SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K







(Mark
One)




x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934




For the
Fiscal Year ended December 31, 2009




OR




 ̈ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934




For the
transition period from _______ to
________




Commission
File Number 001-15831





MERRIMAN
CURHAN FORD GROUP, INC.


(Exact
Name of Registrant as Specified in its Charter)




Delaware
            
            11-2936371(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            
            (IRS
      Employer
              Identification
      No.)




600
California Street, 9th Floor


San
Francisco, CA 94108


(Address
of principal executive offices)(Zip Code)




(415)
248-5600


(Registrant’s
telephone number, including area code)





Securities
registered pursuant to Section 12(g) of the Act:


None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes o
    Nox




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yeso
    No   x




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. Yesx    Noo





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). Yeso  Nox





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.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
definition of “accelerated filer, large accelerated filer and smaller reporting
company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer   ̈
            Accelerated filer   ̈Non-accelerated filer (Do not check if a smaller reporting company)   ̈
            Smaller Reporting Company  x




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




The
aggregate market value of the 12,554,779 shares of common stock of the
Registrant issued and outstanding as of June 30, 2009, the last business day of
the registrant’s most recently completed second fiscal quarter, excluding
1,272,827 shares of common stock held by affiliates of the Registrant was
$5,076,878. This amount is based on the closing price of the common stock on
NASDAQ of $0.45 per share on June 30, 2009.




The
number of shares of Registrant’s common stock outstanding as of March 15, 2010
was 12,824,294













TABLE
OF CONTENTS





PART IItem 1.
                Business
                1Item 1A.
                Risk
      Factors
                9Item 1B.
                Unresolved
      Staff Comments
                21Item 2.
                Properties
                21Item 3.
                Legal
      Proceedings
                22Item 4.
                ReservedPART IIItem 5.
                Market
      for Registrant’s Common Stock and Related Stockholder
    Matters
                27Item 6.
                Selected
      Consolidated Financial Data
                29Item 7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                30Item 7A.
                Quantitative
      and Qualitative Disclosures about Market Risk
                49Item 8.
                Financial
      Statements and Supplementary Data
                50Item 9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                101Item 9A.
                Controls
      and Procedures
                101Item 9B.
                Other
      Information
                102PART IIIItem
      10.
                Directors
      and Executive Officers of the Registrant
                104Item 11.
                Executive Compensation
                104Item 12.
                Security Ownership
      of Certain Beneficial Owners and Management
                104Item 13.
                Certain
      Relationships and Related Transactions
                104Item 14.
                Principal Accounting Fees and Services
                104PART IVItem 15.
                Exhibits
      and Financial Statement Schedules
                105




i


This
Annual Report on Form 10-K and the information incorporated by reference in this
Form 10-K include forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Some of the forward-looking statements can be
identified by the use of forward-looking words such as “believes,” “expects,”
“may,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or
“anticipates,” or the negative of those words or other comparable terminology.
Forward-looking statements involve risks and uncertainties. You should be aware
that a number of important factors could cause our actual results to differ
materially from those in the forward-looking statements. We will not necessarily
update the information presented or incorporated by reference in this Annual
Report on Form 10-K if any of these forward-looking statements turn out to be
inaccurate. Risks affecting our business are described throughout this Form 10-K
and especially in the section “Risk Factors.” This entire Annual Report on Form
10-K, including the consolidated financial statements and the notes and any
other documents incorporated by reference into this Form 10-K, should be read
for a complete understanding of our business and the risks associated with that
business.





PART
I




Item
1. Business




Overview




We are a
financial services holding company that provides equity research, capital
markets services, corporate and venture services, and investment banking through
our primary operating subsidiary, Merriman Curhan Ford & Co.
(“MCF”).  In 2009, we sold the operating assets of Panel Intelligence,
LLC, which had been our subsidiary dedicated to primary research, and
discontinued operations of MCF Asset Management, our subsidiary which managed
investment products.




MCF is an
investment bank and securities broker-dealer focused on fast-growing companies
and institutional investors. Our mission is to become a leader in the
researching, advising, financing, trading and investing in fast-growing
companies under $1 billion in market capitalization. We provide equity research,
brokerage and trading services primarily to institutions, as well as investment
banking and advisory services to corporate clients. We are attempting to gain
market share by originating differentiated research for our institutional
investor clients and providing specialized and integrated services for our
fast-growing corporate clients.





Institutional
Cash Distributors (“ICD”) is a division of MCF which brokers money market funds
serving the short-term investing needs of corporate finance departments at
companies throughout the United States and Europe.  In January 2009,
we sold the primary assets related to the ICD operations to a group of investors
which included some of our employees.  To assist in the transition of
operations to the new owners, we are providing substantial services to ICD,
including collecting its revenues.  When ICD receives its
broker-dealer license, we will no longer provide such services and record ICD
revenues.




Panel
Intelligence, LLC was acquired in April 2007.  It offered custom and
published primary research to industry clients and investment professionals
through online panel discussions, quantitative surveys and an extensive research
library. Panel Intelligence, LLC provided greater access, compliance, insights
and productivity to clients in the health care, CleanTech and financial
industries. In January 2009, the majority of the assets of Panel Intelligence,
LLC were sold to an investor group that included certain members of its
management team. For financial reporting purposes, we have listed the operations
of the business as part of discontinued operations.





MCF Asset
Management, LLC managed absolute return investment products for institutional
and high-net worth clients. We were the sub-advisor for the MCF Focus fund. In
an effort to refocus the holding company back to its core investment banking/
broker-dealers services, management liquidated the funds under management and
returned investments to the investors in the fourth quarter of 2008. We no
longer have, for all practical purposes, a subsidiary dedicated to asset
management.   At December 31, 2009, we held an immaterial amount
of illiquid assets and were in the process of distributing these to
investors.




We are
headquartered in San Francisco, with additional offices in New York, NY. As of
December 31, 2009, we had 94 employees, including employees of our Institutional
Cash Distributor division (ICD), whose assets we sold in January 2009. Merriman
Curhan Ford & Co. is registered with the Securities and Exchange Commission
(“SEC”) as a broker-dealer and is a member of Financial Industry Regulatory
Authority (“FINRA”) and the Securities Investors Protection Corporation
(“SIPC”).




1


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 December 31, 2009, we had retained deficit
of $124,815,000. While we believe our current funds will be sufficient to enable
us to meet our planned expenditures through at least January 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.




Principal
Services




Our
investment bank / broker-dealer segment provides three service offerings:
investment banking, brokerage and equity research. We provide traditional
research-based financial services to companies with market capitalizations up to
$1 billion, which we believe is an underserved sector in the financial services
industry.




Investment
Banking




Our
investment bankers provide a full range of corporate finance and strategic
advisory services. Our corporate finance practice is comprised of industry
coverage investment bankers that are focused on raising capital for fast-growing
companies in selected industry sectors. Our strategic advisory practice tailors
solutions to meet the specific needs of our clients at various points in their
growth cycle. As of December 31, 2009, we had 8 professionals in our investment
banking group.




Corporate Finance. Our
corporate finance practice advises on and structures capital raising solutions
for our corporate clients through public and private offerings of primarily
equity and convertible debt securities. Our focus is to provide fast-growing
companies with the capital necessary to drive them to the next level of growth.
We offer a wide range of financial services designed to meet the needs of
fast-growing companies, including initial public offerings, secondary offerings,
private investments in public equity, or PIPEs, and private placements. Our
equity capital markets team executes underwritten securities offerings, assists
clients with investor relations advice and introduces companies seeking to raise
capital to investors who we believe will be supportive, long-term investors.
Additionally, we draw upon our contacts throughout the financial and corporate
world, expanding the options available for our corporate clients.




Strategic Advisory. Our
strategic advisory services include transaction-specific advice regarding
mergers and acquisitions, divestitures, spin-offs and privatizations, as well as
general strategic advice. Our commitment to long-term relationships and our
ability to meet the needs of a diverse range of clients has made us a reliable
source of advisory services for fast-growing public and private companies. Our
strategic advisory services are also supported by our capital markets
professionals, who provide assistance in acquisition financing in connection
with mergers and acquisitions transactions.




Institutional
Brokerage Services




We
provide institutional sales, sales trading and trading services to about 324
institutional accounts in the United States. We execute securities transactions
for money managers, mutual funds, hedge funds, insurance companies, and pension
and profit-sharing plans. Institutional investors normally purchase and sell
securities in large quantities, which require the distribution and trading
expertise we provide.




We
provide integrated research and trading solutions centered on helping our
institutional clients to invest profitably, to grow their portfolios and
ultimately their businesses. We understand the importance of building long-term
relationships with our clients who look to us for the professional resources and
relevant expertise to provide answers for their specific situations. We believe
it is important for us to be involved with public companies early in their
corporate life cycles. We strive to provide unique investment opportunities in
fast-growing, relatively undiscovered companies and to help our clients execute
trades rapidly, efficiently and accurately.




2


Institutional Sales. Our
sales professionals focus on communicating investment ideas to our clients and
executing trades in securities of companies in our target growth sectors. By
actively trading in these securities, we endeavor to couple the capital market
information flow with the fundamental information flow provided by our analysts.
We believe that this combined information flow is the underpinning of getting
our clients favorable execution of investment strategies. Sales professionals
work closely with our research analysts to provide up-to-date information to our
institutional clients. We interface actively with our clients and plan to be
involved with our clients over the long term.




Sales Trading. Our sales
traders are experienced in the industry and possess in-depth knowledge of both
the markets for fast-growing company securities and the institutional traders
who buy and sell them.




Trading. Our trading
professionals facilitate liquidity discovery in equity securities. We make
markets in securities traded on NASDAQ, stock exchanges and ECNs, and service
the trading desks of institutions in the United States. Our trading
professionals have direct access to the major stock exchanges, including the New
York Stock Exchange and the American Stock Exchange. As of December 31, 2009, we
were a market maker in 163 securities.




The
customer base of our institutional brokerage business includes mutual funds,
hedge funds, and private investment firms. We believe this group of potential
clients to number over 4,000. We grow our business by adding new customers and
increasing the penetration of existing institutional customers that use our
equity research and trading services in their investment process.




Proprietary Trading. We will
from time to time take significant positions in fast-growing companies that we
feel are undervalued in the marketplace. We believe that our window into these
opportunities, due to the types of companies we research, offers us a
significant competitive advantage.




Corporate & Executive
Services. We offer brokerage services to corporations for purposes such
as stock repurchase programs. We also serve the needs of company executives with
restricted stock transactions, cashless exercise of options, and liquidity
strategies.




Venture Services. The Venture
Services team provides sales distribution for capital raises for private
companies via the introduction to venture capital and private equity investors.
Our venture services include distribution and liquidity programs, portfolio
company advisory services, research dissemination and best-execution
trading.




OTCQX Advisory. Merriman
Curhan Ford & Co. began offering services to sponsor companies on the
International and Domestic OTCQX markets in 2007. In 2008, we solidified our
position as the leading investment bank sponsor in this market. We enable
non-U.S. and domestic companies to obtain greater exposure to U.S. institutional
investors without the expense and regulatory burdens of listing on traditional
U.S. exchanges. The International and Domestic OTCQX market tiers do not require
full SEC registration and are not subject to the Sarbanes Oxley Act of 2002.
Listing on the market requires the sponsorship of a qualified investment bank
called a Principal American Liaison (PAL) for non-U.S. companies or a Designated
Advisor for Disclosure (DAD) for domestic companies. Merriman Curhan Ford &
Co. was the first investment bank to achieve DAD and PAL designations and
currently is the sponsor of 10 out of 91 issuers listed on OTCQX.




Institutional Cash Distributors
(ICD). ICD is a broker of money market funds serving the short-term
investing needs of corporate finance departments at companies throughout the
United States and Europe. Companies using ICD’s services receive access to over
40 fund families through ICD’s one-stop process that includes one application,
one wire and one statement that consolidates reporting regardless of the number
of funds utilized. In January 2009, we sold the primary assets related to the
ICD operations to a group of investors which included some of our employees.
However, until the new company is able to form its own broker-dealer, which is
anticipated to be in 2010, the business will continue operating under Merriman
Curhan Ford & Co. and its financial results included in our consolidated
financial statements.




3


Equity
Research




A key
part of our strategy is to originate specialized and in-depth research. Our
analysts cover a universe of approximately 114 companies in our focus industry
sectors. We leverage the ideas generated by our research teams, using them to
attract and retain institutional brokerage clients.




Supported
by the firm’s institutional sales and trading capabilities, our analysts deliver
timely recommendations to clients on innovative investment opportunities. In an
effort to make money for our investor clients, our analysts are driven to find
undiscovered opportunities in fast-growing companies that we believe are
undervalued. Given the contrarian and undiscovered nature of many of our
research ideas, we, as a firm, specialize in serving sophisticated, aggressive
institutional investors.





As of
February 12, 2010, approximately 67% of the companies covered by our research
professionals had market capitalizations of $1 billion or less.





Our
equity research focuses on bottom-up, fundamental analysis of fast-growing
companies in selected growth sectors. Our analysts’ expertise in these
categories of companies, along with their intensive industry knowledge and
contacts, provides us with the ability to deliver timely, accurate and
value-added information.




Our
objective is to build long lasting relationships with our institutional clients
by providing investment recommendations that directly equate to enhanced
performance of their portfolios. Further, given our approach and focus on
quality service, we believe our equity research analysts are in a unique
position to maintain close, ongoing communication with our clients.




The
industry sectors covered by our eight equity research analysts
include:





·
            Clean
    Energy


-
            Natural
      Resources and related sectors





·
            Consumer, Media&
      Internet


-
            Branded
      Consumer


-
            China
      Consumer


-
            Media/Entertainment


-
            Internet
      Media and Infrastructure





·
            Health
    Care


-
            Biotechnology
      - Life Sciences





·
            Technology


-
            Clean
      Energy Semiconductors


-
            Communications
      - Wireless Technology


-
            Defense
      Electronics/Advanced Communications


-
            Emerging
      Data Center/Enterprise Technologies


-
            Cloud
      Computing Service Providers


Research
Coverage by Industry
 As of
2/2/10







After
initiating coverage on a company, our analysts seek to effectively communicate
new developments to our institutional clients through our sales and trading
professionals. We produce full-length research reports, notes and earnings
estimates on the companies we cover. We also produce comprehensive industry
sector reports. In addition, our analysts distribute written updates on these
issuers both internally and to our clients through the use of daily morning
meeting notes, real-time electronic mail and other forms of immediate
communication. Our clients can also receive analyst comments through electronic
media, and our sales force receives intra-day updates at meetings and through
regular announcements of developments. All of the above is also available
through a password protected searchable database of our daily and historical
research archives found on our website at www.merrimanco.com.




Our
Equity Research Group annually hosts several conferences targeting fast-growing
companies and institutional investors, including our annual Investor Summit and
various industry sector conferences. We use these events to primarily showcase
our equity research to the institutional investment community.




4


Competition




Merriman
Curhan Ford is engaged in the highly competitive financial services and
investment industries. We compete with other securities firms - from large
U.S.-based firms, securities subsidiaries of major commercial bank holding
companies and U.S. subsidiaries of large foreign institutions, to major regional
firms, smaller niche players, and those offering competitive services via the
Internet. Long term developments in the brokerage industry, including
decimalization and the growth of electronic communications networks, or ECNs,
have reduced commission rates and profitability in the brokerage industry. Many
large investment banks have responded to lower margins within their equity
brokerage divisions by reducing research coverage, particularly for smaller
companies, consolidating sales and trading services, and reducing headcount of
more experienced sales and trading professionals.




This
trend by competitors to reduce services creates an opportunity for us as many
highly qualified individuals have lost their jobs, expanding the pool of
experienced employees to hire. The economic environment in 2009 has marked a
bottom of the negative secular trends experienced by financial institutions in
2008 and the beginning of 2009. During the period, many of our buy-side clients
have merged, gone out of business or have sharply reduced their commission flow.
The reduction in the number of these clients also has lowered the number of
potential buyers for our investment banking product.




Many
remaining competitors have greater personnel and financial resources than we do.
Larger competitors may have a greater number and variety of distribution outlets
for their products. Some competitors have much more extensive investment banking
activities than we do and therefore, may possess a relative advantage with
regard to access to deal flow and capital.




For a
further discussion of the competitive factors affecting our business, see “We
face strong competition from larger firms,” under “Item 1A - Risk
Factors.”




Corporate
Support




Accounting,
Administration and Operations




Our
accounting, administration and operations personnel are responsible for
financial controls, internal and external financial reporting, human resources
and personnel services, office operations, information technology and
telecommunications systems, the processing of securities transactions, and
corporate communications. With the exception of payroll processing, which is
performed by an outside service bureau, and customer account processing, which
is performed by our clearing broker, most data processing functions are
performed internally. We believe that future growth will require implementation
of new and enhanced communications and information systems, and training of our
personnel to operate such systems. Despite the challenges that we experienced,
we have implemented such enhancements in 2009 and expect to continue in
2010.




Compliance,
Legal, Risk Management and Internal Audit




Our
compliance, legal and risk management personnel (together with other appropriate
personnel) are responsible for our compliance with legal and regulatory
requirements of our investment banking business and our exposure to market,
credit, operations, liquidity, compliance, legal and reputation risk. In
addition, our compliance personnel test and audit for compliance with our
internal policies and procedures. Our general counsel also provides legal
service throughout our company, including advice on managing legal risk. The
supervisory personnel in these areas have direct access to senior management and
to the Audit Committee of our Board of Directors to ensure their independence in
performing these functions. In addition to our internal compliance, legal, and
risk management personnel, we retain outside consultants and attorneys for their
particular functional expertise.




Risk
Management




In
conducting our business, we are exposed to a range of risks
including:




Market risk is the risk to
our earnings or capital resulting from adverse changes in the values of assets
resulting from movement in equity prices or market interest rates.




Credit risk is the risk of
loss due to an individual customer’s or institutional counterparty’s
unwillingness or inability to fulfill its obligations.




5


Operations risk is the risk
of loss resulting from systems failure, inadequate controls, human error, fraud
or unforeseen catastrophes.





Liquidity risk is the
potential that we would be unable to meet our obligations as they come due
because of an inability to liquidate assets or obtain funding. Liquidity risk
also includes the risk of having to sell assets at a loss to generate liquid
funds, which is a function of the relative liquidity (market depth) of the
asset(s) and general market conditions.





Compliance risk is the risk
of loss, including fines, penalties and suspension or revocation of licenses by
self-regulatory organizations, or from failing to comply with federal, state or
local laws pertaining to financial services activities.





Legal risk is the risk that
arises from potential contract disputes, lawsuits, adverse judgments, or adverse
governmental or regulatory proceedings that can disrupt or otherwise negatively
affect our operations or condition.





Reputation risk is the
potential that negative publicity regarding our practices, whether factually
correct or not, will cause a decline in our customer base, costly litigation, or
revenue reductions.





We have a
risk management program that sets forth various risk management policies,
provides for a risk management committee and assigns risk management
responsibilities. The program is designed to focus on the
following:




·     Identifying,
assessing and reporting on corporate risk exposures and trends;





·     Establishing
and revising policies, procedures and risk limits, as
necessary;





·     Monitoring
and reporting on adherence with risk policies and limits;





·     Developing
and applying new measurement methods to the risk process as appropriate;
and





·     Approving
new product developments or business initiatives.





We cannot
provide assurance that our risk management program or our internal controls will
prevent or mitigate losses attributable to the risks to which we are
exposed.





For a
further discussion of the risks affecting our business, see “Item 1A Risk
Factors.”





Regulation





As a
result of federal and state registration and self-regulatory organization, or
SRO, memberships, we are subject to overlapping layers of regulation that cover
all aspects of our securities business. Such regulations cover matters including
capital requirements; uses and safe-keeping of clients’ funds; conduct of
directors; officers and employees; record-keeping and reporting requirements;
supervisory and organizational procedures intended to ensure compliance with
securities laws and to prevent improper trading on material nonpublic
information; employee-related matters, including qualification and licensing of
supervisory and sales personnel; limitations on extensions of credit in
securities transactions; requirements for the registration, underwriting, sale
and distribution of securities; and rules of the SROs designed to promote high
standards of commercial honor and just and equitable principles of trade. A
particular focus of the applicable regulations concerns the relationship between
broker-dealers and their customers. As a result, many aspects of the
broker-dealer customer relationship are subject to regulation including, in some
instances, “suitability” determinations as to certain customer transactions,
limitations on the amounts that may be charged to customers, timing of
proprietary trading in relation to customers’ trades, and disclosures to
customers.




