the date of the acquisition (in thousands):


Assets
Cash and cash equivalents:	$	4,927
Financial instruments owned, at fair value:		2,501
Private placement and other fees receivable		597
Receivable from brokers, dealers & clearing agencies		1,337
Property and equipment, net		152
Other assets		2,516

Total assets		12,030

Liabilities
Accrued compensation payable	$	1,231
Accounts payable and accrued expenses		4,701
Financial instruments sold, not yet purchased, at fair value		1,227

Total liabilities assumed		7,159

Net assets acquired	$	4,871

Hudson’s results of operations have been included in the consolidated financial statements prospectively from the date of acquisition. Hudson’s businesses were integrated with the Company’s immediately after the merger; therefore, the revenues, expenses, and net income of the integrated businesses are not distinguishable within the Company’s results of operations. The following unaudited pro forma financial data assumes the acquisition had occurred at the beginning of each period presented. Pro forma results have been prepared by adjusting the Company’s historical results to include Hudson’s results of operations. The unaudited pro forma results presented do not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable periods presented, nor do they indicate the results of operations in future periods. Additionally, the unaudited pro forma results do not include the impact of possible business model changes, nor do they consider any potential impacts of current market conditions or revenues, reduction of expenses, asset dispositions, or other factors. The impact of these items could alter the following pro forma results (in thousands of dollars):

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


	Three Months Ended September 30, 2011			Nine Months Ended September 30, 2011

	Unaudited			Unaudited
Total revenues	$	11,177			63,494
Net loss		(8,990	)		(20,437	)
Loss per share
Basic	$	(0.24	)		(0.55	)
Diluted	$	(0.24	)		(0.55	)

NOTE 4 - Financial Instruments, at Fair Value

The following is a summary of the Company’s financial assets and liabilities that are accounted for at fair value as of September 30, 2011 and December 31, 2010 by level within the fair value hierarchy (in thousands of dollars):


	September 30, 2011

	Level I		Level II		Level III		Total

Assets:
Financial instruments owned:
Corporate equity securities	$	7,465		—		359		7,824
Merchant banking investments		—		—		8,998		8,998
Warrants and options		20		—		6,845		6,865
Investments in shell companies		—		—		1,484		1,484
Fixed income		—		469		—		469
Other investments		—		—		372		372

Total financial instruments owned	$	7,485		469		18,058		26,012


Liabilities:
Financial instruments sold, not yet purchased	$	2,299		—		—		2,299

Total financial instruments sold, not yet purchased	$	2,299		—		—		2,299

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


	December 31, 2010

	Level I		Level II		Level III		Total

Assets:
Financial instruments owned:
Corporate equity securities	$	5,700		—		1,797		7,497
Merchant banking investments		—		—		10,557		10,557
Warrants		—		—		15,570		15,570
Notes		—		—		2,197		2,197
Investments in shell companies		—		—		1,654		1,654
Other investments		—		—		505		505

Total financial instruments owned	$	5,700		—		32,280		37,980


Liabilities:
Financial instruments sold, not yet purchased	$	3,918		—		—		3,918

Total financial instruments sold, not yet purchased	$	3,918		—		—		3,918

Financial instruments are assessed on a quarterly basis to determine the appropriate classification within the fair value hierarchy, as defined by ASC 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 $2.9 million in transfers between Level I and Level III classified instruments during the nine months ended September 30, 2011. The transfers primarily relate to non-publicly traded promissory notes that were converted into publicly traded common stock.

The following is a description of the valuation basis, including valuation techniques and inputs, used in measuring the Company’s financial assets and liabilities that are accounted for at fair value on a recurring basis:

Corporate Equity Securities.

Exchange Traded Equity Securities: Exchange-traded equity securities are measured based on quoted exchange prices, which are generally obtained from pricing services, and are categorized as Level I in the fair value hierarchy.

Non-exchange Traded Equity Securities: Non-exchange traded equity securities are categorized as Level III financial instruments and measured using valuation techniques involving quoted prices of, or market data for, comparable companies, similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the company. When using pricing data of comparable companies, judgment must be applied to adjust the pricing data to account for differences between the measured security and the comparable security (e.g., issuer market capitalization, yield, dividend rate, geographical concentration).

Merchant Banking Investments.

The value of the Company’s investment in Aceras BioMedical’s assets is categorized as Level III financial instruments and was determined based on a valuation which takes into consideration, when applicable, cash received, cost of the investment, market participant inputs, estimated cash flows based on entity specific criteria, purchase multiples paid in other comparable third-party transactions, market conditions, liquidity, operating results and other qualitative and quantitative factors. The values at which the Company’s investments are carried on its books are adjusted to estimated fair value at the end of each quarter taking into account general economic and stock market conditions.

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Warrants and Options.

Notes.

Notes categorized within Level III are valued based on estimates of future cash flow incorporating assumptions regarding creditor default and recovery rates and consideration of the issuer’s capital structure.

Investments in Shell Companies.

Investments in shell companies are categorized as Level III financial instruments and are valued at cost, which for this type of instrument approximates fair value.

Fixed Income.

Fixed income consists of municipal securities which are categorized as Level II and measured based on quoted prices obtained from external data providers.

Other Investments.

Other investments consist of equity limited partnerships which are categorized as Level III financial instruments. The investments are valued based on net asset values.

The following is a summary of changes in fair value of the Company’s financial assets and liabilities that have been classified as Level III for the three months and nine months ended September 30, 2011 and 2010 (in thousands of dollars):


	Three Months Ended September 30, 2011

	Corporate Equity Securities			Merchant Banking			Warrants			Notes			Shells		Other			Total

Balance, June 30, 2011	$	1,304			9,888			11,429			11			1,484		374			24,490
Purchases / issuances		2			—			1,260			—			—		—			1,262
Sales / settlements		—			—			(632	)		—			—		—			(632	)
Transfer to Level I		(597	)		—			—			(11	)		—		—			(608	)
Realized and unrealized losses (1)		(350	)		(890	)		(5,212	)		—			—		(2	)		(6,454	)

Balance, September 30, 2011	$	359			8,998			6,845			—			1,484		372			18,058

Change in unrealized losses relating to instruments still held at September 30, 2011	$	(350	)		(890	)		(5,212	)		—			—		(2	)		(6,454	)



(1) Reported in Principal transactions in the Consolidated Statements of Operations.

