ITEM 1.   Financial Statements (unaudited)

MERRIMAN CURHAN FORD GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

		Three Months Ended
		March 31,				March 31,
		2010				2009
Revenue:
Commissions		$	10,428,255			$	9,117,928
Principal transactions			(206,781	)			(842,536	)
Investment banking			6,046,673				1,216,417
Advisory and other			239,373				558,813
Total revenue			16,507,520				10,050,622
Operating expenses:
Compensation and benefits			11,915,532				9,265,167
Brokerage and clearing fees			458,216				312,959
Professional services			466,794				767,234
Occupancy and equipment			482,781				576,390
Communications and technology			694,502				721,265
Depreciation and amortization			102,491				147,242
Travel and entertainment			525,932				235,124
Legal services and litigation settlement expense			390,077				345,516
Other			1,103,969				696,623
Total operating expenses			16,140,294				13,067,520
Operating income (loss)			367,226				(3,016,898	)
Other income			-				1,200,000
Interest income			3,335				6,487
Interest expense			(14,920	)			(15,365	)
Income (loss) from continuing operations before income taxes			355,641				(1,825,776	)
Income tax expense			(15,294	)			(3,216	)
Income (loss) from continuing operations			340,347				(1,828,992	)
Income (loss) from discontinued operations			-				(94,894	)
Net income (loss)			340,347				(1,923,886	)
Preferred stock cash dividend		$	(151,800	)		$	-
Net income (loss) attributable to common shareholders		$	188,547			$	(1,923,886	)
Basic net income (loss) per share:
Income (loss) from continuing operations		$	0.03			$	(0.15	)
Loss from discontinued operations			-				(0.01	)
Net income (loss)		$	0.03			$	(0.15	)
Net income (loss) attributable to common shareholders		$	0.01			$	(0.15	)
Diluted net income (loss) per share:
Income (loss) from continuing operations		$	0.01			$	(0.14	)
Income (loss) from discontinued operations			-				(0.01	)
Net income (loss)		$	0.01			$	(0.15	)
Net income (loss) attributable to common shareholders		$	0.00			$	(0.15	)
Weighted average number of common shares:
Basic			12,802,288				12,603,744
Diluted			45,001,720				12,603,744

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

 

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MERRIMAN CURHAN FORD GROUP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(unaudited)

 

		March 31,				December 31,
		2010				2009
Assets
Cash and cash equivalents		$	6,404,282			$	5,656,750
Securities owned:
Marketable, at fair value			3,661,796				4,728,940
Not readily marketable, at estimated fair value			892,003				272,463
Other			81,876				67,448
Restricted cash			1,072,086				1,072,086
Due from clearing broker			2,309,648				2,546,581
Accounts receivable, net			492,914				470,992
Prepaid expenses and other assets			1,156,681				801,946
Equipment and fixtures, net			417,428				506,535
Total assets		$	16,488,714			$	16,123,741
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable		$	463,758			$	346,220
Commissions and bonus payable			3,896,318				4,133,924
Accrued expenses			2,544,581				2,755,831
Due to clearing and other brokers			8,514				7,185
Securities sold, not yet purchased			453,366				161,461
Deferred revenue			65,000				304,334
Capital lease obligation			330,081				397,958
Total liabilities			7,761,618				8,106,913
Stockholders’ equity:
Convertible Preferred stock, Series A–$0.0001 par value; 2,000,000 shares
authorized; 2,000,000 shares issued and 0 shares outstanding as of
March 31, 2010 and December 31 2009; aggregate liquidation
preference of $0			-				-
Convertible Preferred stock, Series B–$0.0001 par value; 12,500,000 shares
authorized; 8,750,000 shares issued and 0 shares outstanding as of
March 31, 2010 and December 31, 2009; aggregate liquidation
preference of $0			-				-
Convertible Preferred stock, Series C–$0.0001 par value; 14,200,000 shares
authorized; 11,800,000 shares issued and 0 shares outstanding as of
March 31, 2010 and December 31, 2009; aggregate liquidation
preference of $0			-				-
Convertible Preferred stock, Series D–$0.0001 par value; 24,000,000
shares authorized, 23,720,916 shares issued and 23,162,778 shares
outstanding as of March 31, 2010;  23,720,916 shares issued and
23,720,916 sharesand outstanding as of December 31, 2009;
aggregate liquidation preference of $9,959,995 prior to conversion,
and pari passu with common stock on conversion			2,316				2,372
Common stock, $0.0001 par value; 300,000,000 shares authorized;
13,762,865 and 12,988,073 shares issued and 13,561,288 and
12,786,496 shares outstanding as of March 31, 2010 and
December 31, 2009, respectively			1,376				1,299
Additional paid-in capital			133,424,093				133,054,192
Treasury stock			(225,613	)			(225,613	)
Accumulated deficit			(124,475,076	)			(124,815,422	)
Total stockholders’ equity			8,727,096				8,016,828
Total liabilities and stockholders’ equity		$	16,488,714			$	16,123,741