6


As a
broker-dealer registered with the Securities and Exchange Commission (“SEC”),
and as a member firm of Financial Industry Regulatory Authority (“FINRA”), we
are subject to the net capital requirements of the SEC (Rule 15c3-1 of the
Securities Exchange Act of 1934) as regulated and enforced by FINRA. These
capital requirements specify minimum levels of capital, computed in accordance
with regulatory requirements that each firm is required to maintain and also
limit the amount of leverage that each firm is able to obtain in its respective
business.




“Net
capital” is essentially defined as net worth (assets minus liabilities, as
determined under accounting principles generally accepted in the United States
(“U.S. GAAP”), plus qualifying subordinated borrowings, less the value of all of
a broker-dealer’s assets that are not readily convertible into cash (such as
furniture, prepaid expenses, and unsecured receivables), and further reduced by
certain percentages (commonly called “haircuts”) of the market value of a
broker-dealer’s positions in securities and other financial instruments. The
amount of net capital in excess of the regulatory minimum is referred to as
“excess net capital.”




The SEC’s
capital rules also (i) require that broker-dealers notify it, in writing, two
business days prior to making withdrawals or other distributions of equity
capital or lending money to certain related persons if those withdrawals would
exceed, in any 30-day period, 30% of the broker-dealer’s excess net capital, and
that they provide such notice within two business days after any such withdrawal
or loan that would exceed, in any 30-day period, 20% of the broker-dealer’s
excess net capital; (ii) prohibit a broker-dealer from withdrawing or otherwise
distributing equity capital or making related party loans if, after such
distribution or loan, the broker-dealer would have net capital of less than
$300,000 or if the aggregate indebtedness of the broker-dealer’s consolidated
entities would exceed 1,000% of the broker-dealer’s net capital in certain other
circumstances; and (iii) provide that the SEC may, by order, prohibit
withdrawals of capital from a broker-dealer for a period of up to 20 business
days, if the withdrawals would exceed, in any 30-day period, 30% of the
broker-dealer’s excess net capital and if the SEC believes such withdrawals
would be detrimental to the financial integrity of the firm or would unduly
jeopardize the broker-dealer’s ability to pay its customer claims or other
liabilities.




Compliance
with regulatory net capital requirements could limit those operations that
require the intensive use of capital, such as underwriting and trading
activities, and also could restrict our ability to withdraw capital from our
broker-dealer, which in turn could limit our ability to pay interest, repay
debt, and redeem or repurchase shares of our outstanding capital
stock.




We
believe that at all times we have been in compliance with the applicable minimum
net capital rules of the SEC and FINRA.




The
failure of a U.S. broker-dealer to maintain its minimum required net capital
would require it to cease executing customer transactions until it came back
into compliance, and could cause it to lose its FINRA membership, its
registration with the SEC or require its liquidation. Further, the decline in a
broker-dealer’s net capital below certain “early warning levels,” even though
above minimum net capital requirements, could cause material adverse
consequences to the broker-dealer.




We are
also subject to “Risk Assessment Rules” imposed by the SEC, which require, among
other things, that certain broker-dealers maintain and preserve certain
information, describe risk management policies and procedures, and report on the
financial condition of certain affiliates whose financial and securities
activities are reasonably likely to have a material impact on the financial and
operational condition of the broker-dealers. Certain “Material Associated
Persons” (as defined in the Risk Assessment Rules) of the broker-dealers and the
activities conducted by such Material Associated Persons may also be subject to
regulation by the SEC. In addition, the possibility exists that, on the basis of
the information it obtains under the Risk Assessment Rules, the SEC could seek
authority over our unregulated subsidiary either directly or through its
existing authority over our regulated subsidiary.




In the
event of non-compliance by us or our subsidiary with an applicable regulation,
governmental regulators and one or more of the SROs may institute administrative
or judicial proceedings that may result in censure, fine, civil penalties
(including treble damages in the case of insider trading violations), the
issuance of cease-and-desist orders, the deregistration or suspension of the
non-compliant broker-dealer, the suspension or disqualification of officers or
employees, or other adverse consequences. The imposition of any such penalties
or orders on us or our personnel could have a material adverse effect on our
operating results and financial condition.




7


Additional
legislation and regulations, including those relating to the activities of our
broker-dealer, changes in rules promulgated by the SEC, FINRA, or other United
States, state, or foreign governmental regulatory authorities and SROs or
changes in the interpretation or enforcement of existing laws and rules, may
adversely affect our manner of operation and our profitability. Our businesses
may be materially affected not only by regulations applicable to us as a
financial market intermediary, but also by regulations of general
application.




Geographic
Area




Merriman
Curhan Ford Group, Inc. is domiciled in the United States and most of our
revenue is attributed to United States and Canadian customers. In 2007, through
our broker-dealer subsidiary, we began advising both international and domestic
companies on listing on OTCQX, a prime tier of Pink Sheets. We have several
international clients, most of which are Australian companies listed on the
Australian Securities Exchange.




All of
our long-lived assets are located in the United States.




Available
Information




Our
website address is www.merrimanco.com. You may obtain free electronic copies of
our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and all amendments to those reports on the “Investor Relations”
portion of our website, under the heading “SEC Filings.” These reports are
available on our website as soon as reasonably practicable after we
electronically file them with the SEC. We are providing the address to our
Internet site solely for the information of investors. We do not intend the
address to be an active link or to otherwise incorporate the contents of the
website into this report.




8


Item 1a. Risk Factors





We face a
variety of risks in our business, many of which are substantial and inherent in
our business and operations. The following are risk factors that could affect
our business which we consider material to our industry and to holders of our
common stock. Other sections of this Annual Report on Form 10-K, including
reports which are incorporated by reference, may include additional factors
which could adversely impact our business and financial performance. Moreover,
we operate in a very competitive and rapidly changing environment. New risk
factors emerge from time to time and it is not possible for our management to
predict all risk factors, nor can we assess the impact of all factors on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements.





Risks
Related to Our Business





We
may not be able to maintain a positive cash flow and profitability.





Our
ability to maintain a positive cash flow and profitability depends on our
ability to generate and maintain greater revenue while incurring reasonable
expenses. This, in turn, depends, among other things, on the development of our
investment banking and securities brokerage business, and we may be unable to
maintain profitability if we fail to do any of the following:




·
            establish,
      maintain, and increase our client
base;





·
            manage
      the quality of our services;





·
            compete
      effectively with existing and potential
  competitors;





·
            further
      develop our business activities;





·
            attract
      and retain qualified personnel;





·
            limit
      operating costs;





·
            settle
      pending litigation, and





·
            maintain
      adequate working capital





We cannot
be certain that we will be able to sustain or increase a positive cash flow and
profitability on a quarterly or annual basis in the future. Our inability to
maintain profitability or positive cash flow could result in disappointing
financial results, impede implementation of our growth strategy, or cause the
market price of our common stock to decrease. Accordingly, we cannot assure you
that we will be able to generate the cash flow and profits necessary to sustain
our business.




We have
had a number of structural changes to our operations as we divested certain
non-core business lines to focus our service and product offerings.
Additionally, there have been a number of significant challenges faced by the
securities and financial industries in the past 18 months. As a result of our
structural changes and the uncertainty of the current economic environment, the
factors upon which we are able to base our estimates as to the gross revenue and
the number of participating clients that will be required for us to maintain a
positive cash flow are unpredictable. For these and other reasons, we cannot
assure you that we will not require higher gross revenue and an increased number
of clients, securities brokerage, and investment banking transactions, and/or
more time in order for us to complete the development of our business that we
believe we need to be able to cover our operating expenses. It is more likely
than not that our estimates will prove to be inaccurate because actual events
more often than not differ from anticipated events. Furthermore, in the event
that financing is needed in addition to the amount that is required for this
development, we cannot assure you that such financing will be available on
acceptable terms, if at all.




9


There
are substantial legal proceedings against us involving claims for significant
damages.




The
actions of a former customer, William Del Biaggio III (“Del Biaggio”), and a
former employee, David Scott Cacchione (“Cacchione”), have given rise to many
legal actions against us as described in the Legal Proceedings section below. We
selected the lawsuits we believed were of the most threatening in nature and, as
of September 8, 2009, settled them in conjunction with our strategic transaction
of that date. There are other lawsuits related to these actions of our former
employee which we have elected not to settle. If we are found to be liable for
the claims asserted in any or all of these legal actions, our cash position may
suffer. Even if we ultimately prevail in all of these lawsuits, we may incur
significant legal fees and diversion of management’s time and attention from our
core businesses, and our business and financial condition may be adversely
affected. We believe we have meritorious defenses against these claims, but
there is no assurance of any favorable outcome.




Our
exposure to legal liability is significant, and damages that we may be required
to pay and the reputation harm that could result from legal action against us
could materially adversely affect our businesses.




Unrelated
to the actions of Del Biaggio and Cacchione, we face significant legal risks in
our businesses and, in recent years, the volume of claims and amount of damages
sought in litigation and regulatory proceedings against financial institutions
have been increasing. These risks include potential liability under securities
or other laws for materially false or misleading statements made in connection
with securities offerings and other transactions, potential liability for
“fairness opinions” and other advice we provide to participants in strategic
transactions and disputes over the terms and conditions of complex trading
arrangements. We are also subject to claims arising from disputes with employees
for alleged discrimination or harassment, among other things. These risks often
may be difficult to assess or quantify and their existence and magnitude often
remain unknown for substantial periods of time.




Our role
as advisor to our clients on important underwriting or mergers and acquisitions
transactions involves complex analysis and the exercise of professional
judgment, including rendering “fairness opinions” in connection with mergers and
other transactions. Therefore, our activities may subject us to the risk of
significant legal liabilities to our clients and third parties, including
shareholders of our clients who could bring securities class actions against us.
Our investment banking engagements typically include broad indemnities from our
clients and provisions to limit our exposure to legal claims relating to our
services, but these provisions may not protect us or may not be enforceable in
all cases.




For
example, an indemnity from a client that subsequently is placed into bankruptcy
is likely to be of little value to us in limiting our exposure to claims
relating to that client. As a result, we may incur significant legal and other
expenses in defending against litigation and may be required to pay substantial
damages for settlements and adverse judgments. Substantial legal liability or
significant regulatory action against us could have a material adverse effect on
our results of operations or cause significant reputation harm to us, which
could seriously harm our business and prospects.




In the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation often has been instituted against
that company. Such litigation is expensive and diverts management’s attention
and resources. We cannot assure you that we will not be subject to such
litigation. If we are subject to such litigation, even if we ultimately prevail,
our business and financial condition may be adversely affected.




We
may not be able to continue operating our business




The
Company incurred significant losses in 2009 and 2008. Even if we are successful
in executing our plans, we will not be capable of sustaining losses such as
those incurred in 2008. The Company’s ability to meet its financial obligations
is highly dependent on market and economic conditions. We also recorded net
losses in certain quarters within other past fiscal years. If operating
conditions worsen in 2010 or if the Company receives adverse judgments in its
pending litigations, we may not have the resources to meet our financial
obligations. If the Company is not able to continue in business, the entire
investment of our common stockholders may be at risk, and there can be no
assurance that any proceeds stockholders would receive in liquidation would be
equal to their investment in the Company, or even that stockholders would
receive any proceeds in consideration of their common stock.




10


Limitations
on our access to capital and our ability to comply with net capital requirements
could impair ability to conduct our business




Liquidity,
or ready access to funds, is essential to financial services firms. Failures of
financial institutions have often been attributable in large part to
insufficient liquidity. Liquidity is of importance to our trading business and
perceived liquidity issues may affect our clients and counterparties’
willingness to engage in brokerage transactions with us. Our liquidity could be
impaired due to circumstances that we may be unable to control, such as a
general market disruption or an operational problem that affects our trading
clients, third parties or us. Further, our ability to sell assets may be
impaired if other market participants are seeking to sell similar assets at the
same time.




MCF, our
broker-dealer subsidiary, is subject to the net capital requirements of the SEC
and various self-regulatory organizations of which it is a member. These
requirements typically specify the minimum level of net capital a broker-dealer
must maintain and also mandate that a significant part of its assets be kept in
relatively liquid form. Any failure to comply with these net capital
requirements could impair our ability to conduct our core business as a
brokerage firm. Furthermore, MCF is subject to laws that authorize regulatory
bodies to block or reduce the flow of funds from it to Merriman Curhan Ford
Group, Inc. As a holding company, Merriman Curhan Ford Group, Inc. depends on
distributions and other payments from its subsidiaries to fund all payments on
its obligations. As a result, regulatory actions could impede access to funds
that Merriman Curhan Ford Group, Inc. needs to make payments on obligations,
including debt obligations.




Our
financial results may fluctuate substantially from period to period, which may
impair our stock price.




We have
experienced, and expect to experience in the future, significant periodic
variations in our revenue and results of operations. These variations may be
attributed in part to the fact that our investment banking revenue is typically
earned upon the successful completion of a transaction, the timing of which is
uncertain and beyond our control. In most cases we receive little or no payment
for investment banking engagements that do not result in the successful
completion of a transaction. As a result, our business is highly dependent on
market conditions as well as the decisions and actions of our clients and
interested third parties. For example, a client’s acquisition transaction may be
delayed or terminated because of a failure to agree upon final terms with the
counterparty, failure to obtain necessary regulatory consents or board or
shareholder approvals, failure to secure necessary financing, adverse market
conditions, or unexpected financial or other problems in the client’s or
counterparty’s business. If the parties fail to complete a transaction on which
we are advising or an offering in which we are participating, we will earn
little or no revenue from the transaction. This risk may be intensified by our
focus on growth companies in the CleanTech, Consumer/Internet/Media, Health
Care, and Tech/Telecom sectors, as the market for securities of these companies
has experienced significant variations in the number and size of equity
offerings. Recently, there have been very few initial public offerings. More
companies initiating the process of an initial public offering are
simultaneously exploring merger and acquisition opportunities. If we are not
engaged as a strategic advisor in any such dual-tracked process, our investment
banking revenue would be adversely affected in the event that an initial public
offering is not consummated.




As a
result, we are unlikely to achieve steady and predictable earnings on a
quarterly basis, which could in turn adversely affect our stock
price.




Our
ability to retain our professionals and recruit additional professionals is
critical to the success of our business, and our failure to do so may materially
adversely affect our reputation, business, and results of
operations.




Our
ability to obtain and successfully execute our business depends upon the
personal reputation, judgment, business generation capabilities and project
execution skills of our senior professionals, particularly D. Jonathan Merriman,
our Co-Founder and Chief Executive Officer of the parent company, and the other
members of our Executive Committee. Our senior professionals’ personal
reputations and relationships with our clients are a critical element in
obtaining and executing client engagements. We face intense competition for
qualified employees from other companies in the investment banking industry as
well as from businesses outside the investment banking industry, such as
investment advisory firms, hedge funds, private equity funds, and venture
capital funds. From time to time, we have experienced losses of investment
banking, brokerage, research, and other professionals and losses of our key
personnel may occur in the future. The departure or other loss of Mr. Merriman,
other members of our Executive Committee or any other senior professional who
manages substantial client relationships and possesses substantial experience
and expertise, could impair our ability to secure or successfully complete
engagements, or protect our market share, each of which, in turn, could
materially adversely affect our business and results of operations. Please see
Risk Factor below entitled “If our CEO leaves the Company...“ for additional
information regarding the consequences of the loss of the services of Mr.
Merriman.




11


If any of
our professionals were to join an existing competitor or form a competing
company, some of our clients could choose to leave. The compensation plans and
other incentive plans we have entered into with certain of our professionals may
not prove effective in preventing them from resigning to join our competitors.
If we are unable to retain our professionals or recruit additional
professionals, our reputation, business, results of operations, and financial
condition may be materially adversely affected.




Our
compensation structure may negatively impact our financial condition if we are
not able to effectively manage our expenses and cash flows.




Historically,
the industry has been able to attract and retain investment banking, research,
and sales and trading professionals in part because the business models have
provided for lucrative compensation packages. Compensation and benefits is our
largest expenditure and the variable compensation component, or bonus, has
represented a significant proportion of this expense. The Company’s bonus
compensation is discretionary. For 2009, the potential pool was determined by a
number of components including revenue production, key operating milestones, and
profitability. There is a potential, in order to ensure retention of key
employees, that we could pay individuals for revenue production despite the
business having negative cash flows and/or net losses.




Pricing
and other competitive pressures may impair the revenue and profitability of our
brokerage business.




We derive
a significant portion of our revenue from our brokerage business. Along with
other brokerage firms, we have experienced intense price competition in this
business in recent years. Recent developments in the brokerage industry,
including decimalization and the growth of electronic communications networks,
or ECNs, have reduced commission rates and profitability in the brokerage
industry. We expect this trend toward alternative trading systems to continue.
We believe we may experience competitive pressures in these and other areas as
some of our competitors seek to obtain market share by competing on the basis of
price. In addition, we face pressure from larger competitors, which may be
better able to offer a broader range of complementary products and services to
brokerage clients in order to win their trading business. As we are committed to
maintaining our comprehensive research coverage in our target sectors to support
our brokerage business, we may be required to make substantial investments in
our research capabilities. If we are unable to compete effectively with our
competitors in these areas, brokerage revenue may decline and our business,
financial condition, and results of operations may be adversely
affected.




We
may experience significant losses if the value of our marketable security
positions deteriorates.




We
conduct active and aggressive securities trading, market making, and investment
activities for our own account, which subjects our capital to significant risks.
These risks include market, credit, counterparty, and liquidity risks, which
could result in losses. These activities often involve the purchase, sale, or
short sale of securities as principal in markets that may be characterized as
relatively illiquid or that may be particularly susceptible to rapid
fluctuations in liquidity and price. Trading losses resulting from such trading
could have a material adverse effect on our business and results of
operations.




Difficult
market conditions could adversely affect our business in many ways.




Difficult
market and economic conditions and geopolitical uncertainties have in the past
adversely affected and may in the future adversely affect our business and
profitability in many ways. Weakness in equity markets and diminished trading
volume of securities could adversely impact our brokerage business, from which
we have historically generated more than half of our revenue. Industry-wide
declines in the size and number of underwritings and mergers and acquisitions
also would likely have an adverse effect on our revenue. In addition, reductions
in the trading prices for equity securities also tend to reduce the deal value
of investment banking transactions, such as underwriting and mergers and
acquisitions transactions, which in turn may reduce the fees we earn from these
transactions. As we may be unable to reduce expenses correspondingly, our
profits and profit margins may decline.




We
may suffer losses through our investments in securities purchased in secondary
market transactions or private placements.




Occasionally,
our Company, its officers and/or employees may make principal investments in
securities through secondary market transactions or through direct investment in
companies through private placements. In many cases, employees and officers with
investment discretion on behalf of our Company decide whether to invest in our
account or their personal account. It is possible that gains from investing will
accrue to these individuals because investments were made in their personal
accounts, and our Company will not realize gains because it did not make an
investment. It is possible that gains from investing will accrue to these
individuals and /or to the Company, while the Company’s brokerage customers do
not accrue gains in the same securities due to differences in timing of
investment decisions. Conversely, it is possible that losses from investing will
accrue to our Company, while these individuals do not experience losses in their
personal accounts because the individuals did not make investments in their
personal accounts.




12


We
face strong competition from larger firms.




The
brokerage and investment banking industries are intensely competitive. We
compete on the basis of a number of factors, including client relationships,
reputation, the abilities and past performance of our professionals, market
focus and the relative quality and price of our services and products. We have
experienced intense price competition with respect to our brokerage business,
including large block trades, spreads, and trading commissions. Pricing and
other competitive pressures in investment banking, including the trends toward
multiple book runners, co-managers, and multiple financial advisors handling
transactions, have continued and could adversely affect our revenue, even during
periods where the volume and number of investment banking transactions are
increasing. We believe we may experience competitive pressures in these and
other areas in the future as some of our competitors seek to obtain market share
by competing on the basis of price.