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


	Three Months Ended September 30, 2010

	Corporate Equity Securities		Merchant Banking		Warrants			Notes			Shells		Other			Total

Balance, June 30, 2010	$	1,313		9,495		14,950			2,771			1,654		758			30,941
Purchases / issuances		136		200		89			19			—		—			444
Sales / settlements		—		—		(417	)		(50	)		—		—			(467	)
Deconsolidation of Aceras BioMedical		—		—		—			—			—		—			—
Realized and unrealized gains/(losses) (1)		—		24		(812	)		(241	)		—		(141	)		(1,170	)

Balance, September 30, 2010	$	1,449		9,719		13,810			2,499			1,654		617			29,748

Change in unrealized gains/(losses) relating to instruments still held at September 30, 2010	$	—		24		(783	)		(242	)		—		(141	)		(1,142	)



(1) Reported in Principal transactions in the Consolidated Statements of Operations.


	Nine Months Ended September 30, 2011

	Corporate Equity Securities			Merchant Banking			Warrants			Notes			Shells			Other			Total

Balance, December 31, 2010	$	1,797			10,557			15,570			2,197			1,654			505			32,280
Purchases / issuances		1,158			9			9,145			—			—			2			10,314
Sales / settlements		—			(951	)		(6,774	)		—			—			—			(7,725	)
Transfer to Level I		(910	)		—			—			(1,943	)		—			—			(2,853	)
Realized and unrealized losses (1)		(1,686	)		(617	)		(11,096	)		(254	)		(170	)		(135	)		(13,958	)

Balance, September 30, 2011	$	359			8,998			6,845			—			1,484			372			18,058

Change in unrealized losses relating to instruments still held at September 30, 2011	$	(373	)		(617	)		(11,791	)		(252	)		(170	)		(135	)		(13,338	)



(1) Reported in Principal transactions in the Consolidated Statements of Operations.


	Nine Months Ended September 30, 2010

	Corporate Equity Securities		Merchant Banking			Warrants			Notes			Shells		Other			Total

Balance, December 31, 2009	$	1,313		22,251			22,945			1,920			1,654		893			50,976
Purchases / issuances		136		200			8,052			1,051			—		—			9,439
Sales / settlements		—		—			(4,845	)		(550	)		—		—			(5,395	)
Deconsolidation of Aceras BioMedical		—		(12,821	)		—			—			—		—			(12,821	)
Realized and unrealized gains/(losses) (1)		—		89			(12,342	)		78			—		(276	)		(12,451	)

Balance, September 30, 2010	$	1,449		9,719			13,810			2,499			1,654		617			29,748

Change in unrealized gains/(losses) relating to instruments still held at September 30, 2010	$	—		89			(11,728	)		77			—		(276	)		(11,838	)



(1) Reported in Principal transactions in the Consolidated Statements of Operations.

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 5 – Goodwill and Other Intangible Assets

The following table represents a summary of the changes to goodwill and other intangible assets from December 31, 2010 to September 30, 2011 (in thousands of dollars):


	Goodwill		Customer Relationships			Trademark			Total

Balance, December 31, 2010	$	334		92			175			601

Additions		391		—			—			391
Amortization		—		(92	)		(18	)		(110	)

Balance, September 30, 2011	$	725		—			157			882

The acquisition of Hudson was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations.” Accordingly, goodwill was measured as the excess of the acquisition-date fair value of the consideration transferred over the amount of acquisition-date identifiable assets acquired, net of assumed liabilities. Goodwill of $0.4 million was recorded as an asset in the consolidated statement of financial condition, which has been allocated to the Company’s Capital Markets segment. The allocation of the purchase price is preliminary and will be finalized upon completion of the analysis of the fair values of the net assets of Hudson. The final goodwill and intangible assets recorded on the consolidated statement of financial condition may differ from that reflected herein as a result of future measurement period adjustments. In management’s opinion, the goodwill represents the value expected from the synergies created through the operational enhancement benefits that will result from the integration of Hudson’s business and the reputation and expertise of Hudson in the equity trading business. Preliminarily, no intangible assets have been identified.

The annual review of goodwill was performed as of September 30, 2011 and the fair value of the reporting unit was determined to be in excess of the carrying value of goodwill.

NOTE 6 - Commitments and Contingencies

Lease Commitments

The Company leases its headquarters and other office locations under non-cancelable lease agreements which expire between 2011 and 2014. The Company lease for the 20th floor at 1251 Avenue of the Americas, New York, NY (the “NY Lease”) expires in October 2013. As of September 30, 2011, the only significant change in the Company’s lease agreements since December 31, 2010 is the assumption of Hudson’s Jersey City, New Jersey office lease which expires in 2012. The New Jersey office was for the most part abandoned in August 2011.

Letter of Credit

In connection with the NY Lease, the Company issued a letter of credit in favor of the landlord in the sum of $0.8 million, as a security deposit. The letter of credit expires in February 2012 but is subject to automatic extension. The Company has issued additional letters of credit totaling $0.4 million in favor of other landlords for other office locations.

Equity Commitment

The Company, through its wholly owned subsidiary, Rodman Principal Investments, LLC (“RPI”), has made an investment commitment to Aceras BioMedical to fund its operating budget and Aceras BioMedical’s principal investments in life science companies. At September 30, 2011, $11.2 million of this commitment remained unfunded.

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 7 - Net Capital Requirements

R&R is subject to various regulatory requirements, including the SEC’s Uniform Net Capital Rule (SEC Rule 15c3-1). These regulations place limitations on certain transactions, such as repaying subordinated borrowings, paying cash dividends, and making loans to a parent, affiliates or employees. Broker-dealers are prohibited from such transactions which would result in a reduction of its total net capital to less than 120% of its required minimum net capital. Moreover, broker-dealers are required to notify the SEC before entering into any such transactions, which if executed, would result in a reduction of 30% or more of its excess net capital (net capital less the minimum requirement). The SEC has the ability to prohibit or restrict such transactions if the result is detrimental to the financial integrity of the broker-dealer.

At September 30, 2011, R&R had net capital of $4.4 million, which was $3.4 million in excess of its required net capital of $1.0 million.

NOTE 8 - Income Taxes

Management evaluated the realizability of its deferred tax assets as of September 30, 2011 and determined that a further valuation allowance was not necessary due to future operations and the reversal of taxable temporary differences.

The Company does not anticipate any change in the amount of unrecognized tax benefits within the next twelve months. The Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Company is no longer subject to federal, state, local or non-U.S. income tax examinations by tax authorities for years before 2006. Tax years 2006 through 2010 remain open to examination by the U.S. federal, state, and foreign tax authorities.

NOTE 9 - Stock-Based Compensation

The Company recorded stock-based compensation of $0.6 million and $0.4 million for the three month periods ended September 30, 2011 and 2010, respectively and $2.4 million and $(0.5) million for the nine month periods ended September 30, 2011 and 2010, respectively. The negative stock-based compensation in the 2010 periods was due to several large forfeitures offsetting stock-based compensation expense during the period. The unamortized deferred stock-based compensation balance as of September 30, 2011 was $5.5 million and will be fully amortized through 2016.