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

 

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MERRIMAN CURHAN FORD GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		March 31,				March 31,
		2010				2009
Cash flows from operating activities:
Net income (loss)		$	340,347			$	(1,923,886	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on sale of Institutional Cash Distributors			-				(1,200,000	)
Depreciation and amortization			102,491				157,852
Stock-based compensation			227,631				89,616
Loss on disposal of equipment and fixtures			-				294,379
Provision for uncollectible accounts receivable			(3,841	)			-
Securities received for services			(727,242	)			(168,913	)
Unrealized loss on securities owned			447,798				1,011,777
Changes in operating assets and liabilities:
Securities owned and sold, but not purchased			1,004,523				(2,070,773	)
Restricted cash			-				1,043
Due from clearing broker			236,934				(244,809	)
Accounts receivable			(18,080	)			20,728
Prepaid expenses and other assets			(354,735	)			34,529
Accounts payable			117,537				(381,632	)
Commissions and bonus payable			(237,606	)			856,116
Accrued liabilities			(193,214	)			(1,556,178	)
Due to clearing and other brokers			1,329				(19,180	)
Net cash provided by (used in) operating activities			943,872				(5,099,331	)
Cash flows from investing activities:
Purchase of equipment and fixtures			(13,382	)			-
Sale of Panel Intelligence			-				702,965
Sale of Institutional Cash Distributors			-				1,200,000
Net cash (used in) provided by investing activities			(13,382	)			1,902,965
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants			36,720				-
Preferred stock dividend			(151,800	)			-
Debt service principal payments			(67,878	)			(245,307	)
Net cash used in financing activities			(182,958	)			(245,307	)
Increase (decrease) in cash and cash equivalents			747,532				(3,441,673	)
Cash and cash equivalents at beginning of year			5,656,750				6,358,128
Cash and cash equivalents, assets held for sale			-				222,892
Cash and cash equivalents at end of year		$	6,404,282			$	3,139,347
Supplementary disclosure of cash flow information:
Cash paid during the year:
Interest		$	14,921			$	16,067
Income taxes		$	-			$	3,216
Noncash investing and financing activities:
Warrant issued for legal settlement		$	257,370			$	-
Stock received as part of Panel sale		$	-			$	100,000

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

 

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MERRIMAN CURHAN FORD GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Significant Accounting Policies

 

Basis of Presentation

The interim unaudited financial statements included herein for Merriman Curhan Ford Group, Inc. (formerly MCF Corporation), or the Company, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the financial statements included in this report reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of the results of operations for the interim periods covered and the financial position of the Company at the date of the interim statement of financial condition. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to understand the information presented. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with the Company’s 2009 audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K and on Form 10-K/A for the year ended December 31, 2009.

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

Securities Owned

“Securities owned” and “Securities sold, but not yet purchased” in the consolidated statements of financial condition consist of financial instruments carried at fair value with related unrealized gains or losses recognized in the consolidated statement of operations.   The securities owned are classified into “Marketable,” “Non-marketable” and “Other.”  Marketable securities are those that can readily be sold, either through a stock exchange or through a direct sales arrangement.  Non-marketable securities are typically securities restricted under Rule 144A or have some restriction on their sale whether or not a buyer is identified.  Other securities consist of investments accounted for under the equity method.