We are a
relatively small investment bank with approximately 94 employees as of December
31, 2009 and revenue less than $50 million in 2009. Many of our competitors in
the investment banking and brokerage industries have a broader range of products
and services, greater financial and marketing resources, larger customer bases,
greater name recognition, more senior professionals to serve their clients’
needs, greater global reach, and more established relationships with clients
than we have. These larger and better capitalized competitors may be better able
to respond to changes in the brokerage, investment banking, and asset management
industries, to compete for skilled professionals, to finance acquisitions, to
fund internal growth, and to compete for market share generally.




The scale
of our competitors has increased in recent years as a result of substantial
consolidation among companies in the investment banking and brokerage
industries. In addition, a number of large commercial banks, insurance
companies, and other broad-based financial services firms have established or
acquired underwriting or financial advisory practices and broker-dealers or have
merged with other financial institutions. These firms have the ability to offer
a wider range of products than we do, which may enhance their competitive
position. They also have the ability to support investment banking with
commercial banking, insurance, and other financial services in an effort to gain
market share, which has resulted, and could further result, in pricing pressure
in our businesses. In particular, the ability to provide financing has become an
important advantage for some of our larger competitors and, because we do not
provide such financing, we may be unable to compete as effectively for clients
in a significant part of the brokerage and investment banking
market.




If we are
unable to compete effectively with our competitors, our business, financial
condition, and results of operations will be adversely affected.




We
have incurred losses for the period covered by this report and in the recent
past and may incur losses in the future.




The
Company recorded net losses of $5,462,000 for the year ended December 31, 2009
and $30,274,000 for the year ended December 31, 2008. We also recorded net
losses in certain quarters within other past fiscal years. We may incur losses
in future periods. If we are unable to finance future losses, those losses may
have a significant effect on our liquidity as well as our ability to
operate.




In
addition, the Company may incur significant expenses in connection with
initiating new business activities or in connection with any expansion of our
underwriting, brokerage, or other businesses. We may also engage in strategic
acquisitions and investments for which we may incur significant expenses.
Accordingly, we may need to increase our revenue at a rate greater than our
expenses to achieve and maintain profitability. If our revenue does not increase
sufficiently, or even if our revenue does increase but we are unable to manage
our expenses, we will not achieve and maintain profitability in future
periods.




Capital
markets and strategic advisory engagements are singular in nature and do not
generally provide for subsequent engagements.




Our
investment banking clients generally retain us on a short-term,
engagement-by-engagement basis in connection with specific capital markets or
mergers and acquisitions transactions, rather than on a recurring basis under
long-term contracts. As these transactions are typically singular in nature and
our engagements with these clients may not recur, we must seek out new
engagements when our current engagements are successfully completed or are
terminated. As a result, high activity levels in any period are not necessarily
indicative of continued high levels of activity in any subsequent period. If we
are unable to generate a substantial number of new engagements and generate fees
from those successful completion of transactions, our business and results of
operations would likely be adversely affected.




13


A
significant portion of our brokerage revenue is generated from a relatively
small number of institutional clients.




A
significant portion of our brokerage revenue is generated from a relatively
small number of institutional clients. For example, in 2009 we generated 14% of
our brokerage revenue, or approximately 12% of our total revenue, from our ten
largest brokerage clients. Similarly, in 2008 we generated 37% of our brokerage
revenue, or approximately 25% of our total revenue, from our ten largest
brokerage clients. If any of our key clients departs or reduces its business
with us and we fail to attract new clients that are capable of generating
significant trading volumes, our business and results of operations will be
adversely affected.




Our
risk management policies and procedures could expose us to unidentified or
unanticipated risk.




Our risk
management strategies and techniques may not be fully effective in mitigating
our risk exposure in all market environments or against all types of
risk.




We are
exposed to the risk that third parties that owe us money, securities, or other
assets will not perform their obligations. These parties may default on their
obligations to us due to bankruptcy, lack of liquidity, operational failure,
breach of contract, or other reasons. We are also subject to the risk that our
rights against third parties may not be enforceable in all circumstances. As a
clearing member firm, we finance our customer positions and could be held
responsible for the defaults or misconduct of our customers. Although we
regularly review credit exposures to specific clients and counterparties and to
specific industries and regions that we believe may present credit concerns,
default risk may arise from events or circumstances that are difficult to detect
or foresee. In addition, concerns about, or a default by, one institution could
lead to significant liquidity problems, losses, or defaults by other
institutions, which in turn could adversely affect us. Also, risk management
policies and procedures that we utilize with respect to investing our own funds
or committing our capital with respect to investment banking or trading
activities may not protect us or mitigate our risks from those activities. If
any of the variety of instruments, processes, and strategies we utilize to
manage our exposure to various types of risk are not effective, we may incur
losses.




Our
operations and infrastructure may malfunction or fail.




Our
businesses are highly dependent on our ability to process, on a daily basis, a
large number of increasingly complex transactions across diverse markets. Our
financial, accounting, or other data processing systems may fail to operate
properly or become disabled as a result of events that are wholly or partially
beyond our control, including a disruption of electrical or communications
services or our inability to occupy one or more of our buildings. The inability
of our systems to accommodate an increasing volume of transactions could also
constrain our ability to expand our businesses. If any of these systems do not
operate properly or are disabled or if there are other shortcomings or failures
in our internal processes, people, or systems, we could suffer an impairment to
our liquidity, financial loss, a disruption of our businesses, liability to
clients, regulatory intervention, or reputation damage.




We also
face the risk of operational failure of any of our clearing agents, the
exchanges, clearing houses, or other financial intermediaries we use to
facilitate our securities transactions. Any such failure or termination could
adversely affect our ability to effect transactions and to manage our exposure
to risk.




In
addition, our ability to conduct business may be adversely impacted by a
disruption in the infrastructure that supports our businesses and the
communities in which located. This may include a disruption involving
electrical, communications, transportation, or other services used by us or
third parties with which we conduct business, whether due to fire, other natural
disaster, power or communications failure, act of terrorism or war or otherwise.
Nearly all of our employees in our primary locations, including San Francisco
and New York, work in proximity to each other. If a disruption occurs in one
location and our employees in that location are unable to communicate with or
travel to other locations, our ability to service and interact with our clients
may suffer and we may not be able to implement successfully contingency plans
that depend on communication or travel. Insurance policies to mitigate these
risks may not be available or may be more expensive than the perceived benefit.
Further, any insurance that we may purchase to mitigate certain of these risks
may not cover our loss.




14


Our
operations also rely on the secure processing, storage, and transmission of
confidential and other information in our computer systems and networks. Our
computer systems, software, and networks may be vulnerable to unauthorized
access, computer viruses, or other malicious code and other events that could
have a security impact. If one or more of such events occur, this potentially
could jeopardize our or our clients’ or counterparties’ confidential and other
information processed by, stored in, and transmitted through our computer
systems and networks, or otherwise cause interruptions or malfunctions in our,
our clients’, our counterparties’, or third parties’ operations. We may be
required to expend significant additional resources to modify our protective
measures or to investigate and remediate vulnerabilities or other exposures, and
we may be subject to litigation and financial losses that are either not insured
against or not fully covered through any insurance maintained by
us.




Strategic
investments or acquisitions and joint ventures may result in additional risks
and uncertainties in our business.




We may
grow our business through both internal expansion and through strategic
investments, acquisitions or joint ventures. To the extent we make strategic
investments or acquisitions or enter into joint ventures, we face numerous risks
and uncertainties combining or integrating businesses, including integrating
relationships with customers, business partners, and internal data processing
systems. In the case of joint ventures, we are subject to additional risks and
uncertainties in that we may be dependent upon, and subject to liability, losses
or reputation damage relating to systems, controls, and personnel that are not
under our control. In addition, conflicts or disagreements between us and our
joint venture partners may negatively impact our businesses.




Future
acquisitions or joint ventures by us could entail a number of risks, including
problems with the effective integration of operations, the inability to maintain
key pre-acquisition business relationships and integrate new relationships, the
inability to retain key employees, increased operating costs, exposure to
unanticipated liabilities, risks of misconduct by employees not subject to our
control, difficulties in realizing projected efficiencies, synergies and cost
savings, and exposure to new or unknown liabilities.




Any
future growth of our business may require significant resources and/or result in
significant unanticipated losses, costs, or liabilities. In addition,
expansions, acquisitions or joint ventures may require significant managerial
attention, which may be diverted from our other operations.




Evaluation
of our prospects may be more difficult in light of our limited operating
history.




As a
result of the volatile economic conditions faced by the securities and financial
industries, and the restructuring of our business lines, there have been a
number of changes to our operations. Given these changes, we can no longer rely
upon prior operating history to evaluate our business and prospects.
Additionally, we are subject to the risks and uncertainties that face a Company
in the process of restructuring its business in the midst of uncertain economic
environment. Some of these risks and uncertainties relate to our ability to
attract and retain clients on a cost-effective basis, expand and enhance our
service offerings, raise additional capital, and respond to competitive market
conditions. We may not be able to address these risks adequately, and our
failure to do so may adversely affect our business and the value of an
investment in our Common Stock.




Risks
Related to Our Industry




Risks
associated with volatility and losses in the financial markets.




The U.S.
financial markets in 2008 and early 2009 suffered unprecedented volatility and
losses. Several mortgage-related financial institutions and large, reputable
investment banks were not able to continue operating their businesses. In the
event that the securities and financial industries face similar or greater
volatility, there can be no assurance that we will be able to continue our
operations.




Employee
misconduct could harm us and is difficult to detect and deter.




There
have been a number of highly publicized cases involving fraud or other
misconduct by employees in the financial services industry in recent years. Our
experience with our former employee Scott Cacchione hurt our business
significantly, and we run the risk that employee misconduct could occur at our
company. For example, misconduct by employees could involve the improper use or
disclosure of confidential information, which could result in regulatory
sanctions and serious reputation or financial harm to us. It is not always
possible to deter employee misconduct. The precautions we take to detect and
prevent this activity may not be effective in all cases and we may suffer
significant reputation harm for any misconduct by our employees.




15


Risks
associated with regulatory impact on capital markets.




Highly
publicized financial scandals in recent years have led to investor concerns over
the integrity of the U.S. financial markets and have prompted Congress, the SEC,
the NYSE, and FINRA to significantly expand corporate governance and public
disclosure requirements. To the extent that private companies, in order to avoid
becoming subject to these new requirements, decide to forgo initial public
offerings, our equity underwriting business may be adversely affected. In
addition, provisions of the Sarbanes-Oxley Act of 2002 and the corporate
governance rules imposed by self-regulatory organizations have diverted many
companies’ attention away from capital market transactions, including securities
offerings and acquisition and disposition transactions. In particular, companies
that are or are planning to register their securities with the SEC or to become
subject to the reporting requirements of the Securities Exchange Act of 1934 are
incurring significant expenses in complying with the SEC and accounting
standards relating to internal control over financial reporting, and companies
that disclose material weaknesses in such controls under the new standards may
have greater difficulty accessing the capital markets. These factors, in
addition to adopted or proposed accounting and disclosure changes, may have an
adverse effect on the business.




Financial
services firms have been subject to increased scrutiny over the last several
years, increasing the risk of financial liability and reputation harm resulting
from adverse regulatory actions.




Firms in
the financial services industry have been operating in a difficult regulatory
environment. The industry has experienced increased scrutiny from a variety of
regulators, including the SEC, the NYSE, FINRA and state attorneys general.
Penalties and fines sought by regulatory authorities have increased
substantially over the last several years. This regulatory and enforcement
environment has created uncertainty with respect to a number of transactions
that had historically been entered into by financial services firms and that
were generally believed to be permissible and appropriate. We may be adversely
affected by changes in the interpretation or enforcement of existing laws and
rules by these governmental authorities and self-regulatory organizations. We
also may be adversely affected as a result of new or revised legislation or
regulations imposed by the SEC, other United States or foreign governmental
regulatory authorities or self-regulatory organizations that supervise the
financial markets. Among other things, we could be fined, prohibited from
engaging in some of our business activities or subject to limitations or
conditions on our business activities. Substantial legal liability or
significant regulatory action against us could have material adverse financial
effects or cause significant reputation harm to us, which could seriously harm
our business prospects.




In
addition, financial services firms are subject to numerous conflicts of
interests or perceived conflicts. The SEC and other federal and state regulators
have increased their scrutiny of potential conflicts of interest. We have
adopted various policies, controls and procedures to address or limit actual or
perceived conflicts and regularly seek to review and update our policies,
controls and procedures. However, appropriately dealing with conflicts of
interest is complex and difficult and our reputation could be damaged if we
fail, or appear to fail, to deal appropriately with conflicts of interest. Our
policies and procedures to address or limit actual or perceived conflicts may
also result in increased costs, additional operational personnel and increased
regulatory risk. Failure to adhere to these policies and procedures may result
in regulatory sanctions or client litigation. For example, the research areas of
investment banks have been and remain the subject of heightened regulatory
scrutiny which has led to increased restrictions on the interaction between
equity research analysts and investment banking personnel at securities firms.
Several securities firms in the United States reached a global settlement in
2003 and 2004 with certain federal and state securities regulators and
self-regulatory organizations to resolve investigations into equity research
analysts’ alleged conflicts of interest. Under this settlement, the firms have
been subject to certain restrictions and undertakings, which have imposed
additional costs and limitations on the conduct of our businesses.




Financial
service companies have experienced a number of highly publicized regulatory
inquiries concerning market timing, late trading and other activities that focus
on the mutual fund industry. These inquiries have resulted in increased scrutiny
within the industry and new rules and regulations for mutual funds, investment
advisers, and broker-dealers.


16


Our
exposure to legal liability is significant, and damages that we may be required
to pay and the reputational harm that could result from legal action against us
could materially adversely affect our businesses.




We face
significant legal risks in our businesses and, in recent years, the volume of
claims and amount of damages sought in litigation and regulatory proceedings
against financial institutions have been increasing. These risks include
potential liability under securities or other laws for materially false or
misleading statements made in connection with securities offerings and other
transactions, potential liability for “fairness opinions,” and other advice we
provide to participants in strategic transactions, and disputes over the terms
and conditions of complex trading arrangements. We are also subject to claims
arising from disputes with employees for alleged discrimination or harassment,
among other things. These risks often may be difficult to assess or quantify and
their existence and magnitude often remain unknown for substantial periods of
time.




Our role
as advisor to our clients on important underwriting or mergers and acquisitions
transactions involves complex analysis and the exercise of professional
judgment, including rendering “fairness opinions” in connection with mergers,
and other transactions. Therefore, our activities may subject us to the risk of
significant legal liabilities to our clients and aggrieved third parties,
including stockholders of our clients who could bring securities class actions
against us. Our investment banking engagements typically include broad
indemnities from our clients and provisions to limit our exposure to legal
claims relating to our services, but these provisions may not protect us or may
not be enforceable in all cases.




For
example, an indemnity from a client that subsequently is placed into bankruptcy
is likely to be of little value to us in limiting our exposure to claims
relating to that client. As a result, we may incur significant legal and other
expenses in defending against litigation and may be required to pay substantial
damages for settlements and adverse judgments. Substantial legal liability or
significant regulatory action against us could have a material adverse effect on
our results of operations or cause significant reputational harm to us, which
could seriously harm our business and prospects.




In the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation often has been instituted against
that company. Such litigation is expensive and diverts management’s attention
and resources. We cannot assure you that we will not be subject to such
litigation. If we are subject to such litigation, even if we ultimately prevail,
our business and financial condition may be adversely affected.




Risks
Related to Ownership of Our Common Stock




We
have issued Series D Convertible Preferred Stock with rights preferences and
privileges that are senior to those of our Common Stock. The exercise of some or
all of these Series D Convertible Preferred Stock rights may have a detrimental
effect on the rights of the holders of the Common Stock.




On
September 8, 2009, we closed a private placement Preferred Stock strategic
transaction. We sold 23,720,916 shares of our Series D Convertible Preferred
Stock at $0.43 per share and warrants to purchase 23,720,916 share of Common
Stock at $0.65 per share to an investor group that includes certain of our
officers and directors in addition to outside investors. In connection with this
transaction, the Company converted the principal and accrued interest of certain
notes issued by the Company between May 2009 and July 2009 into Series D
Convertible Stock. The aggregate principal amount from these cancelled notes was
$1,425,000.




As the
warrants originally contained a full ratchet antidilution provision, we recorded
a non-cash warrant liability of approximately $26 million as of September 30,
2009 in accordance with generally accepted accounting principles (“GAAP”), which
resulted in a stockholders’ deficit (negative stockholders’ equity). This, in
turn, caused us to fall outside of the NASDAQ Listing Rules which require a
minimum of $2,000,000 of stockholders’ equity.




17


We have
since remedied the noncompliance with the NASDAQ listing rules by amending the
warrants to remove the full ratchet antidilution provision and thus remove the
resulting stockholders’ deficit. At December 31, 2009, we no longer carried
warrant liabilities on our Statement of Financial Condition. In consideration
for such amendment, the Company has agreed to pay the holders of the warrants
$0.005 per warrant share in cash, which is anticipated to be paid around August
15, 2010. We believe we are now in full compliance with the NASDAQ minimum
shareholders’ equity requirements.




The
Series D Convertible Preferred Stock has a number of rights, preferences, and
privileges that are superior to those of the Common Stock. Holders of the Series
D Convertible Preferred Stock are entitled to a 6% annual dividend payable
monthly in arrears. As of December 31, 2009, the Company recorded cash dividends
payable of $51,000. The Company cannot pay any dividends on the Common Stock
until all accrued dividends on the Series D Convertible Preferred Stock are
first paid.




The
holders of Series D Convertible Preferred Stock are entitled to a “liquidation
preference payment” of $0.43 per share of Series D Convertible Preferred Stock
plus all accrued but unpaid dividends on such shares prior and in preference to
any payment to holders of the Common Stock upon a merger, acquisition, sale of
substantially all the assets, or certain other liquidation events of the
Company. Any proceeds after payment of the “liquidation preference payment”
shall be paid pro rata to the holders of the Series D Convertible Preferred
Stock and Common Stock on an as converted to Common Stock basis. As such,
holders of Common Stock might receive nothing in liquidation, or receive much
less than they would if there were no Series D Convertible Preferred Stock
outstanding.




The
Series D Convertible Preferred Stock has antidilution protection, including a
full ratchet provision for certain new issuances of Company Stock, as specified
in the Certificate of Designation of Series D Convertible Preferred Stock which
is incorporated herein by reference. If such antidilution protection is
triggered, the holders of Common Stock may have their ownership in the Company
diluted.




The
holders of the Series D Convertible Preferred Stock also have substantial voting
power over the Company. Such holders are entitled to elect four of the nine
members of our Board of Directors. Additionally, they have certain “protective
provisions,” as set forth in the Certificate of Designation, requiring us to
obtain their approval before we can carry out certain actions. The holders of
Series D Convertible Preferred Stock may gain additional voting power if they
exercise the warrants or they acquire shares of our Common Stock in the
market.




The
interests of the holders of the Series D Convertible Preferred Stock might not
be aligned with those of the holders of Common Stock, which could result in the
Company being sold or liquidated in a transaction in which the holders of Common
Stock receive little or nothing.


18


In
connection with the private placement transaction, we entered into an Investors’
Rights Agreement with the investors. Under the terms of the Investors’ Rights
Agreement, if a registration statement relating to the Common Shares underlying
the Series D Convertible Preferred Stock and warrants is not declared effective
or is not available within time lines provided in the Investors’ Rights
Agreement (with certain limited exceptions), then we are required to pay the
investors, pro rata, in proportion to the number of shares of Series D
Convertible Preferred Stock purchased by such investor in the transaction, five
year warrants to purchase 150,000 shares of the Company’s Common Stock at $0.65
per share, on terms identical to those issued to the investors under the
financing transaction (the “Registration Warrants”), as liquidated damages and
not as penalty, subject to an overall limit of liquidated damages in the
aggregated of 900,000 Registration Warrants. The liquidated damages pursuant to
the terms hereof shall apply on a daily pro rata basis for any portion of a
month prior to securing an effective registration statement. The foregoing shall
in no way limit any equitable remedies available to investors for failure to
secure an effective registration statement by the time specified in the
Investors’ Rights Agreement. Investors shall also be able to pursue monetary
damages for failure to secure an effective registration statement by the time
specified in the Investors’ Rights Agreement. Investors shall also be able to
pursue monetary damages for failure to secure an effective registration
statement by the agreed upon time but only if such failure is due to the willful
or deliberate action or inaction of the Company in breach of the
covenants.