There were no stock option grants in the first nine months of 2011. A summary of stock options outstanding as of September 30, 2011 is as follows (shares in thousands):


Stock Options	Number of Options			Weighted Average Exercise Price		Weighted Average Grant Date Fair		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value

Outstanding at December 31, 2010		4,107		$	4.07	$	0.96
Expired		(1,491	)		3.78		0.67

Outstanding at September 30, 2011		2,616		$	4.24	$	1.12	1.3 years	$	—

Exercisable at September 30, 2011		2,616		$	4.24	$	1.12	1.3 years	$	—

Total compensation cost associated with stock options was $0 and $10,000 for the three months ended September 30, 2011 and 2010, respectively and $0 and $86,000 for the nine months ended September 30, 2011, and 2010, respectively.

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table details the activity of restricted stock (shares in thousands):


Restricted Stock	Number of Shares			Weighted Average Grant Date Fair Value

Balance at December 31, 2010		88		$	2.33
Forfeited		5			2.28
Vested		(93	)		2.33

Balance at September 30, 2011		—		$	—

Total compensation cost associated with restricted stock was $0 and $55,000 for the three months ended September 30, 2011and 2010, respectively and $37,000 and $0.2 million for the nine months ended September 30, 2011and 2010, respectively.

The following tables detail the activity of RSUs (shares in thousands):


Restricted Stock Units	Shares					Weighted Average Grant Date Fair Value

	Future Service Required			No Future Service Required (1)		Future Service Required		No Future Service Required


Balance at December 31, 2010		5,563			1,707	$	1.28	$	1.13
Granted		1,527			—		1.34		—
Forfeited		(369	)		—		1.13		—
Vested		(1,047	)		1,047		1.10		1.10
Distribution of underlying shares		—			—		—		—

Balance at September 30, 2011		5,674			2,754	$	1.34	$	1.12



(1) Represents fully vested RSUs which are still subject to transferability restrictions.

Approximately 1.5 million RSUs were granted, primarily to former Hudson employees, during the nine months ended September 30, 2011.

Total compensation cost associated with RSUs was $0.6 million and $0.3 million for the three months ended September 30, 2011 and 2010, respectively and $2.4 million and ($0.8 million) for the nine months ended September 30, 2011 and 2010. The negative stock-based compensation in the 2010 periods was due to several large forfeitures offsetting stock-based compensation expense during the period.

NOTE 10 - Weighted Average Shares Outstanding

In conjunction with the acquisition of Hudson, outstanding warrants to purchase Hudson common stock were converted into 310,817 warrants to purchase the Company’s common stock at an average exercise price of $23.85. As of September 30, 2011, the aggregate intrinsic value of these warrants was zero.

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The table below reconciles weighted average number of common shares outstanding, basic and diluted, for the three month and nine month periods ended September 30, 2011 and 2010 (weighted average shares in thousands):


			Three months ended September 30,					Nine months ended September 30,

			2011		2010			2011			2010

Shares outstanding	(1	)		34,669		34,509			34,359			35,039
Unearned restricted stock	(2	)		—		(93	)		(15	)		(110	)
Earned RSUs	(3	)		2,656		1,697			2,385			1,409

Shares outstanding, basic				37,325		36,113			36,729			36,338

Stock options and warrants	(4	)		—		—			—			—
Non-vested restricted stocks and RSUs	(4	)		—		—			—			—

Shares outstanding, diluted				37,325		36,113			36,729			36,338


	(1)	Shares outstanding represents shares issued less shares repurchased in treasury stock.
	(2)	As restricted stock is contingent upon a future service condition, unearned shares are removed from shares outstanding in the calculation of basic EPS as the Company’s obligation to issue these shares remains contingent.
	(3)	As earned RSUs are no longer contingent upon a future service condition and are issuable upon a certain date in the future, earned restricted stock units are added to shares outstanding in the calculation of basic EPS.
	(4)	Calculated under the treasury stock method. The treasury stock method assumes the issuance of only a net incremental number of shares as proceeds from issuance are assumed to be used to repurchase shares at the average stock price for the period.

NOTE 11 – Segment Reporting

The Company operates in two business segments, Capital Markets and Merchant Banking. The Capital Markets reportable segment includes the Company’s investment banking, sales and trading activities and research. The Capital Markets reportable segment is managed as a single operating segment that provides the following principal sources of revenue:


	•	investment banking fees, which are derived from corporate finance activities and strategic advisory services;
	•	realized and unrealized gains with respect to securities held for the Company’s own account;
	•	commissions on sales and trading activities;
	•	conference fees; and
	•	other miscellaneous sources of revenues, such as interest.

Although the Company has multiple sources of revenue derived within Capital Markets, most of its revenue is derived from (a) investment banking services and consists of private placement, underwriting and strategic advisory fees earned upon the successful completion of financing or other types of corporate transactions, such as mergers, acquisitions and dispositions and (b) sales and trading activities.

The Merchant Banking segment is primarily comprised of operating activities related to Aceras BioMedical. On May 12, 2008, the Company formed Aceras BioMedical, a joint venture through which it, in partnership with Aceras Partners, LLC, makes principal investments in early-stage biotechnology and life sciences companies. In conjunction with the establishment of the joint venture, the Company formed RPI, which holds a 50% stake in Aceras BioMedical and serves as the holding vehicle for all of its principal-related businesses. At September 30, 2011, $11.2 million of this commitment remained unfunded. RPI receives 50% of Aceras BioMedical’s economic interest in all investments made.