Fair Value of Financial Instruments

Substantially all of our financial instruments are recorded at fair value or contract amounts that approximate fair value. Securities owned and securities sold, not yet purchased, are stated at fair value, with any related changes in unrealized appreciation or depreciation reflected in Principal Transactions in the consolidated statements of operations. Financial instruments carried at contract amounts include cash and cash equivalents and amounts due from and to brokers, dealers and clearing brokers.

Fair Value Measurement—Definition and Hierarchy

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

Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. Assets and liabilities recorded at fair value in the consolidated statement of financial condition are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

 

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MERRIMAN CURHAN FORD GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

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

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

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

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

For further information on financial assets and liabilities that are measured at fair value on a recurring and nonrecurring basis, and a description of valuation techniques, see Note 5, Fair Value of Assets and Liabilities.

Investment Banking Revenue

Investment banking revenue includes underwriting and private placement agency fees earned through the Company’s participation in public offerings and private placements of equity and convertible debt securities and fees earned as financial advisor in mergers and acquisitions and similar transactions. Underwriting revenue is earned in securities offerings in which the Company acts as an underwriter and includes management fees, selling concessions and underwriting fees. Fee revenue relating to underwriting commitments is recorded when all significant items relating to the underwriting cycle have been completed and the amount of the underwriting revenue has been determined. This generally is the point at which all of the following have occurred: (i) the issuer’s registration statement has become effective with the SEC, or other offering documents are finalized, (ii) the Company has made a firm commitment for the purchase of the shares or debt from the issuer, and (iii) the Company has been informed of the exact number of shares or the principal amount of debt that it has been allotted.

Syndicate expenses related to securities offerings in which the Company acts as underwriter or agent are deferred until the related revenue is recognized or we determine that it is more likely than not that the securities offerings will not ultimately be completed. Underwriting revenue is presented net of related expenses. As co-manager for registered equity underwriting transactions, management must estimate the Company’s share of transaction related expenses incurred by the lead manager in order to recognize revenue. Transaction related expenses are deducted from the underwriting fee and therefore reduces the revenue that is recognized as co-manager. Such amounts are adjusted to reflect actual expenses in the period in which the Company receives the final settlement, typically 90 days following the closing of the transaction.

Merger and acquisition fees and other advisory service revenue are generally earned and recognized only upon successful completion of the engagement. Unreimbursed expenses associated with private placement and advisory transactions are recorded as expenses as incurred.

 

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MERRIMAN CURHAN FORD GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

1. Significant Accounting Policies — continued

Commissions and Principal Transactions Revenue

Commissions revenue includes revenue resulting from executing trades in stock exchange-listed securities, over-the- counter securities and other transactions as agent for the Company’s clients. Principal transactions consist of a portion of dealer spreads attributed to the Company’s securities trading activities as principal in exchange-listed and other securities, and include transactions derived from activities as a market-maker. Additionally, principal transactions include gains and losses resulting from market price fluctuations that occur while holding positions in trading security inventory. Commissions revenue and related clearing expenses are recorded on a trade-date basis as security transactions occur. Principal transactions in regular-way trades are recorded on the trade date, as if they had settled. Profit and loss arising from all securities and commodities transactions entered into for the account and risk of the Company are recorded on a trade-date basis.

Stock-based Compensation Expense

The Company measures and recognizes compensation expense based on estimated fair values for all stock-based awards made to employees and directors, including stock options, and restricted stock. The Company estimates fair value of stock-based awards on the date of grant using the Black-Scholes option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company’s consolidated statements of operations over the requisite service periods. Stock-based compensation expense recognized in the Company’s consolidated statement of operations includes compensation expense for stock-based awards granted (i) prior to, but not yet vested as of December 31, 2005, based on the grant date fair value, and (ii) subsequent to December 31, 2005. Compensation expense for all stock-based awards subsequent to December 31, 2005 is recognized using the straight-line single-option method. Because stock-based compensation expense is based on awards that are ultimately expected to vest, stock-based compensation expense has been reduced to account for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

To calculate stock-based compensation resulting from the issuance of options, restricted common stock, and warrants, the Company uses the Black-Scholes option pricing model, which is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for all net deferred tax assets.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are determined based on temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which temporary differences are expected to reverse. A valuation allowance is recorded to reduce deferred tax assets to an amount whose realization is more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.