Your
ownership percentage may be diluted by warrants issued in connection with our
convertible notes financing.




The
investors of the convertible notes issued on May 29, 2009 and June 1, 2009
received warrants to purchase an aggregate of 937,500 shares of the Common Stock
of the Company at $0.50 per share. The investor and guarantors of the Note
issued on July 31, 2009 received warrants to purchase an aggregate of 2,326,000
shares of the Common Stock of the Company at $0.65 per share. While the
convertible notes and the note are no longer outstanding, the warrants issued in
conjunction with them are, and exercise of these warrants would dilute the
ownership percentage of existing stockholders in the Company.




A
significant percentage of our outstanding common stock is owned or controlled by
our senior professionals and other employees and their interests may differ from
those of other shareholders.




Our
executive officers and directors, and entities affiliated with them, currently
control approximately 44% of our outstanding common stock including exercise of
their options and D Preferred stock and associated warrants. These stockholders,
if they act together, will be able to exercise substantial influence over all
matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying or preventing a change in
control of us and might affect the market price of our common
stock.




Provisions
of the organizational documents may discourage an acquisition of
us.




Our
Articles of Incorporation authorize our Board of Directors to issue up to an
additional 13,729,083 shares of preferred stock, without approval from our
stockholders. This preferred stock, often called “blank check” preferred stock,
could have conversion terms that would allow one share of preferred stock to
convert into multiple shares of common stock. It could also have voting rights
and other rights advantageous to holders of that preferred stock, but
disadvantageous to holders of the Company’s common stock.




If you
hold our common stock, this means that our Board of Directors has the right,
without your approval as a common stockholder, to fix the relative rights and
preferences of the preferred stock. This would affect your rights as a common
stockholder regarding, among other things, dividends and liquidation. We could
also use the preferred stock to deter or delay a change in control of our
company that may be opposed by our management even if the transaction might be
favorable to you as a common stockholder.




In
addition, the Delaware General Corporation Law contains provisions that may
enable our management to retain control and resist our takeover. These
provisions generally prevent us from engaging in a broad range of business
combinations with an owner of 15% or more of our outstanding voting stock for a
period of three years from the date that such person acquires his or her stock.
Accordingly, these provisions could discourage or make more difficult a change
in control or a merger or other type of corporate reorganization even if it
could be favorable to the interests of our stockholders.


19


The
market price of our common stock may decline.





The
market price of our common stock has in the past been, and may in the future
continue to be, volatile. A variety of events may cause the market price of our
common stock to fluctuate significantly, including:





·
            variations
      in quarterly operating results;





·
            announcements
      of significant contracts, milestones, and
  acquisitions;





·
            relationships
      with other companies;





·
            ability
      to obtain needed capital
commitments;





·
            additions
      or departures of key personnel;





·
            sales
      of common and preferred stock, conversion of securities convertible into
      common stock, exercise of options and warrants to purchase common stock,
      or termination of stock transfer
restrictions;





·
            general
      economic conditions, including conditions in the securities brokerage and
      investment banking markets;





·
            changes
      in financial estimates by securities analysts;
  and





·
            fluctuation
      in stock market price and trading
volume.




Many of
these factors are beyond our control. Any one of the factors noted herein could
have an adverse effect on the value of our common stock. Declines in the price
of our stock may adversely affect our ability to recruit and retain key
employees, including our senior professionals.




In
addition, the stock market in recent years has experienced significant price and
volume fluctuations that have particularly affected the market prices of equity
securities of many companies and that often have been unrelated to the operating
performance of such companies. These market fluctuations have adversely impacted
the price of our common stock in the past and may do so in the
future.




Investor
interest in our firm may be diluted due to issuance of additional shares of
common stock.




Our Board
of Directors has the authority to issue up to 300,000,000 shares of common stock
and to issue options and warrants to purchase shares of our common stock without
stockholder approval in certain circumstances. Future issuance of additional
shares of our common stock could be at values substantially below the price at
which you may purchase our stock and, therefore, could represent substantial
dilution. In addition, our Board of Directors could issue large blocks of our
common stock to fend off unwanted tender offers or hostile takeovers without
further stockholder approval.




We have a
significant number of outstanding stock options and warrants. During 2009,
shares issuable upon the exercise of these options and warrants, at prices
ranging currently from approximately $0.50 to $49.00 per share, represent
approximately 9% of our total outstanding stock on a fully diluted basis using
the treasury stock method. Associated with the strategic transaction we closed
in September 2009, we issued a total of 23,720,916 shares of Series D Preferred
Stock which may convert, at the holders’ option, to an equal number of common
stock. In addition, we issued warrants to purchase 28,755,791 shares of common
stock at per share exercisable at the holders’ option. Unrelated to the Series D
Preferred Stock transaction, we issued warrants to purchase an additional
1,030,833 shares of common stock in 2009. The Company has a total of 29,023,649
warrants outstanding, with exercise prices from $0.50 to $9.87.




20


The
exercise of the outstanding options and warrants would dilute the then-existing
stockholders’ percentage ownership of our common stock. Any sales resulting from
the exercise of options and warrants in the public market could adversely affect
prevailing market prices for our common stock. Moreover, our ability to obtain
additional equity capital could be adversely affected since the holders of
outstanding options and warrants may exercise them at a time when we would also
wish to enter the market to obtain capital on terms more favorable than those
provided by such options and warrants. We lack control over the timing of any
exercise or the number of shares issued or sold if exercises occur.




Your
ability to sell your shares may be restricted because there is a limited trading
market for our common stock.




Although
our common stock is currently traded on the Nasdaq Stock Market, we received a
notice from Nasdaq that our common stock is not currently in compliance with the
requirements of Nasdaq for continued listing which requires a minimum bid price
of $1.00 per share. We have 180 days from the date of notification to regain
compliance and may be eligible at the end of that period for an additional 180
days to regain compliance. Even if we regain compliance, an active trading
market in our stock has been limited. Accordingly, you may not be able to sell
your shares when you want or at the price you want.




We
do not expect to pay any cash dividends on our common stock in the foreseeable
future.




We do not
anticipate paying cash dividends on our common stock in the foreseeable future.
Accordingly, our common stock shareholders must rely on sales of their shares of
common stock after price appreciation, which may never occur, as the only way to
realize any future gains on an investment in our common stock. Investors seeking
cash dividends should not purchase our common stock.




If
our CEO leaves the Company, additional warrants will be issued, which may
further dilute the ownership percentage of the holders of the Company's Common
Stock




If D.
Jonathan Merriman ceases to serve as Chief Executive Officer of the Company
prior to August 27, 2012, the Company agreed in connection with the issuance of
the Series D Convertible Preferred Stock to issue additional warrants (the
“Merriman Warrants”) to the holders of the Series D Preferred Stock to purchase
shares of the Company’s Common Stock.  The Merriman Warrants would be
exercisable for a total of 23,720,916 shares of Common Stock, with an exercise
price of $0.65 per share and a term of five years.  Exercise of the
Merriman Warrants would dilute the ownership percentage of existing holders of
Common Stock.  If Mr. Merriman dies, is terminated without “Cause” or
resigns with “Good Reason,” these warrants will not be
issuable.  “Cause” and “Good Reason” are defined in the Investors
Rights Agreement entered into in connection with the issuance of the Series D
Preferred Stock, which was filed as Exhibit 10.48 to the Company’s Amended
Current Report on Form 8-K/A on September 2, 2009.




Item
1b. Unresolved Staff Comments




None.




Item
2. Properties




As of
December 31, 2009, all of our real estate properties are leased. Our principal
executive offices are located in San Francisco, California. We lease additional
offices to support our business activities. These offices are located in New
York, NY. We believe the facilities we are now using are adequate and suitable
for business requirements.





In
January 2009, we sold the assets related to Panel Intelligence, the subsidiary
which occupied the Cambridge, MA facilities.  As part of the sale, we
subleased the office space to the new acquiring entity but we remain as the
lessee on the rental contract.




21


Item
3. Legal Proceedings




Settlement with the
Securities and Exchange Commission




On
November 10, 2009, the Securities and Exchange Commission (“SEC”) issued an
Order Instituting
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and
21(c) of the Securities and Exchange Act of 1934, Making Findings and Imposing
Remedial Sanctions and a Cease-and-Desist Order as to MCF, D. Jonathan Merriman,
and Christopher Aguilar (the “Order”). The Order was issued in connection
with the conduct of a former broker of the Company, Cacchione, from
approximately March 2006 to April 2008 for violation of the anti-fraud
provisions of the federal securities laws. Cacchione was fired in May 2008,
shortly after the underlying facts became known.




The Order
censures and imposes sanctions for the failure of MCF to reasonably supervise
Cacchione with a view toward preventing future violations arising out of his
disseminating confidential customer information to third parties and executing
unauthorized orders for certain customers. Pursuant to the Order, MCF paid a
penalty of $100,000 and hired an Independent Consultant to review and make
recommendations as needed to MCF’s written policies and procedures relating to
the supervision of registered representatives.




The Order
also imposes sanctions on D. Jonathan Merriman, MCF’s former CEO and current CEO
of Merriman Curhan Ford Group, Inc., the Company’s parent; and Christopher
Aguilar, MCF’s former Chief Compliance Officer; for failure to adequately
supervise Cacchione. Pursuant to the Order, Mr. Merriman paid a penalty of
$75,000 and Mr. Aguilar must pay a penalty of $40,000. Both individuals are also
suspended from acting in a supervisory capacity for any broker or dealer for a
period of twelve months from the date of the Order.




The Order
makes no finding or allegation of any fraudulent activity involving anyone in
MCF other than Cacchione. MCF, Mr. Merriman, and Mr. Aguilar cooperated fully
with the SEC’s investigation and consented to the SEC’s Order without admitting
or denying the findings.




Del Biaggio/Cacchione
Matters




A number
of lawsuits have been filed against MCF in connection with the actions of
William Del Biaggio III (“Del Biaggio”), a former customer of MCF and Cacchione,
a former retail broker of MCF. Del Biaggio and Cacchione pleaded guilty to
securities fraud and were sentenced to prison terms of 97 and 60 months,
respectively.




The
claims filed against the Company by DGB Investments, 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 in an aggregate amount of $43,577,000 related to the fraud were
settled as of September 8, 2009. The amount for which the claims were settled
was $4,300,000, the issuance of 5-year warrants to buy 1,538,461 shares of the
Company’s common stock at $0.65 each, and the assignment of certain rights to
collect potential insurance payments from the Company’s insurers.




On
February 12, 2010, the Company and MCF settled with the insurers collecting an
aggregate amount of $5,750,000. The Company was allocated $325,000, less
expenses, of the settlement. The balance of the settlement amount was allocated
to the litigants on a pro rata basis. As a result of these proceeds, the Company
was obligated to issue 373,563 warrants to purchase shares of the Company’s
common stock at a price of $0.87 per shares. The warrant expense was accrued as
of December 31, 2009. (See Note 21, “Subsequent Events.”)




There are
additional lawsuits related to the fraud that the Company has elected not to
settle. We intend to defend vigorously each case, other than matters we describe
as having been settled. Although there can be no assurance as to the ultimate
outcome, the Company generally believes it has meritorious defenses and denies
liability in all litigation pending against it, including the matters described
below. In accordance with applicable accounting guidance, the Company
establishes reserves for litigation and regulatory matters when those matters
present loss contingencies which are both probable and estimable. When loss
contingencies are not both probable and estimable, we do not establish reserves.
In the matters described below, loss contingencies are not both probable and
estimable in the view of management, and accordingly, reserves have not been
established for those matters.




22


Don
Arata, et al. v. Merriman Curhan Ford & Co.




In July
2008, MCF and the Company were served with a complaint filed in the San
Francisco County, California Superior Court by several plaintiffs who invested
money with Del Biaggio and related entities. In March 2009, MCF and the Company
were served with an amended consolidated complaint on behalf of 39 plaintiffs
which consolidated several similar pending actions filed by the same law firm.
Plaintiffs allege, among other things, fraud based on Cacchione’s alleged
assistance to Del Biaggio in connection with the allegedly fraudulent
investments and MCF’s failure to discover and stop the continuing fraud.
Plaintiffs in this lawsuit seek damages of over $9 million. MCF and the Company
responded to the amended consolidated complaint in June 2009 denying all
liability. We believe that MCF and the Company have meritorious defenses and
intend to contest these claims vigorously. (The previously disclosed Davis,
Cook, and Bachelor cases now are part of the consolidated cases.)




David
Hengehold v. Merriman Curhan Ford & Co.




In June
2008, the Company and MCF were served with a complaint filed in San Mateo
County, California Superior Court by David Hengehold. Plaintiff alleges fraud
based on Cacchione having induced plaintiff into making loans to Del Biaggio.
Plaintiff in this lawsuit seeks damages of over $500,000. We believe that the
Company has meritorious defenses and intends to contest this claim
vigorously.




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, and is continuing to follow up that demand. We
believe that MCF has little or no remaining exposure in this matter and intends
to contest this claim vigorously.




The
Private Bank of the Peninsula v. Merriman Curhan Ford & Co.




In July
2008, MCF was served with a complaint filed in the Santa Clara County Superior
Court by The Private Bank of the Peninsula. Plaintiff alleges, among other
things, fraud based on Cacchione having induced plaintiff into making loans to
Del Biaggio. Plaintiff in this lawsuit alleges damages of $916,666.65. We
believe that MCF has meritorious defenses and intends to contest this claim
vigorously.




Pacific
Capital Bank v. Merriman Curhan Ford & Co.




In
October 2008, MCF was served with a complaint filed in the San Francisco County
Superior Court by Pacific Capital Bank. Plaintiff alleges, among other things,
fraud based on Cacchione having induced plaintiff into making loans to Del
Biaggio. Plaintiff in this lawsuit alleges damages of $1.84 million. We believe
that MCF has meritorious defenses and intends to contest this claim
vigorously.




Gary
Thornhill, et al. v. Merriman Curhan Ford & Co.




In May
2009, a complaint was filed in the San Francisco County Superior Court by Gary
Thornhill and several related family members and entities, naming as defendants
the Company and MCF. The complaint alleges, , among other things, fraud based on
Cacchione’s alleged assistance to Del Biaggio in connection with the allegedly
fraudulent investments and MCF’s failure to discover and stop the continuing
fraud. Plaintiffs in this lawsuit seek damages of $230,000. We believe that MCF
has meritorious defenses and intend to contest these claims vigorously. (This
case was consolidated with the Arata case disclosed above on February 5, 2010.
See Note 21, “Subsequent Events.”)




23


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




In early
2009, MCF and D. Jonathan Merriman were served with a FINRA arbitration claim
filed by Irving Bronstein and several related family members and entities.
Claimants allege, among other things, that MCF benefited from the sale of a
particular security it held at the expense of its customers, including the
claimants, and fraud based on Cacchione’s alleged assistance to Del Biaggio in
connection with allegedly fraudulent investments and MCF’s failure to discover
and stop the fraud. This case was settled on March 1, 2010. (See Note 21,
“Subsequent Events”).




John
Zarich v. Merriman Curhan Ford & Co.




In or
around April 2009, John Zarich filed an arbitration claim with FINRA naming MCF.
The statement of claim alleges that Zarich was convinced by Cacchione to
purchase shares of a small, risky stock in which MCF held a position. It further
alleges that Cacchione convinced Zarich not to sell the shares when the stock’s
price fell. The statement seeks $265,000 in compensatory damages plus punitive
damages of $200,000 and 10% interest beginning January 2, 2008. We believe that
MCF has meritorious defenses and intends to contest this claim
vigorously.




Demand
by Shelly Schaffer to Merriman Curhan Ford & Co. for Payment of Attorneys’
Fees




On April
24, 2009, former Vice President of Client Services, Shelly Schaffer, through her
attorney, Robert Shartsis, made a written demand for payment of attorneys’ fees
for Ms. Schaffer’s defense in a civil action by the Securities and Exchange
Commission. Ms. Schaffer, who was hired by MCF on May 25, 2006, retained Mr.
Shartsis to respond to an SEC Enforcement action in which it is alleged that Ms.
Schaffer violated the antifraud provisions of federal securities laws and
applicable regulations. Ms. Schaffer worked for Cacchione prior to their coming
to MCF. MCF has denied Ms. Schaffer’s requests for payment of her attorneys’
fees on the grounds that the accusations against her concern activities that
were outside the course and scope of her employment. Ms. Schaffer’s attorneys
are demanding payment of their fees from MCF in a total amount of approximately
$150,000. We believe that MCF has meritorious defenses and intends to contest
the claims vigorously.




Other
Litigation




There
have been a number of legal cases that are unrelated to the Del
Biaggio/Cacchione matters. These are as follows:




Spare
Backup Inc. v. Merriman Curhan Ford & Co.




In April
2008, MCF entered into an engagement to provide investment banking services to
Spare Backup, Inc. (“Spare Backup”). MCF was able to close a round of bridge
financing in June 2008. MCF was successful in raising $1,300,000 in capital for
Spare Backup. As a result of closing the financing transaction, MCF was entitled
to reimbursement of its expenses, a convertible note with principal valued at
$161,100 and 370,370 shares of Spare Backup common stock. As of November 2008,
these transaction fees had not been paid to MCF. We hired counsel to seek
payment of the fees and to proceed to arbitration, as is specified in the
engagement letter. In January 2009, MCF filed a petition to compel arbitration
in the San Francisco County Superior Court. In response to the petition to
compel arbitration, Spare Backup filed a complaint in the Riverside County
Superior Court, Indio Branch, for fraud and declaratory relief alleging that MCF
fraudulently induced it to execute the investment banking engagement letter. The
petition for arbitration was granted in May of 2009 and the Indio action was
stayed for all purposes pending the outcome of arbitration. The arbitration date
has been set for March 22, 2010.




24


Joy
Ann Fell v. Merriman Curhan Ford & Co.




In
November 2008, MCF received a demand letter from a former employee, Joy Ann
Fell. In January 2009, MCF received a claim filed by Ms. Fell in FINRA
arbitration. Ms. Fell worked in our investment banking department and was
terminated in October of 2008, as part of a reduction in force. Ms. Fell alleges
claims of breach of an implied employment contract, emotional distress and
work-place discrimination. The demand for money damages is approximately
$350,000. We believe that MCF has meritorious defenses and intends to contest
this claim vigorously. MCF has responded to the claim and the parties have
propounded, but not responded to, written discovery. The parties and FINRA have
jointly selected an arbitration panel of three New York-based arbitrators: Aaron
Tyk, Caryl D. Feldman, and Beth Bird Pocker.




Wesley
Rusch v. Merriman Curhan Ford & Co.




In
October 2008, MCF was served with a claim in FINRA Arbitration by Wesley Rusch.
Mr. Rusch is a former at-will employee of MCF and worked in the compliance
department. Mr. Rusch was terminated by MCF in July 2007. Mr. Rusch alleges
theories of discrimination and lack of cause for termination. Mr. Rusch filed a
Statement of Claim seeking damages of over $1 million. We contested this claim
at the arbitration before a FINRA arbitration panel in March 2009 which resulted
in a decision in our favor in July 2009. Mr. Rusch requested that the San
Francisco Superior Court vacate the decision, and we requested that it be
confirmed.




Peter
Marcil v. Merriman Curhan Ford & Co.