RODMAN & RENSHAW CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Company’s net revenues, expenses, and total assets by segment are summarized below (in millions of dollars):


	Capital Markets			Merchant Banking			Total

2011
Three Months Ended September 30
Total revenues	$	10.9			0.3			11.2
Expenses	$	25.2			0.9			26.1
Operating loss	$	(14.3	)		(0.6	)		(14.9	)
Segment assets	$	57.4			9.0			66.4

Nine Months Ended September 30
Total revenues	$	53.6			0.8			54.4
Expenses	$	77.3			2.8			80.1
Operating loss	$	(23.7	)		(2.0	)		(25.7	)
Segment assets	$	57.4			9.0			66.4

2010
Three Months Ended September 30
Total revenues	$	17.3			0.1			17.4
Expenses	$	22.8			0.6			23.4
Operating loss	$	(5.5	)		(0.5	)		(6.0	)
Segment assets	$	61.0			9.7			70.7

Nine Months Ended September 30
Total revenues	$	60.2			1.3			61.5
Expenses	$	68.6			2.5			71.1
Operating loss	$	(8.4	)		(1.2	)		(9.6	)
Segment assets	$	61.0			9.7			70.7

NOTE 12 – Subsequent Event

On October 31, 2011, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the accredited investors named therein (the “Purchasers”). Pursuant to the Purchase Agreement, the Company sold, and the Purchasers purchased, jointly and not severally, $6,650,000 original principal amount of the Company’s 10% Senior Secured Convertible Debentures due October 31, 2013 (the “Debentures”) with a net share settlement feature, and warrants (the “Warrants”) to purchase shares of the Company’s Common Stock (the “Offering”). The Debentures are convertible into up to 4,433,333 shares of the Company’s common stock (the “Common Stock”) at any time prior to maturity, based on a conversion price of $1.50 per share. A net share settlement feature of the Debentures could reduce the number of shares of Common Stock issued upon conversion. The Warrants include Class A Warrants covering up to 2,216,667 shares of Common Stock, which are exercisable commencing six months following the date of issuance and until their expiration on October 31, 2014, at $1.50 per share, and Class B Warrants covering up to 2,216,667 shares of Common Stock, which are exercisable only in the event of a prepayment of the Debentures and then only to the extent of up to 50% of the number of shares of Common Stock that would have been issued had the prepaid portion of the Debentures been converted into shares of Common Stock. The Class B Warrants expire on October 31, 2013 and have an exercise price of $1.50 per share. The sale and issuance of the securities was in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended, set forth in Section 4(2) thereof and/or Regulation D thereunder.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our unaudited consolidated
financial statements and the related notes included elsewhere in this report.

Overview

We are a full-service investment bank dedicated to providing corporate finance, strategic advisory and related services to public and private companies across multiple sectors and regions. We also provide research and sales and trading services primarily to institutional investors. We are the leader in the PIPE (private investment in public equity) and RD (registered direct offering) transaction markets. We have been ranked the #1 Placement Agent by deal volume of PIPE and RD financing transactions completed every year since 2005. The sectors that we currently serve include life science/healthcare, energy, metals & mining, industrials, airlines, technology, and cleantech. Our primary product and service offerings include financing transactions, including private placements and public offerings. We also provide research and sales and trading services to institutional investors.

Business Segments

We operate in two business segments, Capital Markets and Merchant Banking. The Capital Markets reportable segment includes our investment banking, sales and trading activities and research. The Capital Markets reportable segment is managed as a single operating segment that provides the following principal sources of revenue:


	•	investment banking fees, which are derived from corporate finance activities and strategic advisory services;
	•	realized and unrealized gains with respect to securities held for our own account;
	•	commissions on sales and trading activities;
	•	conference fees; and
	•	other miscellaneous sources of revenues, such as interest.

The Merchant Banking segment is primarily comprised of operating activities related to Aceras BioMedical. On May 12, 2008, we formed Aceras BioMedical, a joint venture through which we, in partnership with Aceras Partners, LLC, make principal investments in early-stage biotechnology and life sciences companies. In conjunction with the establishment of the joint venture, we formed a new wholly-owned subsidiary which holds a 50% stake in Aceras BioMedical and serves as the holding vehicle for all of our principal-related businesses. At September 30, 2011, our outstanding investment commitment to Aceras BioMedical to fund operations and the joint venture’s principal investments in life science companies was $11.2 million. We receive 50% of Aceras BioMedical’s economic interest in all investments made.

Business Environment

The third quarter was a very difficult period in our industry. With the many geopolitical and economic uncertainties, it is difficult to time a market recovery or predict its sustainability. Market conditions and valuations for companies in the healthcare, metals & mining, oil & gas, technology and clean-tech sectors and other sectors in which we are active, as well as general market conditions, can materially affect our financial performance. Declining valuations in various sectors in which we are active, unprecedented volatility and lack of liquidity in certain sectors of the capital markets, as well as a slowing of economic growth generally has led to declines in financing activity, smaller financing transactions, and declining trading activity and a resulting decline in revenue from prior periods. It is not possible to predict whether, and to what degree, these conditions will continue, abate, or reverse, and the level of capital markets and trading activity is expected to remain uncertain for the foreseeable future. In addition, the nature of our revenue generation, including the size of transactions, the timing of transaction closings and the sectors in which those transactions occur, make future performance difficult to predict and potentially highly variable. Revenues for many of the services we provide are earned only upon the successful completion of a transaction. Accordingly, revenues and net income in any period may not be indicative of full-year results or the results of any other period and may vary significantly from period to period.

Critical Accounting Policies

Our Consolidated Financial Statements are prepared in conformity with GAAP, which require management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and related notes. Actual results can and will differ from estimates. These differences could be material to the financial statements.

We believe our application of accounting policies and the estimates required therein are reasonable. These accounting policies and estimates are constantly re-evaluated, and adjustments are made when facts and circumstances dictate a change. Historically, actual results have not differed materially from those determined using necessary estimates.

Our management believes that our critical accounting policies (policies that are both material to the financial condition and results of operations and require management’s most difficult subjective or complex judgments) are our valuation of financial instruments, valuation of goodwill and other intangible assets, income taxes and our use of estimates related to compensation and benefits during the year.

Valuation of Financial Instruments

Fair value generally is based on quoted market prices. If quoted market prices are not available, fair value is determined based on other relevant factors, including dealer price quotations, price activity for equivalent instruments and valuation pricing models. Among the factors considered in determining the fair value of financial instruments are discount margins, weighted average spreads, discounted anticipated cash flows, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, as well as other measurements. Certain financial instruments have bid and ask prices that can be observed in the marketplace. For financial instruments whose inputs are based on bid-ask prices, such financial instruments are adjusted to the point within the bid-ask range that meets our best estimate of fair value. For offsetting positions in the same financial instrument, the same price within the bid-ask spread is used to measure both the long and short positions.

The valuation process for financial instruments may include the use of valuation models and other techniques. Adjustments to valuations derived from valuation models may be made when, in our judgment, either the size of the position in the financial instrument in a non-active market or other features of the financial instrument such as its complexity, or the market in which the financial instrument is traded require that an adjustment be made to the value derived from the models. An adjustment may be made if a financial instrument is subject to sales restrictions that would result in a price less than the quoted market price. Adjustments from the price derived from a valuation model reflect management’s judgment that other participants in the market for the financial instrument being measured at fair value would also consider in valuing that same financial instrument and are adjusted for assumptions about risk uncertainties and market conditions. Results from valuation models and valuation techniques in one period may not be indicative of future period fair value measurements.