 

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MERRIMAN CURHAN FORD GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

1. Significant Accounting Policies — continued

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates.

 Segment Reporting

The Company has determined that it has only one operating and reportable segment, Merriman Curhan Ford & Co., for the purpose of making operating decisions and assessing performance, which comprised more than 90% of the Company’s consolidated total assets as of March 31, 2010 and December 31, 2009, and consolidated total revenues for the three-month period ended March 31, 2010 and 2009.

New Accounting Pronouncements

 

In February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-09, "Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements," which amends certain provisions of the current guidance, including the elimination of the requirement for disclosure of the date through which an evaluation of subsequent events was performed in issued and revised financial statements. This guidance was effective for the first interim and annual reporting periods beginning after issuance (March 31, 2010 for our company). The adoption of this new guidance did not have a material impact on our consolidated financial statements.

 

In January 2010, the FASB issued Update No. 2010-06, "Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements," which amends the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance also clarifies the existing disclosure requirements in ASC 820-10 regarding: i) the level of disaggregation of fair value measurements; and ii) the disclosures regarding inputs and valuation techniques. The guidance became effective for the Company with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the Company with the reporting period beginning January 1, 2011. Other than requiring additional disclosures, the adoption of this new guidance did not have a material impact on our consolidated financial statements. (See Note 5 - Fair Value of Financial Instruments.)

 

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MERRIMAN CURHAN FORD GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

2. Liquidity

We incurred substantial losses and negative cash flows from operations in 2009 and 2008. We had net losses of $5,462,000 and $30,274,000 in 2009 and 2008, respectively, and negative operating cash flows of $12,648,000 and $24,945,000 for the same respective years. As of March 31, 2010, we had retained deficit of $124,475,000. While we believe our current funds will be sufficient to enable us to meet our planned expenditures through at least April 1, 2011, if anticipated operating results are not achieved, management has the intent and believes it has the ability to delay or reduce expenditures if not to raise additional capital. Failure to generate sufficient cash flows from operations, raise additional capital or reduce certain discretionary spending could have a material adverse effect on our ability to achieve our intended business objectives.

3. Issuance of Warrants

Convertible Notes

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

The Notes were issued with warrants (the “Warrants”) to purchase additional shares of common stock of the Company at $0.50 per share for a number of shares of common stock equal to 75% of the principal amount of the Notes purchased, divided by $0.50.  The Warrants remain outstanding and are exercisable at any time.

Bridge Note

Ronald L. Chez is a member of the Company’s Board of Directors.  Prior to Mr. Chez joining the Board, he received a secured promissory note (the “Chez Note”) in the principal amount of $500,000 from the Company in July 2009.  The Chez Note was issued in a private placement to Mr. Chez as an accredited investor exempt from registration requirements.  The Chez Note carried an interest rate of 9% per annum, payable on maturity.  The principal and interest accrued under the Chez Note was converted into investment in the Company’s Series D Convertible Preferred Stock strategic transaction of September 2009.  The Chez Note was issued with ten-year warrants to purchase 1,162,791 shares of the Company’s common stock at $0.65 per share, which remain outstanding.  The Chez Note was personally guaranteed by Messrs. Merriman and Coleman.

D. Jonathan Merriman is the Company’s Chief Executive Officer and Peter V. Coleman, the Chief Financial Officer.  Messrs. Merriman and Coleman each originally received ten-year warrants to purchase 581,395 shares of the Company’s common stock at $0.65 per share as compensation for their personal guarantees.  Subsequent to issuance, Messrs. Merriman and Coleman each transferred ownership of 228,327 warrants to Mr. Chez and retained ownership of 290,698 warrants each.  The balance of 62,370 warrants was transferred by each of Messrs. Merriman and Coleman to third parties in connection with investments in the Company’s Series D Preferred Convertible Stock strategic transaction of September 2009.

The Chez Note was converted into Series D Convertible Preferred Stock on September 8, 2009.  As of March 31, 2010, no portion of the Chez Notes remain outstanding.  The warrants remain outstanding and may be exercised at the discretion of the holders.