In
January 2009, our broker-dealer subsidiary, MCF, was served with a claim in
FINRA Arbitration by Peter Marcil. Mr. Marcil is a former at-will employee of
MCF and worked in the investment banking department. Mr. Marcil resigned from
MCF in March of 2007. Mr. Marcil alleges breach of an implied employment
contract, wrongful termination, and intentional infliction of emotional
distress. Damages are not specified in the arbitration claim. MCF has not
replied to the claim and an arbitration hearing date has not been set. The
parties participated in a mediation with San Francisco Attorney/Mediator Mark
Rudy on September 14, 2009 and have agreed to continue settlement negotiations.
We believe that MCF has meritorious defenses and it intends to contest this
claim vigorously. However, in the event that MCF does not prevail, based upon
the facts as we know them to date, we do not believe that the outcome will have
a material effect on our financial position, financial results or cash
flows.




Dow
Corning Corporation vs. Merriman Curhan Ford & Co.




In late
July and early August 2009, counsel for Dow Corning Corporation (DCC) indicated
in correspondence and communications that DCC may have some type of claim
against MCF in connection with its purchases of auction rate securities through
MCF’s ICD Division. Counsel would not furnish any specifics about the purported
claim or any purported damages, but requested an agreement tolling any
applicable statute of limitations to allow the parties to undertake “settlement
discussions.” MCF, Institutional Cash Distributors, LLC and certain
representatives of MCF’s ICD Division entered into such a tolling agreement with
DCC for a period of 60 days, which was extended for a further 60 days. MCF’s ICD
Division has refused to extend the tolling agreement further. No claim has been
filed. Accordingly, MCF is not aware of the basis of any purported
claim.




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




On
January 14, 2009, MCF and the Company (collectively “MCF”) filed a civil action
in the Superior Court for Los Angeles County (the “Coverage Lawsuit”) against
its directors’ and officers’ liability insurer, XL Specialty Insurance Company
(XL Specialty). In the Coverage Lawsuit, MCF had asserted claims for breach of
contract, tortious breach of contract, and declaratory relief, alleging that XL
Specialty wrongfully denied coverage for various ongoing third-party claims and
government investigations. This case was settled on February 12, 2010. (Please
see Note 21, “Subsequent Events.”)




25


Midsummer
Investment, Ltd., v. Merriman Curhan Ford Group, Inc.




On
November 6, 2009, Midsummer Investment, Ltd. (“Midsummer”) filed a complaint in
federal court, Southern District of New York, alleging that Midsummer was denied
an anti-dilution adjustment to a warrant issued by the Company to them, and that
the Company refused to honor an exercise of that warrant. The Company believes
that Midsummer is not entitled to any anti-dilution adjustment and its attempted
exercise was not accompanied by proper payment. We believe that the Company has
meritorious defenses and intends to contest this claim vigorously.




The
Company and MCF deny any liability and are vigorously contesting these lawsuits
and arbitrations. At this point, the Company cannot estimate the amount of
damages if they are resolved unfavorably or does not believe that the cases will
result in unfavorable outcomes and accordingly, management has not provided an
accrual for these lawsuits and arbitrations.




Based on
the facts presently known, the Company does not believe the outcome of these
proceedings will have a material adverse effect on its financial
condition.




Additionally,
from time to time, we are involved in ordinary routine litigation incidental to
our business.




26


PART
II




Item
5. Market for Registrant’s Common Stock and Related Stockholder
Matters




Our
common stock has been quoted on The Nasdaq Stock Market, Inc. (“Nasdaq”) under
the symbol “MERR” since February 12, 2008. Prior to this time, our common stock
traded on the American Stock Exchange under the symbol “MEM.” The following
table sets forth the range of the high and low sales prices per share of our
common stock for the fiscal quarters indicated.





High
                  
                  
                  Low2009Fourth
      Quarter
                  
                  $
                  1.63
                  
                  
                  $
                  0.67Third
      Quarter
                  
                  
                  1.80
                  
                  
                  
                  0.38Second
      Quarter
                  
                  
                  0.62
                  
                  
                  
                  0.30First
      Quarter
                  
                  
                  0.65
                  
                  
                  
                  0.242008Fourth
      Quarter
                  
                  $
                  1.02
                  
                  
                  $
                  0.40Third
      Quarter
                  
                  
                  1.57
                  
                  
                  
                  0.93Second
      Quarter
                  
                  
                  4.10
                  
                  
                  
                  1.19First
      Quarter
                  
                  
                  5.94
                  
                  
                  
                  3.91





The
closing sale price for the common stock on March 15, 2010 was $0.86 The market
price of our common stock has fluctuated significantly and may be subject to
significant fluctuations in the future. See Item 1A - “Risk
Factors.”




According
to the records of our transfer agent, we had 638 stockholders of record as of
December 31, 2009. Because many shares are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of beneficial stockholders represented by these record
holders.




Our
policy is to reinvest earnings in order to fund future growth. Therefore, we
have not paid, and currently do not plan to declare, dividends on our common
stock.




27


Securities
Authorized for Issuance Under Equity Compensation Plans
 
 The
following table gives information about the Company’s common stock that may be
issued upon the exercise of options and warrants under all of our existing
equity compensation plans as of December 31, 2009.
 
 Number ofNumber of
                    
                    
                    
                    
                    
                    SecuritiesSecurities to
                    
                    
                    Weighted-
                    
                    
                    Remainingbe Issued
                    
                    
                    Average
                    
                    
                    AvailableUpon
                    
                    
                    Exercise
                    
                    
                    For FutureExercise of
                    
                    
                    Price of
                    
                    
                    IssuanceOutstanding
                    
                    
                    Outstanding
                    
                    
                    Under EquityOptions and
                    
                    
                    Options and
                    
                    
                    CompensationPlan Category
                    
                    Warrants
                    
                    
                    Warrants
                    
                    
                    PlansEquity
      compensation plans approved by stockholders:1999
      Stock Option Plan (expired 12/30/08)
                    
                    
                    65,865
                    
                    
                    $
                    4.47
                    
                    
                    
                    -2000
      Stock Option and Incentive Plan (expired 2/28/10)
                    
                    
                    365,797
                    
                    
                    $
                    1.29
                    
                    
                    
                    206,7532001
      Stock Option and Incentive Plan
                    
                    
                    443,243
                    
                    
                    $
                    0.80
                    
                    
                    
                    50,0322003
      Stock Option and Incentive Plan
                    
                    
                    3,644,879
                    
                    
                    $
                    1.03
                    
                    
                    
                    345,0252009
      Stock Incentive Plan
                    
                    
                    4,945,000
                    
                    
                    $
                    1.16
                    
                    
                    
                    3,011,4622006
      Directors’ Stock Option and Incentive Plan
                    
                    
                    98,838
                    
                    
                    $
                    0.43
                    
                    
                    
                    5,0692002
      Employee Stock Purchase Plan
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -Equity
      compensation not approved by stockholders
                    
                    
                    25,001
                    
                    
                    $
                    49.00
                    
                    
                    
                    -
 
 Equity
compensation not approved by stockholders includes shares in a Non-Qualified
option plan approved by the Board of Directors of NetAmerica.com Corporation
(now known as Merriman Curhan Ford Group, Inc.) in 1999 and a Non-Qualified
option plan approved by the Board of Directors in 2004 that is consistent with
the exchange guidelines at the time of listing.
  Recent
Sale of Unregistered Securities
  On
September 8, 2009, the Company closed on the sale and purchase of approximately
23,721,000 shares of Series D Preferred Stock at $0.43 per share, together with
warrants to purchase an additional 23,721,000 shares of the Company’s common
stock at $0.65 per share pursuant to a Series D Preferred Stock Purchase
Agreement (the “Series D Financing”). The investor group included approximately
fifty individuals and entities, including certain officers, directors and
employees of the Company, as well as outside investors. The Series D Preferred
Stock was issued in a private placement exempt from registration requirements
pursuant to Regulation D of the Securities Act of 1933, as amended. Cash
consideration was deposited into escrow. Each share of Series D Preferred Stock
is convertible into one share of Common Stock of the Company. The Series D
Preferred Stock carries a dividend rate of 6% per annum, payable in cash
monthly.
  28
  Item
6. Selected Consolidated Financial Data
  The
following selected consolidated financial data should be read in conjunction
with Item 7. “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and the consolidated financial statements and the notes
thereto included in Part II, Item 8 to this Annual Report
on Form 10-K.
  2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005Statement
      of operations data:Revenue
                    
                    $
                    49,263,042
                    
                    
                    $
                    36,567,836
                    
                    
                    $
                    83,748,265
                    
                    
                    $
                    51,818,638
                    
                    
                    $
                    43,184,315Operating
      expenses
                    
                    
                    62,842,395
                    
                    
                    
                    62,979,424
                    
                    
                    
                    70,701,900
                    
                    
                    
                    58,315,930
                    
                    
                    
                    44,912,772Operating
      (loss) income
                    
                    
                    (13,579,353
                    )
                    
                    
                    (26,411,588
                    )
                    
                    
                    13,046,365
                    
                    
                    
                    (6,497,292
                    )
                    
                    
                    (1,728,457
                    )Loss
      on retirement of convertible notes payable (1)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,348,805
                    )
                    
                    
                    -Other
      income
                    
                    
                    2,000,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Change
      in warrant liability
                    
                    
                    6,910,656
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Interest
      income
                    
                    
                    15,658
                    
                    
                    
                    375,949
                    
                    
                    
                    461,491
                    
                    
                    
                    484,909
                    
                    
                    
                    446,273Interest
      expense
                    
                    
                    (1,341,753
                    )
                    
                    
                    (72,304
                    )
                    
                    
                    (134,868
                    )
                    
                    
                    (535,014
                    )
                    
                    
                    (76,103
                    )Income
      tax benefit (expense)
                    
                    
                    627,923
                    
                    
                    
                    1,635,214
                    
                    
                    
                    (2,462,165
                    )
                    
                    
                    -
                    
                    
                    
                    (142,425
                    )(Loss)
      income from continuing operations
                    
                    
                    (5,366,869
                    )
                    
                    
                    (24,472,729
                    )
                    
                    
                    10,910,823
                    
                    
                    
                    (7,896,202
                    )
                    
                    
                    (1,500,712
                    )Loss
      from discontinued operations
                    
                    
                    (94,894
                    )
                    
                    
                    (5,801,076
                    )
                    
                    
                    (1,587,788
                    )
                    
                    
                    (324,213
                    )
                    
                    
                    (13,731
                    )Net
      (loss) income
                    
                    $
                    (5,461,763
                    )
                    
                    $
                    (30,273,805
                    )
                    
                    $
                    9,323,035
                    
                    
                    $
                    (8,220,415
                    )
                    
                    $
                    (1,514,443
                    )Basic
      (loss) income from continuing operations
                    
                    $
                    (0.42
                    )
                    
                    $
                    (1.95
                    )
                    
                    $
                    0.95
                    
                    
                    $
                    (0.79
                    )
                    
                    $
                    (0.16
                    )Diluted
      (loss) income from continuing operations
                    
                    $
                    (0.42
                    )
                    
                    $
                    (1.95
                    )
                    
                    $
                    0.86
                    
                    
                    $
                    (0.79
                    )
                    
                    $
                    (0.16
                    )Statement
      of financial condition data:Cash
      and cash equivalents
                    
                    $
                    5,656,750
                    
                    
                    $
                    6,358,128
                    
                    
                    $
                    31,653,657
                    
                    
                    $
                    13,746,590
                    
                    
                    $
                    11,138,923Marketable
      securities owned
                    
                    
                    4,728,940
                    
                    
                    
                    4,622,577
                    
                    
                    
                    14,115,022
                    
                    
                    
                    7,492,914
                    
                    
                    
                    8,627,543Total
      assets
                    
                    
                    16,123,741
                    
                    
                    
                    18,865,590
                    
                    
                    
                    64,573,331
                    
                    
                    
                    30,498,213
                    
                    
                    
                    27,694,413Capital
      lease obligations
                    
                    
                    397,958
                    
                    
                    
                    923,683
                    
                    
                    
                    721,380
                    
                    
                    
                    1,292,378
                    
                    
                    
                    883,993Notes
      payable, net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    238,989
                    
                    
                    
                    325,650
                    
                    
                    
                    408,513Stockholders’
      equity
                    
                    
                    8,016,828
                    
                    
                    
                    7,715,201
                    
                    
                    
                    34,806,048
                    
                    
                    
                    16,215,020
                    
                    
                    
                    18,403,001
 
 (1)
              In
      December 2006, Merriman Curhan Ford Group, Inc. repaid the $7.5 million
      variable rate secured convertible note, issued to Midsummer Investment,
      Ltd., or Midsummer, in March 2006. Midsummer retained the stock warrant to
      purchase 267,858 shares of our common stock. The loss on repayment of the
      convertible note consists of the write-off of the unamortized discount
      related to the stock warrant, as well as the write-off of the unamortized
      debt issuance costs.
  29
  Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
  The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the notes thereto in Part II, Item 8 to
this Annual Report on Form 10-K. This discussion contains forward-looking
statements reflecting our current expectations. Actual results and the timing of
events may differ significantly from those projected in forward- looking
statements due to a number of factors, including those set forth in Item 1A
“Risk Factors” of this Annual Report on Form 10-K.
  Overview
  Merriman
Curhan Ford Group, Inc. (formerly MCF Corporation) is a financial services
company that provides investment banking, capital markets services, corporate
and venture services, and investment banking through its primary operating
wholly-owned subsidiary, MCF.
  MCF is an
investment bank and securities broker-dealer focused on fast-growing companies
and institutional investors. Our mission is to become a leader in the
researching, advising, financing, trading and investing in fast-growing
companies under $1 billion in market capitalization. We provide equity research,
brokerage and trading services primarily to institutions, as well as investment
banking and advisory services to corporate clients. We are attempting to gain
market share by originating differentiated research for our institutional
investor clients and providing specialized and integrated services for our
fast-growing corporate clients. MCF is registered with the Securities and
Exchange Commission (“SEC”) as a broker-dealer and is a member of the Financial
Industry Regulatory Authority (“FINRA”), and the Securities Investor Protection
Corporation (“SIPC”).
  We
acquired Panel Intelligence, LLC (formerly MedPanel, Inc.) (“Panel”) in April
2007. It offers custom and published primary research to industry clients and
investment professionals through online panel discussions, quantitative surveys
and an extensive research library. Panel provides greater access, compliance,
insights and productivity to clients in the health care, CleanTech and financial
industries. In January 2009, the majority of the assets of Panel were sold to an
investor group that included certain members of its management team. We decided
to sell the assets in order to reduce our costs and to refocus on our core
investment banking and broker-dealer services. For financial reporting purposes,
we have listed the operations of the business as “discontinued
operations.”
  On
January 16, 2009, the Company entered into an agreement to sell the assets of
ICD, a division of Merriman Curhan Ford & Co., to a group of investors who
are also its employees in order to raise capital. The assets being sold include
the Company’s rights in trademark, copyright, and other intellectual property
used in the business, customer lists, marketing materials, and books and
records. As of December 31, 2009, the Company determined that the discontinued
operations criteria in ASC Topic 205, Discontinued Operations, had
not been met, as such the revenues and expenses of ICD are still presented as
part of continuing operations. In accordance with Securities and Exchange
Commission (SEC) Staff Accounting Bulletin (SAB) 104,“Revenue Recognition”, the
Company recognized $2,000,000 as Other Income for the year ended December 31,
2009.
  To assist
in the transition of operations to the new owners, the Company is providing
substantial services to ICD, including collecting its revenues. Under guidance
provided in ASC Subtopic 605-45, “Principal Agent Considerations,” the Company
records ICD’s revenues and expenses at gross levels. In 2010, the Company
expects to no longer provide such services and will no longer record ICD
revenues.
  MCF Asset
Management, LLC manages absolute return investment products for institutional
and high-net worth clients. We are the sub-advisor for the MCF Focus fund. In an
effort to refocus the holding company back to its core investment banking and
broker-dealers services and to reduce expenses, management decided to liquidate
the funds under management and returning investments to the investors. As of
December 31, 2009, we have liquidated all but an immaterial amount of illiquid
assets which we are distributing to investors in the Focus fund.
  We were
formerly known as Ratexchange Corporation, NetAmerica.com Corporation and
Venture World, Ltd., a Delaware corporation organized on May 6, 1987. Our common
stock was listed on the American Stock Exchange in July 2000 and was listed on
Nasdaq in February 2008, where it currently trades under the symbol “MERR.” Our
corporate office is located in San Francisco, California.
  30
  Prior to
2002, we were engaged in the creation of liquid marketplaces for bandwidth and
other telecommunications products, as well as providing trading strategies in
the futures and derivatives markets. This prior business experienced significant
net losses that resulted in an accumulated deficit of $87,731,000 as of December
31, 2001.
  In
December 2001, we acquired Instream Securities, Inc. and later changed the name
of the entity to RTX Securities Corporation, then to MCF. We formed MCF Asset
Management, LLC in January 2004, MCF Wealth Management, LLC in January 2005, and
acquired Panel Intelligence, LLC in April 2007 as wholly owned subsidiaries.
Panel Intelligence, LLC is accounted for as discontinued operations in these
consolidated financial statements for the years ended December 31, 2009 and
2008.
  In 2008
and 2009, we aggressively reduced our cost structure by exiting businesses and
eliminating positions which were not essential to generate revenues. We also
examined all our expenses and eliminated those deemed to be unessential. We
settled all the legal cases we believed were the most threatening. Going into
2010, we believe our current funds are sufficient to enable us to meet our
planned expenditures through at least January 1, 2011. If anticipated operating
results are not achieved, we intend and we believe we have the ability to delay
or reduce expenditures, if not to raise additional financing. 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.
  Executive
Summary
  In 2009,
following the sale of ICD assets, management determined that it would be useful
to view the Company’s financial results without ICD’s sizable revenues and
expenses. Management’s focus is on operating results, excluding ICD revenues and
expenses (which essentially net to zero after signing the asset purchase
agreement in January 2009), unrealized gains and losses, and legal expenses
related to the Del Biaggio/Cacchione matters. In the Form 10-Q for the three
months ended September 30, 2009, we began presenting our operating results
excluding these items, which are not according to generally accepted accounting
principles (non-GAAP). We also present a reconciliation of these non-GAAP
results to our GAAP-based financial results. Management uses the non-GAAP
(“pro-forma”) results in addition to GAAP results in its analyses of the
business.
  Our
revenue increased 35% during 2009 to $49,263,000, attributable to increased
brokerage revenue related to ICD, a business we sold in January 2009. On a
pro-forma basis, our revenue declined by 35% during the same period. Including
discontinued operations, net loss in 2009 was $5,462,000, or $0.43 per diluted
share, compared to $30,274,000, or $2.41 per diluted share, during
2008.
  We were
able to remove significant costs beginning the second half of 2008 and into
2009, particularly with regards to our legal expenses as we reached settlements
with a selected group of litigants and with the SEC. We instituted aggressive
plans to reduce our operating costs and focus our business back to our core
offerings. In addition, management took steps to eliminate non-core businesses
such as Panel and MCF Asset Management LLC that had consumed a large portion of
our operating cash flow. Our focus in 2009 was to build on our core businesses,
aided by a recovery in the broad financial markets beginning in the Spring of
2009.
  Investment Banking– The
investment banking team had an unfavorable year with a decrease in revenue of
37% in 2009. In 2009, we closed 27 corporate financing and strategic advisory
transactions during the year with lower average transaction fees compared to 20
corporate financing and strategic advisory transactions in 2008. As a percentage
of total revenue, on a pro-forma basis, Investment Banking’s contribution was
32% in 2009 compared to 33% in 2008. Throughout 2008 and the first half of 2009,
the new issue market was largely closed.
  31
  Principal Transactions –
Principal transactions produced a loss of $22,000 in 2009 compared to a loss of
$9,040,000 during 2008. The 2008 loss was largely driven by a decline in the
fair value of the Proprietary and Investment accounts. Principal transactions
revenue consists of four different activities: customer principal trades, market
making, trading for our proprietary account, and realized and unrealized gains
and losses in our investment portfolio. As a broker-dealer, we account for all
of our marketable security positions on a trading basis and as a result, all
security positions are marked to fair market value each day. Returns from market
making and proprietary trading activities tend to be more volatile than acting
as agent or principal for customers.
  We will
from time to time take significant positions in fast-growing companies that we
feel are undervalued in the market place. We believe that our window into these
opportunities, due to the types of companies we research, offers us a
significant competitive advantage.
  Commissions– Commissions
revenue from brokering equity securities to institutional investors increased by
19% to $40,180,000 from $33,679,000 in 2008 attributable to increased ICD
business. On a pro-forma basis, commissions revenue declined by 45% to
$12,391,000 from $22,385,000 due to adverse market conditions. This business
continues to face increasing challenges, including the proliferation of
electronic communications networks which have reduced commission rates and
profitability in the brokerage industry. Many large investment banks have
responded to lower margins within their equity brokerage divisions by reducing
research coverage, particularly for smaller companies, consolidating sales and
trading services, and reducing headcount of sales and trading professionals. We
believe that we can grow our institutional brokerage revenue by producing
differentiated equity research on relatively undiscovered, fast-growing
companies within our selected growth sectors and providing this research to
small and mid-sized traditional and alternative investment managers for whom
these companies comprise an important part of their investment
portfolios.
  Institutional Cash Distributors
(ICD) – ICD is a broker of money market funds serving the short-term
investing needs of corporate finance departments at companies throughout the
United States and Europe. Companies using ICD’s services receive access to over
40 fund families through ICD’s one-stop process that includes one application,
one wire and one statement that consolidates reporting regardless of the number
of funds utilized. ICD is a division of MCF. In January 2009, we sold our ICD
assets to three of our employees. We expect we will no longer benefit from these
revenues when ICD obtains its broker-dealer license in 2010. We will then cease
to provide services to them, including collection of their
revenues.
  Primary Research – We closed
the acquisition of MedPanel, Inc. in April 2007, renamed it Panel Intelligence,
LLP (“Panel”) and began offering custom and published primary research to
biotechnology, pharmaceutical and medical device industry clients, as well as
institutional investment companies for a subscription fee. In January 2009, we
sold the assets related to Panel in order to focus on our core investment
banking and broker-dealer businesses and to reduce expenses. The primary
research revenues and expenses were classified as discontinued operations in our
consolidated statements of operations for the year ending December 31, 2008 and
certain Panel assets and liabilities were reclassified to assets and liabilities
held for sale in the consolidated statements of financial condition at December
31, 2008.
  OTCQX Advisory – During 2007,
MCF began offering services to sponsor companies on the Domestic and
International OTCQX markets. This new service offering has been designed to
enable domestic and non-U.S. companies to obtain greater exposure to U.S.
institutional investors without the expense and regulatory burdens of listing on
traditional U.S. exchanges. The Domestic and International OTCQX market tiers do
not require full SEC registration or Sarbanes Oxley compliance. Listing on the
market requires the sponsorship of a qualified investment bank called a
Designated Advisor for Disclosure (DAD) for domestic companies or a Principal
American Liaison (PAL) for non-U.S. companies. MCF was the first U.S. investment
bank to achieve DAD and PAL designations.
  Employees – We began 2009
with 128 employees after reducing our headcount by 36% in 2008. After the sale
of Panel assets, we reduced our headcount further to 89 employees. We have since
strategically hired staff and increased our headcount to 94 employees at
December 31, 2009. Our headcount will be further reduced when ICD obtains its
broker-dealer license and we no longer provide services, including serve as an
employer to its staff, expected for 2010. We expect that we will maintain
headcount below 100 people during 2010, though as always, these hiring decisions
may be impacted by our actual financial results and the overall capital markets
environment.
  Business Development – We
continued to invest in areas of our business that we believe will increase the
awareness of our franchise and contribute to future revenue opportunities such
as hosting investor conferences, introducing management teams of fast-growing
companies to institutional investors, marketing, travel and other business
development activities. Our operating expenses in 2009 were slightly lower than
in 2008 primarily due to cost cutting measures we implemented.
  32
  Business
Environment
  Equity
indices rose sharply in 2009 for the biggest annual gain since 2003, and some
commodities, such as copper, headed for their best rally in at least a decade
after China pledged to maintain policies that helped pull the world market from
recession.
  Stocks
worldwide have risen the most since 2003 this year on dramatically increased
liquidity conditions, with interest rates near zero and increased government
spending which may sustain the recovery from the first global recession since
World War II. The MSCI World Index plunged 42% in 2008, the most in its 40-year
history, hurt by the collapse of the subprime-mortgage market in the U.S. and
the bankruptcy of Lehman Brothers Holdings Inc.
  The Dow
bottomed in March 2009 at 6,547, with the dollar at 1.2607 Euro and oil at $47.
The biggest dynamics in the sharp recovery were extremely aggressive easing by
China, which drove a significant commodity rally that carried over to the global
equity markets. The U.S. government also instituted extremely aggressive
liquidity measures which had a powerful impact on all U.S. indices.
  At year
end, the stimulus policies had not carried over into the small business lending
arena or employment. U.S. unemployment remained near its highs, and banks were
reluctant to lend, dampening the “real” recovery. The financing markets were
very muted despite the impressive stock market rally, with only 49 IPO
transactions being completed in 2009, the second lowest annual total volume on
record. Small business creation and sustainability remained the primary problem
in the 2009 economy. Until small business, which supplies the true engine of
U.S. economic growth, comes back, prospects for better employment performance
remain low.
  33
  Results
of Operations
  In
evaluating our financial performance, management reviews results from operations
excluding non-operating revenues and expenses. Such pro-forma results are
non-GAAP (Generally Accepted Accounting Principles) performance measures, but we
believe it is useful to assist investors in gaining an understanding of the
trends and results of our core business. Pro-forma results should be viewed in
addition to, not instead of, our reported results under U.S. GAAP.
  The
following is a reconciliation of U.S. GAAP results to pro-forma results for the
periods presented.
  Three Months Ended December 31,2009
                  