Financial instruments owned and financial instruments sold, not yet purchased are stated at fair value, with related changes in unrealized appreciation or depreciation reflected in principal transactions, net in the accompanying Consolidated Statements of Operations. Equity interests in certain private equity securities and limited partnership interests are reflected in the Consolidated Financial Statements at fair value, which is often represented at initial cost until significant transactions or developments indicate that a change in the carrying value of the securities is appropriate. This represents our best estimate of exit price. Generally, the carrying values of these securities will be increased or decreased based on company performance in those instances where market values are readily ascertainable by reference to substantial transactions occurring in the marketplace or quoted market prices.

Fair value is the price 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. In determining fair value, we use various methods including market, income and cost approaches. Based on these approaches, we utilize assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, we are required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial instrument assets and liabilities carried at fair value have been classified and disclosed in one of the following three categories:

Level III is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are unobservable from objective sources. Included in this category are warrants, private securities, convertible notes and loans receivable received in conjunction with our investment banking and merchant banking activities and limited partnership interests.

Compensation and Benefits

The use of estimates is important in determining compensation and benefits expenses for interim and year end periods. A substantial portion of our compensation and benefits represents discretionary bonuses. In addition to the level of net revenues and pre-tax income, our overall compensation expense in any given year is influenced by prevailing labor markets, revenue mix and our use of equity-based compensation programs. We believe the most appropriate way to allocate estimated annual discretionary bonuses among interim periods is in proportion to net revenues and pre-tax income earned or reasonably expected. Consequently, we generally accrue interim compensation and benefits based on annual targeted compensation amounts and interim revenues received.

Income Taxes

Management on an ongoing basis, at least quarterly, evaluates our tax positions and ascertains whether those tax positions that may be uncertain require de-recognition or re-measurement. We do not believe that there are any material uncertain tax position requiring de-recognition or measurement.

Third quarter of 2011 compared to third quarter of 2010

Results of Operations

The following table sets forth our results of operations for the three months ended September 30, 2011 and 2010 (in thousands of dollars):


	Three Months Ended

	September 30, 2011						September 30, 2010

				% of Net Revenue						% of Net Revenue

Revenues:
Investment banking	$	7,896						15,101
Merchant banking		298						76
Brokerage		7,084						919
Conference fees		2,716						2,279
Principal transactions		(6,836	)					(1,044	)
Interest and other income		19						31

Total revenues		11,177						17,362


Operating expenses:
Compensation and benefits		12,132			108.5	%		13,530			77.9	%
Conference expense		3,849			34.4	%		3,916			22.6	%
Professional and consulting		1,785			16.0	%		1,464			8.4	%
Occupancy and equipment rentals		1,075			9.6	%		778			4.5	%
Advertising and marketing		132			1.2	%		179			1.0	%
Communication and market research		2,086			18.7	%		969			5.6	%
Execution and clearing		937			8.4	%		49			0.3	%
Depreciation and amortization		387			3.5	%		377			2.2	%
Business development		1,302			11.6	%		1,095			6.3	%
Bad debt expense		110			1.0	%		181			1.0	%
Other		2,248			20.1	%		851			4.9	%

Total operating expenses		26,043			233.0	%		23,389			134.7	%


Loss before income taxes		(14,866	)		-133.0	%		(6,027	)		-34.7	%
Income tax benefit		(5,876	)					(1,754	)

Net loss	$	(8,990	)					(4,273	)

Our operating income for the three months ended September 30, 2011 and 2010 included the following non-cash expenses (in thousands of dollars):


	Three Months Ended

	September 30, 2011		September 30, 2010


Stock-based compensation	$	631		361
Amortization of forgivable loans		184		709
Depreciation and amortization		388		377

Total	$	1,203		1,447

Revenues

Merchant Banking Segment

Merchant banking revenue, consisting of gains (or losses) on investments by our Aceras BioMedical joint venture and other principal investments activity, was $0.3 million. The values at which our investments are carried on our books are adjusted to estimated fair value at the end of each quarter.

Capital Market Segment

Within our Capital Markets segment we derive revenues from two primary sources — investment banking and sales and trading.

Total revenue for the three months ended September 30, 2011 was $10.9 million, representing a decrease of 37% from $17.3 million in the comparable period of 2010. The decrease was primarily due to a $7.2 million decrease in investment banking revenues and a $5.8 million decrease in principal transactions revenues, partially offset by a $6.2 million increase in brokerage revenues.

Investment Banking Revenue

Our investment banking revenue is derived from private placement and underwriting activities and strategic advisory services. The following table sets forth our revenue from our investment banking activities for the three months ended September 30, 2011 and 2010 (in thousands of dollars):


	Three Months Ended

	September 30, 2011		September 30, 2010

Revenue:
Private placement and underwriting	$	6,648		5,996
Strategic advisory		1,248		9,105

Total investment banking revenue	$	7,896		15,101

Investment banking revenue was $7.9 million for the three months ended September 30, 2011, which included $1.3 million related to warrants received as compensation for activities as underwriter or placement agent valued using Black-Scholes, as compared to revenue of $15.1 million, which included $0.5 million related to warrants received as compensation for activities as underwriter or placement agent valued using Black-Scholes, in the comparable period of 2010:


	§	Private placement and underwriting revenue for the quarter was $6.6 million, including $1.3 million of fair value related to warrants received, compared to $6.0 million, including $0.5 million of fair value related to warrants received, in the comparable period of 2010. The decrease in investment banking revenue was due to a very difficult market environment that persisted throughout the quarter as well as a decrease in China related investment banking activity.

	§	Strategic advisory fees for the three months ended September 30, 2011 were $1.2 million, compared to $9.1 million for comparable period of 2010. Strategic advisory fees decreased because the third quarter of 2010 included two significant sell side engagements in the metals & mining sector and the completion of one large advisory engagement in the oil & gas space.

Sales and Trading

Brokerage revenue was $7.1 million, net of $0.4 million of soft dollar expense for the three months ended September 30, 2011, compared with $0.9 million for the three months ended September 30, 2010. The increase in brokerage revenues was primarily due to the Hudson business acquired in the second quarter of 2011.

Principal Transactions

Principal transactions revenue was a $6.8 million loss for the three months ended September 30, 2011, compared with a $1.0 million loss for the three months ended September 30, 2010, principally related to the reduced value of our warrant portfolio. The decline in our warrant portfolio value is related to the reduction in the market value of the securities underlying warrants resulting from adverse market conditions in small cap financial instruments.

The following discussion combines Capital Markets and Merchant Banking expenses.