 

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MERRIMAN CURHAN FORD GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

3. Issuance of Warrants — continued

XL Settlement Warrants

On February 12, 2010, the Company settled its lawsuit with XL Specialty Insurance Company.  As part of its settlement agreement dated September 8, 2009 with DGB Investment, Inc., Craig Leipold, Heritage Bank of Commerce, Modern Bank, Valley Community Bank, AEG Facilities and the Federal Deposit Insurance Company (“FDIC”) as receiver for Security Pacific Bank (the “Litigants”), the Company assigned certain rights of recovery to the Litigants.  The settlement was for $5,750,000, of which the Company’ portion, pursuant to the settlement agreement, was $325,000 less expenses.  As a result of the receipt of these proceeds, the Company was obligated to issue 373,563 warrants to purchase shares of the Company’s common stock at a price per share of $0.87.  As of December 31, 2009, the Company had accrued for the $325,000 liability that was paid out as warrants during the first quarter of 2010.

As of March 31, 2010 and December 31, 2009 the Company had 29,472,212 and 29,023,649 of total warrants outstanding, respectively.

4.  Series D Convertible Preferred Stock

On September 8, 2009, the Company issued 23,720,916 shares of Series D Convertible Preferred Stock along with 5-year warrants to purchase 23,720,916 shares of the Company’s common stock with an exercise price of $0.65 per share.  The investor group consisted of 56 individuals and entities, including certain officers, directors and employees of the Company, as well as outside investors.

The Series D Convertible Preferred Stock was issued in a private placement exempt from registration requirements pursuant to Regulation D of the Securities Act of 1933.  Each share of Series D Convertible Preferred Stock is convertible into one share of Common Stock of the Company.  The Series D Convertible Preferred Stock carries a dividend rate of 6% per annum, payable in cash monthly.  As of March 31, 2010, the Company recorded a cash dividends payable of $50,000 which was included in accounts payable.

The warrants will expire five years from the date of the transaction.  Holders of the Series D Convertible Preferred Stock may convert them into shares of the Company’s common stock at any time in amounts no less than $100,000 unless all of the shares held by the holder are for a lesser amount.  The Series D Convertible Preferred Stock will automatically convert at the discretion of the Company upon 10-day notice given when the average closing price of the Company’s common stock over a 30-day period is at or above $3.00 per share and when the average trading volume for the immediately prior four-week period is 30,000 shares or more, provided that the shares have been effectively registered with the Securities and Exchange Commission or all of the Series D Convertible Preferred Stock may be sold under Rule 144 of the 1933 Exchange Act.

The Company has accounted for this transaction as the issuance of convertible preferred stock and a detachable stock warrant.  The total value of the Series D Preferred Stock strategic transaction was $10,200,000, which consists of $8,808,000 of cash proceeds and $1,392,000 of noncash proceeds from conversions of prior notes and legal services.

 

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MERRIMAN CURHAN FORD GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

5. Fair Value of Assets and Liabilities

Fair value is defined as the price at which an asset would sell for or an amount paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or parameters are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or the market on which they are primarily traded, and the instruments’ complexity. Assets and liabilities recorded at fair value in the Consolidated Statements of Financial Condition are categorized based upon the level of judgment associated with the inputs used to measure their fair value.  A description of the valuation techniques applied to the Company’s major categories of assets and liabilities measured at fair value on a recurring basis follows.

Corporate Equities

Corporate equities are comprised primarily of exchange-traded equity securities that the Company takes selective proprietary positions based on expectations of future market movements and conditions. They are generally valued based on quoted prices from the exchange. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized in Level 1 of the fair value hierarchy.

Stock Warrants

Stock warrants provide their holders with the right to purchase equity in a company.  Such positions are considered illiquid and do not have readily determinable fair values, and therefore require significant management judgment or estimation. For these securities, the Company uses the Black-Scholes valuation methodology or similar techniques. They are classified within Level 3 of the fair value hierarchy.

Underwriters’ Purchase Options

Underwriters’ purchase options represent the right to purchase securities of companies for which the Company acted as an underwriter to account for any overallotment of these securities in a public offering.  Such positions are considered illiquid and do not have readily determinable fair values, and therefore require significant management judgment or estimation. For these securities, the Company uses the Black-Scholes valuation methodology. They are classified within Level 3 of the fair value hierarchy.