                  
                  2008As Reported
                  
                  
                  Less ICD
                  
                  
                  Less Other
                  
                  
                  Pro-Forma
                  
                  
                  As Reported
                  
                  
                  Less ICD
                  
                  
                  Less Other
                  
                  
                  Pro-FormaRevenue:Commissions
                  
                  $
                  11,287,720
                  
                  
                  $
                  7,714,682
                  
                  
                  $
                  -
                  
                  
                  $
                  3,573,038
                  
                  
                  $
                  9,325,010
                  
                  
                  $
                  4,132,373
                  
                  
                  $
                  -
                  
                  
                  $
                  5,192,637Principal
      transactions
                  
                  
                  109,318
                  
                  
                  
                  (685
                  )
                  
                  
                  (815,183
                  )
                  
                  
                  925,186
                  
                  
                  
                  (3,759,668
                  )
                  
                  
                  -
                  
                  
                  
                  (1,669,516
                  )
                  
                  
                  (2,090,152
                  )Investment
      banking
                  
                  
                  1,824,596
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,824,596
                  
                  
                  
                  2,008,788
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,008,788Advisory
      and other fees
                  
                  
                  250,116
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  250,116
                  
                  
                  
                  90,267
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  90,267Total
      revenue
                  
                  
                  13,471,750
                  
                  
                  
                  7,713,997
                  
                  
                  
                  (815,183
                  )
                  
                  
                  6,572,936
                  
                  
                  
                  7,664,397
                  
                  
                  
                  4,132,373
                  
                  
                  
                  (1,669,516
                  )
                  
                  
                  5,201,540Operating
      expenses:Compensation
      and benefits
                  
                  
                  12,045,620
                  
                  
                  
                  6,979,109
                  
                  
                  
                  -
                  
                  
                  
                  5,066,511
                  
                  
                  
                  5,465,311
                  
                  
                  
                  2,535,574
                  
                  
                  
                  -
                  
                  
                  
                  2,929,737Brokerage
      and clearing fees
                  
                  
                  202,905
                  
                  
                  
                  16,923
                  
                  
                  
                  -
                  
                  
                  
                  185,982
                  
                  
                  
                  999,305
                  
                  
                  
                  39,355
                  
                  
                  
                  -
                  
                  
                  
                  959,950Professional
      services
                  
                  
                  718,928
                  
                  
                  
                  210,286
                  
                  
                  
                  -
                  
                  
                  
                  508,642
                  
                  
                  
                  1,980,129
                  
                  
                  
                  35,420
                  
                  
                  
                  1,172,607
                  
                  
                  
                  772,102Occupancy
      and equipment
                  
                  
                  531,386
                  
                  
                  
                  12,672
                  
                  
                  
                  -
                  
                  
                  
                  518,714
                  
                  
                  
                  702,839
                  
                  
                  
                  21,702
                  
                  
                  
                  -
                  
                  
                  
                  681,137Communications and
      technology
                  
                  
                  921,192
                  
                  
                  
                  195,869
                  
                  
                  
                  -
                  
                  
                  
                  725,323
                  
                  
                  
                  1,206,302
                  
                  
                  
                  213,324
                  
                  
                  
                  -
                  
                  
                  
                  992,978Depreciation
      and amortization
                  
                  
                  104,816
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  104,816
                  
                  
                  
                  168,717
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  168,717Travel
      and entertainment
                  
                  
                  448,267
                  
                  
                  
                  147,744
                  
                  
                  
                  -
                  
                  
                  
                  300,523
                  
                  
                  
                  393,113
                  
                  
                  
                  174,152
                  
                  
                  
                  -
                  
                  
                  
                  218,961Legal
      and litigation settlement expense
                  
                  
                  1,140,860
                  
                  
                  
                  -
                  
                  
                  
                  717,089
                  
                  
                  
                  423,771
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      expenses
                  
                  
                  694,661
                  
                  
                  
                  115,337
                  
                  
                  
                  -
                  
                  
                  
                  579,324
                  
                  
                  
                  1,114,028
                  
                  
                  
                  29,706
                  
                  
                  
                  -
                  
                  
                  
                  1,084,322Total
      operating expenses
                  
                  
                  16,808,635
                  
                  
                  
                  7,677,940
                  
                  
                  
                  717,089
                  
                  
                  
                  8,413,606
                  
                  
                  
                  12,029,744
                  
                  
                  
                  3,049,233
                  
                  
                  
                  1,172,607
                  
                  
                  
                  7,807,904Operating
      income/(loss)
                  
                  $
                  (3,336,885
                  )
                  
                  $
                  36,057
                  
                  
                  $
                  (1,532,272
                  )
                  
                  $
                  (1,840,670
                  )
                  
                  $
                  (4,365,347
                  )
                  
                  $
                  1,083,140
                  
                  
                  $
                  (2,842,123
                  )
                  
                  $
                  (2,606,364
                  )
  34
  Year Ended December 31,2009
                  
                  
                  2008As Reported
                  
                  
                  Less ICD
                  
                  
                  Less Other
                  
                  
                  Pro-Forma
                  
                  
                  As Reported
                  
                  
                  Less ICD
                  
                  
                  Less Other
                  
                  
                  Pro-FormaRevenue:Commissions
                  
                  $
                  40,180,288
                  
                  
                  $
                  27,789,003
                  
                  
                  $
                  -
                  
                  
                  $
                  12,391,285
                  
                  
                  $
                  33,678,706
                  
                  
                  $
                  11,293,429
                  
                  
                  $
                  -
                  
                  
                  $
                  22,385,277Principal
      transactions
                  
                  
                  (21,702
                  )
                  
                  
                  (2,973
                  )
                  
                  
                  (1,295,475
                  )
                  
                  
                  1,276,746
                  
                  
                  
                  (9,040,218
                  )
                  
                  
                  -
                  
                  
                  
                  (9,774,573
                  )
                  
                  
                  734,355Investment
      banking
                  
                  
                  7,236,059
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,236,059
                  
                  
                  
                  11,432,454
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  11,432,454Advisory
      and other  fees
                  
                  
                  1,868,397
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,868,397
                  
                  
                  
                  496,894
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  496,894Total
      revenue
                  
                  
                  49,263,042
                  
                  
                  
                  27,786,030
                  
                  
                  
                  (1,295,475
                  )
                  
                  
                  22,772,487
                  
                  
                  
                  36,567,836
                  
                  
                  
                  11,293,429
                  
                  
                  
                  (9,774,573
                  )
                  
                  
                  35,048,980Operating
      expenses:Compensation
      and benefits
                  
                  
                  41,733,106
                  
                  
                  
                  25,499,105
                  
                  
                  
                  -
                  
                  
                  
                  16,234,001
                  
                  
                  
                  36,670,457
                  
                  
                  
                  7,489,738
                  
                  
                  
                  -
                  
                  
                  
                  29,180,719Brokerage
      and clearing fees
                  
                  
                  994,312
                  
                  
                  
                  62,652
                  
                  
                  
                  -
                  
                  
                  
                  931,660
                  
                  
                  
                  3,042,133
                  
                  
                  
                  101,898
                  
                  
                  
                  -
                  
                  
                  
                  2,940,235Professional
      services
                  
                  
                  2,514,224
                  
                  
                  
                  307,283
                  
                  
                  
                  -
                  
                  
                  
                  2,206,941
                  
                  
                  
                  9,161,729
                  
                  
                  
                  108,900
                  
                  
                  
                  4,191,590
                  
                  
                  
                  4,861,239Occupancy
      and equipment
                  
                  
                  2,148,733
                  
                  
                  
                  54,278
                  
                  
                  
                  -
                  
                  
                  
                  2,094,455
                  
                  
                  
                  2,303,944
                  
                  
                  
                  28,742
                  
                  
                  
                  -
                  
                  
                  
                  2,275,202Communications and
      technology
                  
                  
                  3,364,171
                  
                  
                  
                  573,709
                  
                  
                  
                  -
                  
                  
                  
                  2,790,462
                  
                  
                  
                  3,762,954
                  
                  
                  
                  456,501
                  
                  
                  
                  -
                  
                  
                  
                  3,306,453Depreciation
      and amortization
                  
                  
                  477,729
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  477,729
                  
                  
                  
                  705,883
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  705,883Travel
      and entertainment
                  
                  
                  1,507,107
                  
                  
                  
                  674,471
                  
                  
                  
                  -
                  
                  
                  
                  832,636
                  
                  
                  
                  2,921,196
                  
                  
                  
                  620,016
                  
                  
                  
                  -
                  
                  
                  
                  2,301,180Legal
      and litigation settlement expense
                  
                  
                  7,776,918
                  
                  
                  
                  -
                  
                  
                  
                  7,707,548
                  
                  
                  
                  69,370
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      expenses
                  
                  
                  2,326,095
                  
                  
                  
                  404,678
                  
                  
                  
                  -
                  
                  
                  
                  1,921,417
                  
                  
                  
                  4,411,128
                  
                  
                  
                  147,583
                  
                  
                  
                  -
                  
                  
                  
                  4,263,545Total
      operating expenses
                  
                  
                  62,842,395
                  
                  
                  
                  27,576,176
                  
                  
                  
                  7,707,548
                  
                  
                  
                  27,558,671
                  
                  
                  
                  62,979,424
                  
                  
                  
                  8,953,378
                  
                  
                  
                  4,191,590
                  
                  
                  
                  49,834,456Operating
      income/(loss)
                  
                  $
                  (13,579,353
                  )
                  
                  $
                  209,854
                  
                  
                  $
                  (9,003,023
                  )
                  
                  $
                  (4,786,184
                  )
                  
                  $
                  (26,411,588
                  )
                  
                  $
                  2,340,051
                  
                  
                  $
                  (13,966,163
                  )
                  
                  $
                  (14,785,476
                  )
 
 Note –
The column headed “Less Other” includes unrealized gains/losses in “Principal
transactions” revenues, and legal and litigation settlement expense as
related to the Del Biaggio/Cacchione matters in “Litigation
settlement”.
 
 Other
than the tables immediately above, all other results in our Form 10-K and in the
consolidated financial statements are prepared and displayed in accordance with
U.S. GAAP.
  35
  The
following table sets forth a summary of financial highlights for the two years
ended December 31, 2009:
 
 2009
                        
                        
                        2008Revenue:Commissions
                        
                        $
                        40,180,288
                        
                        
                        $
                        33,678,706Principal
      transactions
                        
                        
                        (21,702
                        )
                        
                        
                        (9,040,218
                        )Investment
      banking
                        
                        
                        7,236,059
                        
                        
                        
                        11,432,454Advisory
      and other fees
                        
                        
                        1,868,397
                        
                        
                        
                        496,894Total
      revenue
                        
                        
                        49,263,042
                        
                        
                        
                        36,567,836Operating
      expenses:Compensation
      and benefits
                        
                        
                        41,733,106
                        
                        
                        
                        36,670,457Brokerage
      and clearing fees
                        
                        
                        994,312
                        
                        
                        
                        3,042,133Professional
      services
                        
                        
                        2,514,225
                        
                        
                        
                        9,161,729Occupancy
      and equipment
                        
                        
                        2,148,733
                        
                        
                        
                        2,303,944Communications
      and technology
                        
                        
                        3,364,171
                        
                        
                        
                        3,762,954Depreciation
      and amortization
                        
                        
                        477,729
                        
                        
                        
                        705,883Travel
      and business development
                        
                        
                        1,507,107
                        
                        
                        
                        2,921,196Legal
      services and litigation settlement expense
                        
                        
                        7,776,917
                        
                        
                        
                        -Other
                        
                        
                        2,326,095
                        
                        
                        
                        4,411,128Total
      operating expenses
                        
                        
                        62,842,395
                        
                        
                        
                        62,979,424Operating
      loss
                        
                        
                        (13,579,353
                        )
                        
                        
                        (26,411,588
                        )Other
      income
                        
                        
                        2,000,000
                        
                        
                        
                        -Change
      in warrant liability
                        
                        
                        6,910,656
                        
                        
                        
                        -Interest
      income
                        
                        
                        15,658
                        
                        
                        
                        375,949Interest
      expense
                        
                        
                        (1,341,753
                        )
                        
                        
                        (72,304
                        )Loss
      from continuing operations before income taxes
                        
                        
                        (5,994,792
                        )
                        
                        
                        (26,107,943
                        )Income
      tax benefit
                        
                        
                        627,923
                        
                        
                        
                        1,635,214Loss
      from continuing operations
                        
                        
                        (5,366,869
                        )
                        
                        
                        (24,472,729
                        )Loss
      on discontinued operations
                        
                        
                        (94,894
                        )
                        
                        
                        (5,801,076
                        )Net
      loss
                        
                        $
                        (5,461,763
                        )
                        
                        $
                        (30,273,805
                        )Net
      loss attributable to common shareholders
                        
                        $
                        (10,720,565
                        )
                        
                        $
                        (30,273,805
                        )
 
 Our
revenue during 2009 increased by $12,695,000 or 35%, from 2008 attributable to
ICD, a line of business we sold.  On a pro-forma basis, our revenues
declined by $12,276,000, reflecting accentuated weaknesses in our brokerage and
investment banking businesses, partially offset by greatly reduced losses in our
principal transactions. Net loss for 2009 was $5,462,000 as compared to net loss
of $30,274,000 during 2008.
  36
  Our net
loss during the two years ended December 31, 2009 included the following
selected non-cash items:
 
 2009
                    
                    
                    2008Amortization
      of discounts on notes payable
                    
                    $
                    552,639
                    
                    
                    $
                    2,584Amortization
      of debt issuance costs
                    
                    
                    346,995
                    
                    
                    
                    -Amortization
      of beneficial conversion feature
                    
                    
                    180,639
                    
                    
                    
                    -Change
      in fair value of warrant liability
                    
                    
                    (6,820,567
                    )
                    
                    
                    -Non-cash
      legal settlement expense
                    
                    
                    1,230,953
                    
                    
                    
                    -Stock-based
      compensation
                    
                    
                    837,822
                    
                    
                    
                    2,353,383Reversal
      of FIN 48 liability
                    
                    
                    -
                    
                    
                    
                    (1,838,743
                    )Amortization
      of intangible assets
                    
                    
                    -
                    
                    
                    
                    466,142Depreciation
      and amortization
                    
                    
                    488,339
                    
                    
                    
                    828,598Provision
      for uncollectible note payable
                    
                    
                    128,073
                    
                    
                    
                    476,713Total
                    
                    $
                    (3,055,107
                    )
                    
                    $
                    2,288,677
 
 Investment
Banking Revenue
  Our
investment banking activity includes the following:
  ·
              Capital Raising -
      Capital raising includes private placements of equity and debt instruments
      and underwritten public offerings.
 