Expenses

Compensation

Employee compensation and benefits expense for the third quarter of 2011 was $12.1 million, compared to $13.5 million for the third quarter of 2010 and $15.2 million for the second quarter of 2011. Employee compensation and benefits expense for the three months ended September 30, 2011, excluding the $0.6 million in severance expense from compensation and excluding the $6.8 million principal transactions loss from revenue, represented 64% of transaction related revenue (revenue excluding principal transactions), compared to 74% in the comparable 2010 period. The Company targets a compensation ratio of 60% of transaction related revenue on an annualized basis.

Non-Compensation Expenses

Non-compensation expense was $13.9 million for the three months ended September 30, 2011, comparable to the $9.9 million for the prior year period. The increase from the prior year’s quarter in non-compensation expense was mostly due to additional fixed and variable expenses related to the acquisition of Hudson, including a $1.1million increase in communication and market research, a $1.4 million increase in other expense, and a $0.9 million increase in execution and clearing.

Income Taxes

Income tax benefit for the third quarter was $5.9 million which represents a 39.5% effective tax rate compared to a 29.1% effective tax rate for the comparable 2010 period.

Nine months of 2011 compared to nine months of 2010

Results of Operations

The following table sets forth the results of operations for the nine months ended September 30, 2011 and 2010 (in thousands of dollars):


	Nine Months Ended

	September 30, 2011						September 30, 2010

				% of Net Revenue						% of Net Revenue

Revenues:
Investment banking	$	50,074						65,152
Merchant banking		837						1,316
Brokerage		14,699						2,905
Conference fees		3,162						3,158
Principal transactions		(14,396	)					(11,204	)
Interest and other income		44						151

Total revenues		54,420						61,478


Operating expenses:
Compensation and benefits		45,226			83.1	%		40,546			66.0	%
Conference expense		6,795			12.5	%		9,932			16.2	%
Professional and consulting		5,888			10.8	%		5,165			8.4	%
Occupancy and equipment rentals		2,916			5.4	%		2,332			3.8	%
Advertising and marketing		589			1.1	%		1,256			2.0	%
Communication and market research		4,980			9.2	%		2,600			4.2	%
Depreciation and amortization		1,181			2.2	%		1,231			2.0	%
Execution and clearing		2,155			4.0	%		167			0.3	%
Business development		3,985			7.3	%		3,630			5.9	%
Impairment of other intangibles		—			0.0	%		933			1.5	%
Bad debt expense		158			0.3	%		666			1.1	%
Other		6,251			11.5	%		2,679			4.4	%

Total operating expenses		80,124			147.2	%		71,137			115.7	%


Loss before income taxes		(25,704	)		-47.2	%		(9,659	)		-15.7	%
Income tax benefit		(8,645	)					(2,909	)

Net loss	$	(17,059	)					(6,750	)

Our operating income for the nine months ended September 30, 2011 and 2010 included the following non-cash expenses (in thousands of dollars):


	Nine Months Ended

	September 30, 2011		September 30, 2010


Stock-based compensation	$	2,354		(517	)
Amortization of forgivable loans		1,133		1,945
Depreciation and amortization		1,181		1,321
Impairment of intangibles		—		933

Total	$	4,668		3,682

Revenues

Merchant Banking Segment

Merchant banking revenue, consisting of gains (or losses) on investments by our Aceras BioMedical joint venture and other principal investments activity, was $0.8 million. The values at which our investments are carried on our books are adjusted to estimated fair value at the end of each quarter.

Capital Market Segment

Within our Capital Markets segment we derive revenues from two primary sources — investment banking and sales and trading.

Total revenue for the nine months ended September 30, 2011 was $53.6 million, representing a decrease of 11% from $60.2 million in the comparable period of 2010. The decrease was primarily due to a $15.1 million decrease in investment banking revenues and a $3.2 million decrease in principal transactions revenues, partially offset by an $11.8 million increase in brokerage revenues.

Investment Banking Revenue

Our investment banking revenue is derived from private placement and underwriting activities and strategic advisory services. The following table sets forth our revenue from our investment banking activities for the nine months ended September 30, 2011 and 2010 (in thousands of dollars):


	Nine Months Ended

	September 30, 2011		September 30, 2010

Revenue:
Private placement and underwriting	$	45,320		53,342
Strategic advisory		4,754		11,810

Total investment banking revenue	$	50,074		65,152

Investment banking revenue was $50.1 million for the nine months ended September 30, 2011, which included $9.1 million related to warrants received as compensation for activities as underwriter or placement agent valued using Black-Scholes, as compared to revenue of $65.2 million, which included $9.3 million related to warrants received as compensation for activities as underwriter or placement agent valued using Black-Scholes, in the comparable period of 2010:


	§	Private placement and underwriting revenue for the nine months ended September 30, 2011 was $45.3 million, including $9.1 million of fair value related to warrants received, compared to $53.3 million, including $9.3 million of fair value related to warrants received, in the comparable period of 2010. The decrease in investment banking revenue is a result of a decrease in industry wide capital markets activity.

	§	Strategic advisory fees for the nine months ended September 30, 2011 were $4.8 million, compared to $11.8 million for comparable period of 2010. Strategic advisory fees decreased because the third quarter of 2010 included two significant sell side engagements in the metals & mining sector and the completion of one large advisory engagement in the oil & gas space.

Sales and Trading

Brokerage revenue was $14.7 million, net of $1.5 million of soft dollar expense, for the nine months ended September 30, 2011, compared with $2.9 million for the nine months ended September 30, 2010. The increase in brokerage revenues was primarily due to the Hudson business acquired in the second quarter of 2011.

Principal Transactions

Principal transactions revenue was a $14.4 million loss for the nine months ended September 30, 2011, compared with an $11.2 million loss for the nine months ended September 30, 2010, principally related to the reduced value of our warrant portfolio. The decline in our warrant portfolio value is related to the reduction in the market value of the securities underlying warrants resulting from adverse market conditions in small cap financial instruments.

The following discussion combines Capital Markets and Merchant Banking expenses.

Expenses

Compensation

Employee compensation and benefits expense for the nine months ended September 30, 2011 was $45.2 million, compared to $40.5 million for the comparable 2010 period. Employee compensation and benefits expense for the nine months ended September 30, 2011, excluding the $1.3 million in severance expense from compensation and excluding the $14.4 million principal transactions loss from revenue, represented 64% of transaction related revenue (revenue excluding principal transactions), compared to 56% in the comparable 2010 period. The Company targets a compensation ratio of 60% of transaction related revenue on an annualized basis.