Preferred Stock

Preferred stock represents preferred equity in companies.  The preferred stock owned by the Company is convertible at the Company’s discretion. For these securities, the Company uses the exchange-quoted price of the common stock equivalents to value the securities. They are classified within Level 1 or Level 3 of the fair value hierarchy depending on the availability of an observable stock price on actively traded markets.

Securities Sold, Not Yet Purchased

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

 

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MERRIMAN CURHAN FORD GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

5. Fair Value of Assets and Liabilities — continued

Summary

		Assets at Fair Value at March 31, 2010
		Level 1				Level 2				Level 3				Total
Assets:
Corporate equities		$	2,835,003			$	-			$	227,003			$	3,062,006
Stock warrants			-				-				1,186,716				1,186,716
Underwriters' purchase option			-				-				304,607				304,607
Preferred stock			-				-				470				470
Total securities owned		$	2,835,003			$	-			$	1,718,796			$	4,553,799
Liabilities:
Securities sold, not yet purchased			453,366				-				-				453,366
Total fair value liabilities		$	453,366			$	-			$	-			$	453,366

		Assets at Fair Value at December 31, 2009
		Level 1				Level 2				Level 3				Total
Assets:
Corporate equities		$	3,403,757				-			$	21,731			$	3,425,488
Stock warrants			-				-				1,575,481				1,575,481
Underwriters' purchase option			-				-				-				-
Preferred stock			434				-				-				434
Total securities owned		$	3,404,191			$	-			$	1,597,212			$	5,001,403
Liabilities:
Securities sold, not yet purchased			161,461				-				-				161,461
Total fair value liabilities		$	161,461			$	-			$	-			$	161,461

 

 

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MERRIMAN CURHAN FORD GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

5. Fair Value of Assets and Liabilities — continued

The following summarizes the change in carrying values associated with Level 3 financial instruments for the three months ended March 31, 2010 and 2009:

										Underwriters'
		Corporate				Stock				Purchase				Preferred
		Equities				Warrants				Option				Stock				Total
Balance at December 31, 2009		$	21,731			$	1,575,481			$	-			$	-			$	1,597,212
Purchases, issuances, settlements
and sales			80,618				208,624				403,012				-				692,254
Net transfers in (out)			209,153				(409,528	)			-				434				(199,941	)
Gains (losses):
Realized			-				-				-				-				-
Unrealized			(84,499	)			(187,861	)			(98,405	)			36				(370,729	)
Balance at March 31, 2010		$	227,003			$	1,186,716			$	304,607			$	470			$	1,718,796
Change in unrealized gains
(losses) relating to
instruments still held
at March 31, 2010		$	(84,500	)		$	(185,528	)		$	(98,405	)		$	36			$	(368,396	)

										Underwriters'
		Corporate				Stock				Purchase				Preferred
		Equities				Warrants				Option				Stock				Total
Balance at December 31, 2008		$	695			$	1,605,451			$	27,995			$	-			$	1,634,141
Purchases, issuances, settlements
and sales			50,998				132,879				-				-				183,877
Net transfers in (out)			(695	)			(10,315	)			-				-				(11,010	)
Gains (losses):
Realized			-				-				(91,058	)			-				(91,058	)
Unrealized			(23,032	)			(250,246	)			63,063				-				(210,215	)
Balance at March 31, 2009		$	27,966			$	1,477,769			$	-			$	-			$	1,505,735
Change in unrealized gains
(losses) relating to
instruments still held
at March 31, 2009		$	(23,032	)		$	(250,144	)		$	-			$	-			$	(273,176	)

 

 







 









 

 

 

ITEM 1.         Legal Proceedings

A number of lawsuits have been filed against the Company’s wholly owned subsidiary, Merriman Curhan Ford & Co. (“MCF”), including at least one which also names the parent company as the defendant, in connection with the actions of William Del Biaggio III (“Del Biaggio”), a former customer of MCF and David Scott Cacchione (“Cacchione”), a former retail broker of MCF. The Company selected the claims it judged to be the most threatening and settled all of them simultaneously with its strategic transaction of $10.2 million closed on September 8, 2009.  There are claims remaining in lawsuits and arbitrations filed against MCF disclosed previously.