 ·
              Financial Advisory -
      Financial advisory includes advisory assignments with respect to mergers
      and acquisitions, divestures, restructurings and
  spin-offs.
  The
following table sets forth our revenue and transaction volumes from our
investment banking activities during the two years ended December 31,
2009:
 
 2009
                    
                    
                    2008Revenue:Capital
      raising
                    
                    $
                    4,921,976
                    
                    
                    $
                    9,031,592Financial
      advisory
                    
                    
                    2,314,083
                    
                    
                    
                    2,400,862Total
      investment banking revenue
                    
                    $
                    7,236,059
                    
                    
                    $
                    11,432,454Transaction
      Volumes:Public
      offerings:Capital
      underwritten participations
                    
                    $
                    644,560,000
                    
                    
                    $
                    182,780,000Number
      of transactions
                    
                    
                    7
                    
                    
                    
                    3Private
      placements:Capital
      raised
                    
                    $
                    98,588,481
                    
                    
                    $
                    290,380,000Number
      of transactions
                    
                    
                    12
                    
                    
                    
                    13Financial
      advisory:Transaction
      amounts
                    
                    $
                    78,900,000
                    
                    
                    $
                    82,600,000Number
      of transactions
                    
                    
                    8
                    
                    
                    
                    4
  37
  Our
investment banking revenue amounted to $7,236,000, or 15% of our revenue, or 32%
of our pro forma revenue, during 2009, representing a 37% decrease compared to
$11,432,000 recognized in 2008. The decrease in revenue was driven by a
reduction in capital raising transactions due to the unfavorable market
conditions. Average fees per investment banking transaction decreased slightly
to $268,000 in 2009 from $273,000 in 2008.
 
 During
the years ended December 31, 2009 and 2008, no single investment banking client
accounted for more than 10% of our total revenue.
  Commissions
and Principal Transactions Revenue
  Our
broker-dealer activity includes the following:
  ·
              Commissions -
      Commissions include revenue resulting from executing stock trades for
      exchange-listed securities, over-the-counter securities and other
      transactions as agent, as well as revenue from brokering money market
      mutual funds by our Institutional Cash Distributors
  group.
 
 ·
              Principal Transactions
      -Principal
      transactions consist of a portion of dealer spreads attributed to our
      securities trading activities as principal in Nasdaq-listed and other
      securities, and include transactions derived from our activities as a
      market-maker. Additionally, principal transactions include gains and
      losses resulting from market price fluctuations that occur while holding
      positions in our trading security
inventory.
 
 The
following table sets forth our revenue and several operating metrics which we
utilize in measuring and evaluating performance and the results of our trading
activity operations:
  2009
                    
                    
                    2008Revenue:Commissions:Institutional
      equities
                    
                    $
                    12,391,285
                    
                    
                    $
                    22,385,277Institutional
      Cash Distributors
                    
                    
                    27,789,003
                    
                    
                    
                    11,293,429Total
      commissions revenue
                    
                    $
                    40,180,288
                    
                    
                    $
                    33,678,706Principal
      transactions:Customer
      principal transactions, proprietary trading and market
      making
                    
                    $
                    316,105
                    
                    
                    $
                    (7,693,703
                    )Investment
      portfolio
                    
                    
                    (337,807
                    )
                    
                    
                    (1,346,515
                    )Total
      principal transactions revenue
                    
                    $
                    (21,702
                    )
                    
                    $
                    (9,040,218
                    )Equity
      research:Publishing
      analysts
                    
                    
                    8
                    
                    
                    
                    7Companies
      covered
                    
                    
                    114
                    
                    
                    
                    100Transaction
      Volumes:Number
      of shares traded
                    
                    
                    868,751,782
                    
                    
                    
                    1,281,568,000Number
      of active clients
                    
                    
                    324
                    
                    
                    
                    491
  38
  Commissions
amounted to $40,180,000, or 82%, of our revenue during 2009, representing a 19%
increase over $33,679,000 recognized during 2008.  The growth in
commissions revenue was attributed to higher assets brokered by our
Institutional Cash Distributors group during 2009.  On a pro-forma
basis, commissions revenue was $12,391,000, or 54%, of revenue during 2009,
representing a 45% decrease from 2008 due to a decrease in average commissions
per share and lower average daily trading volume.
  Principal
transaction revenue consists of four different activities - customer principal
trades, market making, trading for our proprietary account, and realized and
unrealized gains and losses in our investment portfolio. As a broker-dealer, we
account for all of our marketable security positions on a trading basis and as a
result, all security positions are marked to fair market value each day. Returns
from market making and proprietary trading activities tend to be more volatile
than acting as agent or principal for customers.
  On a
pro-forma basis, principal transactions revenue was $1,277,000 in 2009 compared
to $734,000 during 2008. Other components of principal transactions revenue
during 2009 included principal trades for customers, realized and unrealized
gains from our investment portfolio and trading gains from making markets in
equity securities.
  During
the year ended December 31, 2009, no single brokerage customer accounted for
more than 10% of our revenues.  During the year ended December 31,
2008, one brokerage customer accounted for more than 10% of our
revenue.
  Compensation
and Benefits Expenses
  Compensation
and benefits expense represents the majority of our operating expenses and
includes commissions, base salaries, discretionary bonuses and stock-based
compensation. Commissions are typically paid to sales representatives based on
their production.  Historically, these employees have not been
eligible for discretionary bonuses. Investment banking, research, support and
executives are salaried and may participate in the discretionary bonus plan. The
bonus pool is funded based on a number of criteria including revenue production,
profitability and other key metrics. However, the total bonuses pool is
considered by management and the Board of Directors and can be adjusted at their
discretion. Salaries, payroll taxes and employee benefits tend to vary based on
title and overall headcount.
  The
following table sets forth the major components of our compensation and benefits
for the three years ended December 31, 2009:
 
 2009
                      
                      
                      2008Incentive
      compensation and discretionary bonuses
                      
                      $
                      31,273,090
                      
                      
                      $
                      17,824,388Salaries
      and wages
                      
                      
                      7,280,251
                      
                      
                      
                      13,009,535Stock-based
      compensation
                      
                      
                      837,822
                      
                      
                      
                      2,353,383Payroll
      taxes, benefits and other
                      
                      
                      2,341,943
                      
                      
                      
                      3,483,151Total
      compensation and benefits
                      
                      $
                      41,733,106
                      
                      
                      $
                      36,670,457Total
      compensation and benefits as a percentage of revenue
                      
                      
                      85
                      %
                      
                      
                      100
                      %Cash
      compensation and benefits as a percentage of revenue
                      
                      
                      83
                      %
                      
                      
                      94
                      %
 
 The
increase in compensation and benefits expense of $5,063,000, or 14%, from 2008
to 2009 was due primarily to higher commissions paid to the ICD partners,
reflecting higher ICD revenues.  On a pro-forma basis, compensation
declined by about 44% due to lower headcount and lower incentive compensation
which is directly correlated to revenue production. On a pro-forma basis, total
compensation declined to 71% of total revenue in 2009 compared to 83% in
2008.  Cash compensation is equal to total compensation and benefits
expense excluding stock-based compensation, which is a non-cash
expense.
  Our
headcount decreased from 198 as of January 1, 2008 to 128 at December 31, 2008,
and decreased further to 94 at December 31, 2009, including about 12 employees
of ICD who will be transitioned out of the Company when we cease to provide
support services to ICD in 2010. No single sales professional accounted for more
than 10% of our revenue in 2009.  Two single sales professionals each
accounted for more than 10% of our revenue in 2008.
  39
  Other
Operating Expenses
  Brokerage
and clearing fees include trade processing expenses that we pay to our clearing
broker and execution fees that we pay to floor brokers and electronic
communication networks. MCF is a fully-disclosed broker-dealer, which has
engaged a third-party clearing broker to perform all of the clearance functions.
The clearing broker-dealer processes and settles the customer transactions for
MCF and maintains the detailed customer records. Security trades are executed by
third-party broker-dealers and electronic trading systems. These expenses are
almost entirely variable with commissions revenue and the volume of brokerage
transactions. The decrease in brokerage and clearing fees of $2,048,000, or 67%,
from 2008 to 2009 is a result of lower brokerage business and
revenues.
  Professional
services expense includes accounting fees, expenses related to investment
banking transactions and various consulting fees. The decrease of $6,648,000, or
73%, from 2008 to 2009 reflected lower legal fees in this expense
category.
  Occupancy
and equipment includes rental costs for our office facilities and equipment, as
well as equipment, software and leasehold improvement expenses. Occupancy
expense is largely fixed in nature while equipment expense tends to increase or
decrease in direct relation to the number of employees we have. The decrease of
$155,000, or 7%, from 2008 to 2009 on a pro-forma basis is due to a decline in
purchase of equipment and the subletting of excess office space.
  Communications
and technology expense includes market data and quote services, voice, data and
Internet service fees, and data processing costs.  The decrease of
$399,000, or 11%, from 2008 to 2009 is a result of our efforts to reduce non
revenue-generating costs.
  Depreciation
and amortization expense primarily relate to the depreciation of our computer
equipment and leasehold improvements. Depreciation and amortization are mostly
fixed in nature.  The decrease of $228,000 or 32% is a result of fewer
purchases of equipment and leasehold improvements, reducing the depreciable base
of assets.
 
 Travel and business development
expenses are incurred by each of our lines of business and include business
development costs by our investment bankers, travel costs for our research
analysts to visit the companies that they cover and non-deal road show expenses.
Non-deal road shows represent meetings in which management teams of our
corporate clients present directly to our institutional
investors.  The decrease of $1,414,000, or 48%, from 2008 to 2009 is a
result of our cost savings efforts, partially offset by increased sales efforts.
Syndicate expenses related to securities offerings in which we act as
underwriter or agent are deferred until either the related revenue is recognized
or we determine that the security offerings are unlikely to be
completed.
 
 Legal services and litigation
settlement expenses were incurred in connection with our activities in
2009.  We concluded a number of legal cases by
settlement.  We incurred expenses in the settlement and related to
other outstanding legal cases.
  The
following expenses are included in other operating expenses for the two years
ended December 31, 2009:
 
 2009
                      
                      
                      2008Investor
      conferences
                      
                      $
                      93,245
                      
                      
                      $
                      817,177Recruiting
                      
                      
                      31,352
                      
                      
                      
                      288,500Public
      and investor relations
                      
                      
                      138,837
                      
                      
                      
                      508,692Provision
      for uncollectible accounts receivable
                      
                      
                      160,073
                      
                      
                      
                      347,410Insurance
                      
                      
                      466,329
                      
                      
                      
                      450,872Supplies
                      
                      
                      168,057
                      
                      
                      
                      335,778Dues
      and subscriptions
                      
                      
                      149,847
                      
                      
                      
                      359,606Other
                      
                      
                      1,118,355
                      
                      
                      
                      1,303,093Total
      other operating expenses
                      
                      $
                      2,326,095
                      
                      
                      $
                      4,411,128
 
 Reduced
expenses in other operating expenses is a result of our cost savings efforts,
partially offset by higher insurance expenses related to the Del
Biaggio/Cacchione fraud we experienced.
  40
  The
Company contests liability and/or the amount of damages as appropriate in each
pending matter. In view of the inherent difficulty of predicting the outcome of
such matters, particularly in cases where claimants seek substantial or
indeterminate damages or where investigations and proceedings are in the early
stages, we cannot predict with certainty the loss or range of loss, if any,
related to such matters; how or if such matters will be resolved; when they will
ultimately be resolved; or what the eventual settlement, fine, penalty or other
relief, if any, might be. Subject to the foregoing, we believe, based on current
knowledge and after consultation with counsel, that the outcome of such pending
matters will not have a material adverse effect on our Consolidated Statements
of Financial Condition, although the outcome of such matters could be material
to our operating results and cash flows for a particular future period,
depending on, among other things, the level our revenues, income or cash flows
for such period. We established appropriate legal reserves as of
December 31, 2009.
  Interest
Income
  Interest
income represents interest earned on our cash balances maintained at financial
institutions. The decrease of $360,000, or 96%, from 2008 to 2009 was due to
changes in average interest earning assets and average interest rates during
these periods.
  Interest
Expense
  Interest
expense for 2009 included $455,000 for interest expense and $886,000 for
amortization of discounts while 2008 included $70,000 for interest expense and
$2,500 for amortization of discounts.
  Income
Tax Expense
  We
recorded an income tax benefit of $628,000 and $1,635,000 in 2009 and 2008,
respectively, resulting in an effective tax rate of 10% and 5% in 2009 and 2008,
respectively. The effective tax rate differs from the statutory rate primarily
due to the existence and utilization of net operating loss carryforwards which
have been offset by a valuation allowance resulting in a tax provision equal to
our expected current expense for the year. We historically have had current tax
expense primarily related to alternative minimum, state and minimum tax
liabilities.
  Historically
and currently, we have recorded a valuation allowance on our deferred tax
assets, the significant component of which relates to net operating loss tax
carryforwards. Management continually evaluates the realizability of its
deferred tax assets based upon negative and positive evidence available. Based
on the evidence available at this time, we continue to conclude that it is not
"more likely than not" that we will be able to realize the benefit of our
deferred tax assets in the near future.
  The
Company adopted ASC Topic 740, Income Taxeson January 1,
2007. As a result of the implementation of ASC 740, the Company recognized no
adjustment in the liability for unrecognized income tax benefits and no
corresponding change in retained earnings. During 2008, the Company recognized
$1,839,000 of unrecognized tax benefits previously established in 2007.
Accordingly, there were no unrecognized tax benefits as of December 31, 2008.
The Company has no unrecognized tax benefit liabilities for the year ended
December 31, 2009. The Company does not have any material accrued interest or
penalties associated with any unrecognized tax benefits. The Company does not
believe it is reasonably possible that the unrecognized tax benefits will
significantly change within the next twelve months.
  Discontinued
Operations
  On April
17, 2007, we acquired 100% of the outstanding common shares of MedPanel Corp.
which we subsequently renamed Panel Intelligence, LLC and made into a subsidiary
of the Merriman Curhan Ford Group, Inc. The results of Panel’s operations have
been included in our consolidated financial statements since that date. As a
result of the acquisition, we began providing independent market data and
information to clients in the biotechnology, pharmaceutical, medical device, and
financial industries by leveraging Panel’s proprietary methodology and vast
network of medical experts.
  We paid
$6.1 million in common stock for Panel. The value of the 1,547,743 shares of
common shares issued was determined based on the average market price of the our
common stock over the period including three days before and after the terms of
the acquisition were agreed to and announced. The selling stockholders were also
entitled to additional consideration on the third anniversary from the closing
which is based upon Panel achieving specific revenue and profitability
milestones.
  41
  In
December 2008, we determined that the sale of Panel would reduce investments
required to develop Panel’s business. Its sale would also generate capital
necessary for our core business. We determined that the plan of sale criteria in
ASC Topic 350, Intangibles –
Goodwill and Other, and ASC Topic 360, Property, Plant, and
Equipment, had been met. Accordingly, the carrying value of the Panel
assets was adjusted to their fair value less costs to sell. As a result, an
impairment loss in the amount of $1,937,000 was recorded for the period ended
December 31, 2009 and is included in “Other expenses” in the table in Note 9,
“Discontinued Operations.” In January 2009, we sold Panel to Panel Intelligence,
LLC (Newco) for $1,000,000 and shares of our common stock in the amount of
$100,000.
  Critical
Accounting Policies and Estimates
  The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which require us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to the valuation of securities owned and deferred tax assets. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from those estimates. We believe the following critical accounting
policies affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements.
  Revenue
Recognition
  Investment
banking revenue includes underwriting and private placement agency fees earned
through our participation in public offerings and private placements of equity
and convertible debt securities and fees earned as financial advisor in mergers
and acquisitions and similar transactions. Underwriting revenue is earned in
securities offerings in which we act as an underwriter and includes management
fees, selling concessions and underwriting fees. 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) we have
made a firm commitment for the purchase of the shares or debt from the issuer,
and (iii) we have 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 we act as underwriter or agent
are deferred until the related revenue is recognized or we determine that it is
more likely than not that the securities offerings will not ultimately be
completed. Underwriting revenue is presented net of related expenses. As
co-manager for registered equity underwriting transactions, management must
estimate our share of transaction-related expenses incurred by the lead manager
in order to recognize revenue. Transaction-related expenses are deducted from
the underwriting fee and therefore reduce the revenue that is recognized as
co-manager. Such amounts are adjusted to reflect actual expenses in the period
in which we receive the final settlement, typically 90 days following the
closing of the transaction.
  Merger
and acquisition fees, and other advisory service revenue are generally earned
and recognized only upon successful completion of the engagement. Unreimbursed
expenses associated with private placement and advisory transactions are
recorded as expenses as incurred.
  Commissions
revenue and related clearing expenses are recorded on a trade-date basis as
security transactions occur. Principal transactions in regular-way trades are
recorded on the trade date, as if they had settled. Profit and loss arising from
all securities and commodities transactions entered into for the account and
risk of our company are recorded on a trade-date basis.
  Primary
research revenue is recognized on a proportional performance basis as services
are provided. It is reported in our financial statements under captions labeled
“Discontinued Operations.”
  OTCQX
revenue is recognized in two parts – Due Diligence and Listing Fees. Due
Diligence Fees are recognized at its completion. The Listing Fees are pro-rated
monthly from the time the end of the Due Diligence period until the end of the
engagement term.
  42




Fair
Value of Financial Instruments





The
Company adopted the provisions of the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 820,Fair Value Measurements and
Disclosures(“ASC 820”), effective January 1, 2008. Under this
guidance, 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.





Fair
Value Measurement—Definition and Hierarchy





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:





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.  The valuation of these securities may require
management estimates of some or all the inputs, including
volatilities.





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 6.





Stock-Based
Compensation




We
measure and recognize compensation expense based on estimated fair values for
all share-based awards made to employees and directors, including stock options,
restricted stock, and participation in our employee stock purchase plan.
Share-based compensation expense recognized in our consolidated statement of
operations for the two years ended December 31, 2009 includes compensation
expense for share-based awards granted (i) prior to, but not yet vested as of
December 31, 2005, based on the grant date fair value, and (ii) subsequent to
December 31, 2005.  Compensation expense for all share-based awards
subsequent to December 31, 2005 is recognized using the straight-line
single-option method.




We
estimate the fair value of stock options granted using the Black-Scholes option
pricing model. This model requires the input of highly subjective assumptions,
including the option’s expected life and the price volatility of the underlying
stock. The expected life of employee stock options represents the
weighted-average period the stock options are expected to remain outstanding. We
calculated the expected term using the Black-Scholes model with specific
assumptions about the suboptimal exercise behavior, post-vesting termination
rates and other relevant factors. The expected stock price volatility was
determined using the historical volatility of our common stock. The fair value
is then amortized on a straight-line basis over the requisite service periods of
the awards, which is generally the vesting period.


43


Because
share-based compensation expense is based on awards that are ultimately expected
to vest, it 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. Changes in inputs and
assumptions used in our model, including forfeiture rates, can materially affect
the measure of estimated fair value of our share-based
compensation.





Change
in Warrant Liabilities





Stock
warrants to purchase the Company’s common stock issued to our investors and
creditors are rights to purchase our common stock.  Such positions are
considered illiquid and do not have readily determinable fair values, and
therefore require significant management judgment or estimation. For the warrant
derivative liabilities, we use the Black-Scholes valuation methodology or
similar techniques.





On
December 28, 2009, we received binding agreements from 100% of the holders of
our warrants agreeing to amend the warrants to remove the ratchet provision
which had triggered the derivative accounting giving rise to the warrant
liability.  As of the date of amendment, the Company marked the
warrant liability on its Consolidated Statements of Financial Condition to
market value and reclassified the market value of $10,073,000 to additional
paid-in capital. The change in warrant liability market value of $16,551,000 was
recorded to change in fair value of warrant liability on the Consolidated
Statements of Operations. We no longer account for the warrants as derivatives
and no longer carry a warrant liability as of December 31, 2009 and all other
future periods.  At December 31, 2009, the Company included $139,000
due to the warrant holders in accrued liabilities in consideration for the
amendment.