Non-Compensation Expenses

Non-compensation expense was $34.9 million for the nine months ended September 30, 2011, comparable to the $30.6 million for the prior year period. The increase was primarily due to a $2.4 million increase in communication and market research, a $3.6 million increase in other expense, and a $2.0 million increase in execution and clearing, offset by a $3.1 million decrease in conference expense and a decrease of $0.9 million in impairment of other intangibles.

Income Taxes

Income tax benefit for the nine months was $8.6 million which represents a 33.6% effective tax rate compared to a 30.1% effective tax rate for the comparable 2010 period.

Liquidity and Capital Resources

We have historically satisfied our capital and liquidity requirements through cash generated internally from operations, however, on October 31, 2011 we raised $6.65 million of 10% Convertible Secured Debentures due 2013 with a net settlement feature, and warrants in a private placement financing.

Since June 2011, we have significantly reduced our fixed costs. During this period, we have:


	•	Cut annualized fixed compensation expense by approximately $5.0 million, including salaries of our CEO and other founder senior executives. Reduced fixed payroll by approximately 20% without affecting the core strength of our platform;

	•	Terminated research coverage on all China based companies due to market conditions. In addition, Rodman has refocused certain investment banking resources on the U.S. markets and its core sectors of expertise, including healthcare, oil & gas, metals & mining, technology and clean-tech. Such initiatives are expected to result in $2.4 million of annualized cost savings;

	•	Suspended our China Investor Conference due to market conditions, which is expected to result in $2.9 million of cost savings.

	•	Terminated or modified certain vendor relationships to align with market driven needs which is expected to result in $1.0 million in cost savings;

Based upon our current expense structure giving effect to the cost savings initiatives described above, it is estimated that for the Company to be cash-flow positive in 2012 it will need to generate approximately $43 million in investment banking cash revenue and approximately $30 million in brokerage revenue. Investment banking revenue for the first nine months of 2011 was approximately $50 million (approximately $41 million in cash and $9 million representing the value of warrants received) and our brokerage revenue since the Hudson acquisition is annualizing at an approximate $28 million run rate. If we cannot achieve positive cash-flow from operations during 2012, then we may need to satisfy our capital and liquidity requirements though cash inflows from financing activities.

At December 31, 2010, we had liquid assets, consisting of unrestricted cash, restricted cash, “Level I” assets less “Level I” liabilities, “Level II” assets (consisting of municipal securities) less “Level II” liabilities (also consisting of municipal securities), net current receivables, and due to / due from clearing brokers of $30.7 million. As of September 30, 2011, we had liquid assets of $16.6 million. The decrease in liquid assets primarily relates to 2010 year-end bonus payments of $14.7 million and treasury stock purchases of $2.5 million.

Subsequent to September 30, 2011, we raised $6.65 million of gross proceeds in a private placement financing comprised of $6.65 million of 10% Senior Secured Convertible Debentures due October 31, 2013 with a net share settlement feature, and warrants (see Note 12).

The timing of bonus and retention compensation payments to our employees may significantly affect our cash position and liquidity from period-to-period. While our employees are generally paid salaries and draws on a semi-monthly basis during the year, bonus payments, which make up a significant portion of total compensation, are generally paid semi-annually or annually.

As a registered securities broker-dealer, we are subject to the net capital requirements of the uniform net capital requirement set forth in Rule 15c3-1 promulgated by the SEC pursuant to the Exchange Act. SEC regulations also provide that equity capital may not be withdrawn or cash dividends paid if certain minimum net capital requirements are not met. At September 30, 2011, we had excess net capital of $3.4 million. Regulatory net capital requirements may change based on investment and underwriting activities.

Because of the nature of settlement transactions in our investment banking and brokerage business, we regularly monitor our liquidity position, including our cash and net capital positions. In light of the uncertainty with respect to the timing of a market recovery and its potential impact on the timing of our receipt of anticipated funds from operating activities, we regularly explore capital raising alternatives.

Cash Flows

Unrestricted cash and cash equivalents were $12.0 million at September 30, 2011, a decrease of $1.4 million from $13.4 million at December 31, 2010.

Operating activities provided $3.9 million of cash and cash equivalents during the nine months ended September 30, 2011.

The primary components of cash used for the nine months ended September 30, 2011 were: (a) $2.5 million in treasury stock purchases; (b) $1.6 million in property, equipment and leasehold purchases; and (c) $0.7 million in acquisition related payments.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may result from the change in value of a financial instrument due to fluctuations in its market price. Market risk is inherent in all financial instruments. Market risk may be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Our exposure to market risk is directly related to our role as a financial intermediary in customer trading and to our market-making and investment activities.

We trade in equity securities as an active participant in both listed and OTC equity markets. We maintain securities in inventory to facilitate our market-making activities and customer order flow. We use a variety of risk management techniques and hedging strategies in the ordinary course of our trading business, including establishing position limits by product type and industry sector, closely monitoring inventory turnover, maintaining long and short positions in related securities, and using exchange-traded equity options and other derivative instruments.

In connection with our trading business, management also reviews reports appropriate to the risk profile of specific trading activities. Typically, market conditions are evaluated and transaction details and securities positions are reviewed.

These activities seek to ensure that trading strategies are within acceptable risk tolerance parameters, particularly when we commit our own capital to facilitate client trading. Our accounting department is actively involved in ensuring the integrity and clarity of the daily profit and loss statements, to the extent that we maintain trading positions for a period longer than one day. Activities include price verification procedures, position reconciliation and review of transaction booking. We believe that these procedures, which stress timely communications between our traders and senior management, are important elements of the risk management process.

At September 30, 2011, $6.8 million, or 26% of $26.0 million of financial instruments owned, at fair value, represented investments in warrants received in conjunction with our investment banking activities. $9.0 million or 35% of financial instruments owned is related to our merchant banking activity. The remaining 39% of the financial instruments owned represents listed equity securities, restricted securities and investments in affiliates at fair value and promissory notes received in conjunction with our investment banking activities.

The primary quantifiable market risk associated with our financial instruments is sensitivity to changes in interest rates. Interest rate risk represents the potential loss from adverse changes in market interest rates. The risk management strategies that we employ use various risk sensitivity metrics to measure such risk and to examine behavior under significant adverse market conditions. We use an interest rate sensitivity simulation to assess our interest rate risk exposure. For purposes of presenting the possible earnings effect of a hypothetical, adverse change in interest rates over the 12-month period from our reporting date, we assume that all interest rate sensitive financial instruments will be impacted by a hypothetical, immediate 100 basis point increase in interest rates as of the beginning of the period. The sensitivity is based upon the hypothetical assumption that all relevant types of interest rates that affect our results would increase instantaneously, simultaneously and to the same degree.