United American Bank v. Merriman Curhan Ford & Co.

In July 2008, MCF was served with a complaint filed in the Santa Clara County Superior Court by United American Bank, which loaned money to Del Biaggio, alleging that MCF entered into an account control agreement for an account that Del Biaggio had previously pledged to another lender. The account pledged was in the name of Del Biaggio. Plaintiff brought claims for, among other things, fraud arising out of the failure to disclose the alleged previous pledge. Plaintiff alleges damages in the amount of $1.75 million. After ensuring that the proper clearance had been obtained from the court in Del Biaggio's bankruptcy case, MCF turned over the pledged collateral to Plaintiff United American Bank, performing its obligation under the account control agreement. MCF then demanded that it be dismissed from the action.  On May 7, 2010, MCF was dismissed from this action with prejudice.  

Henry Khachaturian v. Merriman Curhan Ford & Co.

In January 2010, the Company was served with a complaint filed in the San Francisco County Superior Court by Henry Khachaturian. The complaint also names as defendants officers and former officers D. Jonathan Merriman, Gregory Curhan, and Robert Ford. The statement of claim alleges that Mr. Khachaturian was convinced by the Company to purchase shares of a small, risky stock in which the Company held a position. It further alleges that the Company did not permit Mr. Khachaturian to sell the shares when the stock’s price fell. The complaint seeks unspecified compensatory and punitive damages.

Chuck Peterson v. Merriman Curhan Ford & Co.

On February 23, 2010, Chuck Peterson filed a complaint with the San Francisco Superior Court, California, for fraud, breach of fiduciary duty, and misrepresentation. The complaint was served on MCF on March 5, 2010.

The Company believes it has meritorious defenses and intends to contest these claims vigorously.

Merriman Curhan Ford & Co. & Merriman Curhan Ford Group, Inc v. XL Specialty Insurance Co.

On February 12, 2010, the Company settled its lawsuit with XL Specialty Insurance Company.  As part of its settlement agreement dated September 8, 2009 with DGB Investment, Inc., Craig Leipold, Heritage Bank of Commerce, Modern Bank, Valley Community Bank, AEG Facilities and the Federal Deposit Insurance Company (“FDIC”) as receiver for Security Pacific Bank (the “Litigants”), the Company assigned certain rights of recovery to the Litigants.  The settlement was for $5,750,000, of which the Company’ portion, pursuant to the settlement agreement, was $325,000 less expenses.  As of March 31, 2010, the Company received a cash payment of $310,000.  As a result of the receipt of these proceeds, the Company was obligated to issue 373,563 warrants to purchase shares of the Company’s common stock at a price per share of $0.87.  As of December 31, 2009, the Company had accrued for the $325,000 liability that was paid out as warrants during the first quarter of 2010.

 

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Irving Bronstein et al v. Merriman Curhan Ford & Co.

On March 1, 2010, Irving Bronstein, other plaintiffs and MCF settled all legal claims.  The Company has reserved appropriately, as of March 31, 2010, for this matter.

The Company and MCF deny any liability and are vigorously contesting the remaining lawsuits and arbitrations. At this point, the Company cannot estimate the amount of damages if they are resolved unfavorably and accordingly, management has not provided an accrual for adverse judgments in these lawsuits and arbitrations.  However, the Company is expecting to settle one or more cases and has reserved appropriately as the amount of the settlement becomes estimable.

If the Company or MCF were to be found liable in these lawsuits and arbitrations and the plaintiffs were to be awarded the damages they seek, it would have a severe impact on the Company's financial condition and the Company would likely not be able to continue in business. Even if the Company and MCF ultimately prevail in all of these lawsuits, they will almost certainly incur significant legal fees which could also have a severe impact on the Company’s financial condition.

From time to time, the Company is also named as a defendant and acts as a plaintiff in the routine conduct of its business.

 

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ITEM 1A. Risk Factors 

In addition to the other information set forth in this report, including reports we incorporate by reference, you should carefully consider the risk factors previously disclosed in response to Item 1A to Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2009, filed on March 18, 2010, as amended by our Form 10-K/A filed on April 30, 2010.

 

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