The sensitivity analyses of the interest rate sensitive financial instruments are hypothetical and should be used with caution. Changes in fair value based on a 1% or 2% variation in an estimate generally cannot be extrapolated because the relationship of the change in the estimate to the change in fair value may not be linear. Also, the effect of a variation in a particular estimate on the fair value of financial instruments is calculated independent of changes in any other estimate; in practice, changes in one factor may result in changes in another factor, which might magnify or counteract the sensitivities. In addition, the sensitivity analyses do not consider any action that we may take to mitigate the impact of any adverse changes in the key estimates.

Based on our analysis, as of September 30, 2011, the effect of a 100+/- basis point change in interest rates on the value of our warrant portfolio and promissory note and the resultant effect on our pre-tax income is considered immaterial.

The value of Aceras BioMedical’s assets in our merchant banking segment was determined based on a valuation which takes into consideration, when applicable, cash received, cost of the investment, market participant inputs, estimated cash flows based on entity specific criteria, purchase multiples paid in other comparable third-party transactions, market conditions, liquidity, operating results and other qualitative and quantitative factors. The values at which our investments are carried on our books are adjusted to estimated fair value at the end of each quarter and the instability in general economic conditions, stock markets and regulatory conditions may result in significant changes in the estimated fair value of these investments. The primary quantifiable market risk associated with Aceras BioMedical’s assets is sensitivity to changes in interest rates. Based on our analysis as of September 30, 2011 assuming a 100 basis point increase in interest rates, we estimated the reduction of pre-tax income to be immaterial.

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Report (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

Item 1. Legal Proceedings

We face significant legal risks in our businesses and in recent years, as we have expanded, including into China, the volume of claims and amount of damages sought in litigation and regulatory proceedings against investment banking firms have been increasing. These risks include potential liability under Federal securities and other laws in connection with securities offerings and other transactions, including public offerings in which we act as underwriter, as well as advice and opinions we may provide concerning strategic transactions. While we are typically indemnified in connection with such claims, indemnification provisions are often difficult to enforce, particularly in circumstances where the indemnifying party’s principal assets are located outside of the United States, as is the case in many of our underwritten offerings. In addition, like most investment banking firms, we could be the subject of claims made by current and former employees arising out of their employment or termination of employment with us. These claims often relate to dissatisfaction with an employee’s bonus or separation payment, or involve allegations that the employee was the subject of some form of discrimination, retaliation or other unlawful employment practice.

During 2011, we have been named as a party defendant in various litigations brought as class actions relating to underwritten public offering that we participated in involving China based businesses. Each of these actions is in the preliminary stages and while we believe that we have meritorious defenses, the proceedings are at too early a stage to effectively evaluate the merits or predict the outcome. There is no assurance that we will not be named in other actions brought or that the result of the pending actions or any future actions, or the costs of defense of those actions, will not adversely affect us.

Item 1A. Risk Factors

Information regarding our risk factors appears in Part I, Item 1A. of our annual report on Form 10-K for the fiscal year ended December 31, 2010, as amended. These risk factors describe some of the assumptions, risks, uncertainties and other factors that could adversely affect our business or that could otherwise result in changes that differ materially from our expectations. There have been no material changes to the risk factors contained in our annual report except for the following additional risk related to our Common Stock:

Risks Related to Our Common Stock

If we are unable to satisfy NASDAQ’s maintenance requirements, including a bid price of not less than $1.00, our common stock may be delisted from NASDAQ, which could impair the liquidity and the value of our common stock.

While the shares of our common stock have generally satisfied NASDAQ’s continued listing requirements, the price of a share of our common stock is currently below $1.00, the minimum required for continued listing on Nasdaq. Other continued listing requirements include: (i) a minimum of $2,500,000 in stockholders equity, or $35,000,000 in market capitalization, or $500,000 in net income for either the last fiscal year, or two out of the last three fiscal years; (ii) a minimum 500,000 shares in the public float valued at $1,000,000 or more; (iii) a minimum of two active market makers; and (iv) a minimum of 300 holders. If we are unable to satisfy NASDAQ’s maintenance requirements, our securities may be delisted from The NASDAQ Global Market. We cannot assure you that we will be able to continue to satisfy any or all of these criteria. If we fail to meet any on of these criteria, our stock could be delisted from NASDAQ, in which case it would be quoted on the Over the Counter Bulletin Board. The OTC Bulletin Board is not an exchange and is, thus, a less liquid market. Many institutional investors are precluded from holding securities that are quoted on the Bulletin Board and, for that reason, many analysts do not cover stocks that are quoted on the Bulletin Board. As a result, the liquidity of our stock would be impaired, making it more difficult for stockholders to trade their shares on a timely basis.

We may not successfully achieve positive cash flow and profitability in light of current economic and market conditions.

Our ability to achieve positive cash flow and profitability depends on our ability to generate revenues and control expenses. Our revenue generation largely depends on monetizing our investment banking pipeline where fees are primarily success based. In light of prevailing geopolitical, economic and market uncertainties, we cannot predict when, or if, any of our pipeline of investment banking transactions will be consummated. As such, we cannot predict when, or if, we will be able to achieve positive cash flow or profitability on a quarterly or annual basis. Our inability to achieve profitability or positive cash flow could have an adverse impact on our ability to maintain our operations at current levels and the trading price of our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchase of Equity Securities


Period	Shares Purchased		Price Paid per Share		Announced Plans or Programs (1)		Under the Plans or Programs (1)

July 1 - July 31, 2011		200,000	$	1.49		200,000		2,389,648
August 1 - August 31, 2011		230,000	$	1.39		230,000		2,159,648
September 1 - September 30, 2011		160,000	$	1.28		160,000		1,999,648	(2)

Total		590,000	$	1.39		590,000



	(1) On May 25, 2010 we announced a stock repurchase program covering the purchase of up to an aggregate of $5 million of our common stock in the open market in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. On November 15, 2010 we announced an increase of an additional $5 million to our stock repurchase program.
	(2) Based on the closing price per share of our common stock on September 30, 2011 ($1.12 per share).

Item 6. Exhibits


	Exhibit No.		Description

	31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
	31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
	32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
	32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
	101.INS **		XBRL Instance Document
	101.SCH**		XBRL Taxonomy Extension Schema Document
	101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document.
	101.LAB**		XBRL Taxonomy Extension Label Linkbase Document.
	101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document.
	101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document.



*	Filed herewith.
**	Furnished with this report. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 14, 2011


	RODMAN & RENSHAW
	CAPITAL GROUP, INC.

	By:	/s/ Edward Rubin

		Name: Edward Rubin
		Title: Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ David J. Horin

		Name: David J. Horin
		Title: Chief Financial Officer
		(Principal Financial Officer)

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