Income
Taxes





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





Use
of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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,
MCF, for the purpose of making operating decisions and assessing performance,
which comprised most of the Company’s consolidated total assets as of December
31, 2009 and consolidated total revenues for the year ended December 31,
2009.  In the fourth quarter of 2008, Merriman Curhan Ford Group, Inc.
decided to liquidate the funds under management by MCF Asset Management, LLC,
which was no longer considered by management as an operating and reportable
segment.   In January 2009, the Company sold its primary research
business, Panel Intelligence, LLC, and has presented its results of operations
as discontinued operations.


44


Goodwill
and Intangible Assets





In
accordance with ASC Topic 350, Intangibles – Goodwill and
Others (“ASC 350”), indefinite-life intangible assets and goodwill are
not amortized. Rather, they are subject to impairment testing on an annual basis
or more often if events or circumstances indicate there may be impairment. This
test involves assigning tangible assets and liabilities, identified intangible
assets and goodwill to reporting units and comparing the fair value of each
reporting unit to its carrying amount. If the fair value is less than the
carrying amount, a further test is required to measure the amount of the
impairment.  When available, we use recent, comparable transactions to
estimate the fair value of the respective reporting unit. We calculate an
estimated fair value based on multiples of revenue, earnings, and book value of
comparable transactions. However, when such comparable transactions are not
available or have become outdated, we use discounted cash flow scenarios to
estimate the fair value of the reporting units.





The
goodwill and intangible assets recorded were related to Panel assets and were
classified as held for sale in our financial statements for the year ended
December 31, 2008.  During 2008, we recorded impairments to goodwill
and intangible assets in the amounts of $3,338,000 and $1,301,000,
respectively.  At December 31, 2008, the assets held for sale included
no remaining goodwill and $283,000 of intangible assets after impairment and
depreciation.  During the year ended December 31, 2009, the Company
sold Panel, hence, as of December 31, 2009, the Company did not have assets held
for sale, goodwill or intangible assets reported on its balance
sheets.





Liquidity
and Capital Resources




As of
December 31, 2009, liquid assets consisted primarily of cash and cash
equivalents of $5,657,000 and marketable securities of $4,729,000, for a total
of $10,386,000, which is $595,000 lower than $10,981,000 in liquid assets
as of December 31, 2008.




Cash and
cash equivalents decreased by $924,000 during 2009. Cash used in our operating
activities for 2009 was $12,648,000 which primarily consists of our net loss of
$5,462,000 adjusted for non-cash expenses, including unrealized loss on
securities owned of $1,295,000 and noncash legal expenses of 1,231,000, offset
by a change in warrant liability of $6,821,000, gain on sale of ICD of
$2,000,000, increase in Securities owned and sold, but not purchased, the
decrease in commissions and bonus payable of $946,000, the decrease of accrued
liabilities of $1,629,000, net stock-based compensation of $838,000,
depreciation and amortization of $488,000, and provision for doubtful accounts
of $128,000. Cash provided by investing activities amounted to $2,694,000 during
2009 which reflects our sale of ICD for $2,000,000 and our sale of Panel for
$703,000. Cash provided by our financing activities was $9,030,000. Our
financing activities included strategic transactions which raised net proceeds
of $8,808,000 on September 8, 2009 through the sale of Series D Convertible
preferred stock, proceeds from convertible debt financing of $625,000 and
proceeds from issuance of a bridge note of $500,000, partially offset by debt
service payments of $637,000.




MCF, as a
broker-dealer, is subject to Rule 15c3-1 of the Securities Exchange Act of 1934,
which specifies uniform minimum net capital requirements, as defined, for their
registrants. As of December 31, 2009, MCF had regulatory net capital of
$2,685,000, which exceeded the amount required by $2,369,000.





During
the year ended December 31, 2009, the Company incurred a net loss of $5,462,000
and used $12,648,000 in net cash from operating activities.  At
December 31, 2009, the Company had cash and cash equivalents of $5,657,000,
marketable securities of $4,729,000 and receivables from clearing broker of
$2,547,000.  The Company had liabilities of $8,107,000.  The
Company’s ability to generate profits is highly dependent on stock market
trading volumes and the general economic environment.





In 2008
and 2009, we aggressively reduced our cost structure by exiting businesses and
eliminating positions which were not essential to generate
revenues.  We also examined all our expenses and eliminated those
deemed to be unessential.  We settled all the legal cases we believed
were the most threatening.  Going into 2010, we believe our current
funds are sufficient to enable us to meet our planned expenditures through at
least January 1, 2011.  If anticipated operating results are not
achieved, we intend and we believe we have the ability to delay or reduce
expenditures, if not to raise additional financing.  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.


45


Commitments




The
following is a table summarizing our significant commitments as of December 31,
2009, consisting of non-cancellable payments under operating agreements and
leases and capital leases with initial or remaining terms in excess of one
year.




Operating
                  
                  
                  Operating
                  
                  
                  CapitalCommitments
                  
                  
                  Leases
                  
                  
                  Leases2010
                  
                  $
                  632,424
                  
                  
                  $
                  1,696,102
                  
                  
                  $
                  268,8532011
                  
                  
                  312,846
                  
                  
                  
                  1,616,545
                  
                  
                  
                  146,6472012
                  
                  
                  100,080
                  
                  
                  
                  1,096,230
                  
                  
                  
                  -2013
                  
                  
                  -
                  
                  
                  
                  616,000
                  
                  
                  
                  -2014
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Thereafter
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      commitments
                  
                  
                  1,045,350
                  
                  
                  
                  5,024,877
                  
                  
                  
                  415,500Interest
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (17,542
                  )Net
      commitments
                  
                  $
                  1,045,350
                  
                  
                  $
                  5,024,877
                  
                  
                  $
                  397,958





Off-Balance
Sheet Arrangements




We were
not a party to any off-balance sheet arrangements during the two years ended
December 31, 2009. In particular, we do not have any interest in so-called
limited purpose entities, which include special purpose entities and structured
finance entities.





Newly
Issued Accounting Standards




On July
1, 2009, we adopted the Financial Accounting Standards Board (“FASB”),
Accounting Standards Codification (“ASC”). The ASC does not alter current
generally accepted accounting principles in the United States of America (“U.S.
GAAP”), but rather integrated existing accounting standards with other
authoritative guidance. The ASC provides a single source of authoritative U.S.
GAAP for nongovernmental entities and supersedes all other previously issued
non-SEC accounting and reporting guidance. The adoption of the ASC did not have
any effect on our results of operations or financial position. All prior
references to U.S. GAAP have been revised to conform to the ASC. Updates to the
ASC are issued in the form of Accounting Standards Updates (“ASU”).





In
January 1, 2009, we adopted the revisions to U.S. GAAP accounting standards
included in ASC Topic 815, Derivatives and Hedging(“ASC 815”). ASC 815
applies to any freestanding financial instruments or embedded features that have
the characteristics of a derivative and to any freestanding financial
instruments that are potentially settled in an entity’s own common stock. As a
result of adopting ASC 815, warrants to purchase shares of our common stock
previously treated as equity pursuant to the derivative treatment exemption were
no longer afforded equity treatment.The adoption of the revised guidance related to
derivatives and hedging resulted in classification of certain warrants issued
during the quarter in connection with financing activities as derivative
liabilities with mark to market accounting. See Note 5 for additional
information regarding the accounting for the warrant
liabilities.


46


In April
2009, we adopted the revisions to U.S. GAAP accounting standards included in ASC
Topic 825, Financial
Instruments(“ASC 825”), which
requires public companies to include disclosures required for all financial
instruments within the scope of ASC 825 in their interim financial
statements. In addition, this guidance requires disclosure about the method and
significant assumptions to estimate fair value of financial instruments and
disclosure of changes in the methods or significant assumptions, if any, during
the period. The adoption of the revised guidance related to financial statement
disclosure only and did not have any effect on our results of operations or
financial position.





Also in
April 2009, we adopted the revisions to U.S. GAAP accounting standards included
in ASC Topic 820, which provides additional guidance in determining whether
a market for a financial asset is not active and a transaction is not distressed
for fair value measurement purposes. This guidance does not have a
significant impact on our financial position, results of operations, or cash
flows.





We
adopted the revisions to U.S. GAAP accounting standards included in ASC
Topic 855 (“ASC 855”), Subsequent Events, and the
FASB amendment ASU 2010-09, which establish the accounting and disclosure of
events that occur after the balance sheet date but before financial statements
are issued. This guidance did not have any impact on the Company’s financial
position, results of operations, or cash flows.





ASC Topic
810, Consolidation(“ASC 810”), as amended
in June 2009, is a revision to pre-existing guidance pertaining to the
consolidation and disclosures of variable interest entities. Specifically,
it changes how a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a reporting entity
is required to consolidate another entity is based on, among other things, the
other entity’s purpose and design and the reporting entity’s ability to direct
the activities of the other entity that most significantly impact the other
entity’s economic performance. This guidance will require a reporting
entity to provide additional disclosures about its involvement with variable
interest entities and any significant changes in risk exposure due to that
involvement. A reporting entity will be required to disclose how its involvement
with a variable interest entity affects the reporting entity’s financial
statements. This guidance will be effective at the start of a reporting entity’s
first fiscal year beginning after November 15, 2009. Early application is not
permitted. We are currently evaluating the impact on our financial
statements, if any, upon adoption.





In
January 2010, the FASB amended ASC 820 to require new disclosures for fair value
measurements and provides clarification for existing disclosures requirements.
More specifically, this update will require (a) an entity to disclose
separately the amounts of significant transfers in and out of Levels 1 and
2 fair value measurements and to describe the reasons for the transfers; and
(b) information about purchases, sales, issuances and settlements to be
presented separately (i.e., present the activity on a gross basis rather than
net) in the reconciliation for fair value measurements using significant
unobservable inputs (Level 3 inputs). This update clarifies existing
disclosure requirements for the level of disaggregation used for classes of
assets and liabilities measured at fair value and requires disclosures about the
valuation techniques and inputs used to measure fair value for both recurring
and nonrecurring fair value measurements using Level 2 and Level 3
inputs. ASU 2010-6 is effective for interim and annual fiscal years beginning
after December 15, 2009. The Company does not anticipate that the adoption
of this statement will materially expand its consolidated financial statement
footnote disclosures.





Related
Party Transactions





Unsecured
Promissory Notes





On June
30, 2009, we issued $300,000 in unsecured promissory notes to three of its
employees at an interest rate of 3.25%.  The maturity date of the
notes was October 31, 2009, although they were repayable earlier on the
occurrence of certain events. These notes were paid in full in
cash.


47


Unsecured
Debt





On July 29, 2009, Mr. D. Jonathan
Merriman, the Company’s CEO, and Mr. Brock Ganeles, MCF’s Head of Brokerage,
made short-term loans to the Company in the amounts of $200,000 and $300,000,
respectively.  Mr. Merriman’s loan was repaid on August 5,
2009.  Mr. Merriman forgave the interest on his loan.  Mr.
Ganeles’ loan was repaid on August 20, 2009.  The Company paid Mr.
Ganeles interest in the amount of $9,403.





Bridge
Note





On July
31, 2009, the Company issued Mr. Ronald L. Chez, the lead investor in the Series
D Transaction, a Secured Promissory Note in the amount of $500,000 at an annual
interest rate of 9.00%.  The term of the Note was three years,
redeemable by Mr. Chez upon presentation of written demand.  The Note
was guaranteed personally by Messrs. Jonathan Merriman (CEO) and Peter Coleman
(CFO).  The Company issued 10-year warrants to purchase 1,162,791
shares of the Company’s common stock at $0.65 per share to Mr. Chez in
connection with this transaction.  Identical warrants were issued to
purchase 581,395 shares of the Company’s common stock each to Messrs. Merriman
and Coleman for the guarantee.





The
Bridge Note was converted into the Series D Convertible Preferred Stock on
September 8, 2009.  Subsequent to the Series D Transaction, Mr. Chez
has joined the Company’s Board of Directors.





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 at $0.65 per share.  The investor group
constituted 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, as amended.  Cash consideration was deposited into escrow on or
around August 27, 2009.  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.





Three
of the investors in the Series D Convertible Preferred Stock transaction,
Messrs. Andrew Arno, Douglas Bergeron, and Ronald Chez, have since joined the
Company’s Board of Directors.  In addition, the Company’s CEO and CFO,
along with 11 other executives and senior managers of MCF were also investors in
the Series D Convertible Preferred Stock transaction.  Finally, all 5
members of the Company’s Board of Directors prior to the transaction were
investors in the Series D Convertible Preferred Stock transaction.





Secured
Demand Note





On August
12, 2009, the Company obtained a Temporary Secured Demand Note (“Demand Note”)
in the amount of $1,329,000 from the D. Jonathan Merriman Living Trust as a
subordinated loan.  The trustee of the Trust, D. Jonathan Merriman, is
also the Chief Executive Officer of the Company.  The Demand Note was
collateralized by securities held in a brokerage account held at a third party
by the Trust.  The Demand Note was repaid on September 23, 2009 and
the securities were transferred back to the Trust.  The Company
compensated the Trust with total interest and fees in the amount of $179,000,
the majority of which was reinvested in the Series D Convertible Preferred Stock
transaction.





Temporary
Subordinated Loan





On
January 22, 2010, the Company obtained subordinated loans amounting to an
aggregate of $11,000,000 from DGB Investment, Inc. and the Bergeron Family
Trust, both entities controlled by Douglas G. Bergeron. Mr. Bergeron is a member
of the Parent’s Board of Directors. (For further information, please refer to
Note 21, “Subsequent Events.”)





From time
to time, officers and employees of the Company may invest in private placements,
which the Company arranges and for which the Company charges investment banking
fees.





The
Company’s employees may, at times, provide certain services and supporting
functions to its affiliate entities. The Company is not reimbursed for any costs
related to providing those services.


48


Item
7a. Quantitative and Qualitative Disclosures about Market Risk




The
following discussion about market risk disclosures involves forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements. We may be exposed to market risks related to changes
in equity prices, interest rates and foreign currency exchange rates. We do not
use derivative financial instruments for speculative trading or any other
purpose.




Equity
Price Risk




The
potential for changes in the market value of our trading positions is referred
to as “market risk.” Our trading positions result from proprietary trading
activities. These trading positions in individual equities and equity indices
may be either long or short at any given time. Equity price risks result from
exposures to changes in prices and volatilities of individual equities and
equity indices. We seek to manage this risk exposure through diversification and
limiting the size of individual positions within the portfolio. The effect on
earnings and cash flows of an immediate 10% increase or decrease in equity
prices generally is not ascertainable and could be positive or negative,
depending on the positions we hold at the time. We do not establish hedges in
related securities or derivatives. From time to time, we also hold equity
securities received as compensation for our services in investment banking
transactions. These equity positions are always long; however, as the prices of
individual equity securities do not necessarily move in tandem with the
direction of the general equity market, the effect on earnings and cash flows of
an immediate 10% increase or decrease in equity prices generally is not
ascertainable.




Interest
Rate Risk




Our
exposure to market risk resulting from changes in interest rates relates
primarily to our investment portfolio and long term debt obligations. Our
interest income and cash flows may be impacted by changes in the general level
of U.S. interest rates. We do not hedge this exposure because we believe that we
are not subject to any material market risk exposure due to the short-term
nature of our investments. We would not expect an immediate 10% increase or
decrease in current interest rates to have a material effect on the fair market
value of our investment portfolio.




Foreign
Currency Risk




We do not
have any foreign currency denominated assets or liabilities or purchase
commitments and have not entered into any foreign currency contracts.
Accordingly, we are not exposed to fluctuations in foreign currency exchange
rates.


49


Item
8. Financial Statements and Supplementary Data





The
following financial statements are included in this report:





·
            Report
      of Independent Registered Public Accounting
Firm





·
            Consolidated
      Statements of Operations





·
            Consolidated
      Statements of Financial Condition





·
            Consolidated
      Statements of Stockholders’ Equity





·
            Consolidated
      Statements of Cash Flows





·
            Notes
      to Consolidated Financial
Statements





Schedules
other than those listed above are omitted because of the absence of conditions
under which they are required or because the required information is presented
in the financial statements or notes thereto.


50




Report
of Independent Registered Public Accounting Firm
  
 To the
Board of Directors and Stockholders of
 Merriman
Curhan Ford Group, Inc.
  We have
audited the accompanying consolidated statement of financial condition of
Merriman Curhan Ford Group, Inc. (the Company) as of December 31, 2009, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended December 31, 2009.  These financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audit.  The consolidated financial statements of the Company as
of  December 31, 2008 were audited by other auditors whose report
dated March 30, 2009 expressed an unqualified opinion on those statements and
included an explanatory paragraph that referred to substantial doubt about the
Company’s ability to continue as a going concern.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 2009, and the consolidated results of its operations and its cash
flows for the year ended December 31, 2009 in conformity with accounting
principles generally accepted in the United States of America.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 18, 2010 expressed an
unqualified opinion.
  /s/
      Burr Pilger Mayer, Inc.San
      Francisco, California
                  March
      18, 2010




51




Report
of Independent Registered Public Accounting Firm
 
 The Board
of Directors and Stockholders of
 Merriman
Curhan Ford Group, Inc.
 
 We have
audited the accompanying consolidated statements of financial condition of
Merriman Curhan Ford Group, Inc. (the Company) as of December 31, 2008, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year ended December 31, 2008.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Merriman Curhan Ford
Group, Inc. at December 31, 2008, and the consolidated results of its operations
and its cash flows for the year then ended, in conformity with U.S.
generally accepted accounting principles.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has incurred recurring operating
losses and is facing significant litigation as more fully described in the
footnotes to the 2008 consolidated financial statements. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters also are described in the
footnotes to the 2008 consolidated financial statements. The 2008 financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
  /s/
      Ernst & Young LLPSan
      Francisco, California
                  March
      30, 2009




52


MERRIMAN
CURHAN FORD GROUP, INC.




CONSOLIDATED
STATEMENTS OF OPERATIONS




2009
                                                        
                                                        
                                                        2008Revenue:Commissions
                                                        
                                                        $
                                                        40,180,288
                                                        
                                                        
                                                        $
                                                        33,678,706Principal
      transactions
                                                        
                                                        
                                                        (21,702
                                                        )
                                                        
                                                        
                                                        (9,040,218
                                                        )Investment
      banking
                                                        
                                                        
                                                        7,236,059
                                                        
                                                        
                                                        
                                                        11,432,454Advisory
      and other
                                                        
                                                        
                                                        1,868,397
                                                        
                                                        
                                                        
                                                        496,894Total
      revenue
                                                        
                                                        
                                                        49,263,042
                                                        
                                                        
                                                        
                                                        36,567,836Operating
      expenses:Compensation
      and benefits
                                                        
                                                        
                                                        41,733,106
                                                        
                                                        
                                                        
                                                        36,670,457Brokerage
      and clearing fees
                                                        
                                                        
                                                        994,312
                                                        
                                                        
                                                        
                                                        3,042,133Professional
      services
                                                        
                                                        
                                                        2,514,225
                                                        
                                                        
                                                        
                                                        9,161,729Occupancy
      and equipment
                                                        
                                                        
                                                        2,148,733
                                                        
                                                        
                                                        
                                                        2,303,944Communications
      and technology
                                                        
                                                        
                                                        3,364,171
                                                        
                                                        
                                                        
                                                        3,762,954Depreciation
      and amortization
                                                        
                                                        
                                                        477,729
                                                        
                                                        
                                                        
                                                        705,883Travel
      and entertainment
                                                        
                                                        
                                                        1,507,107
                                                        
                                                        
                                                        
                                                        2,921,196Legal
      services and litigation settlement expense
                                                        
                                                        
                                                        7,776,917
                                                        
                                                        
                                                        
                                                        -Other
                                                        
                                                        
                                                        2,326,095
                                                        
                                                        
                                                        
                                                        4,411,128Total
      operating expenses
                                                        
                                                        
                                                        62,842,395
                                                        
                                                        
                                                        
                                                        62,979,424Operating
      loss
                                                        
                                                        
                                                        (13,579,353
                                                        )
                                                        
                                                        
                                                        (26,411,588
                                                        )Other
      income
                                                        
                                                        
                                                        2,000,000
                                                        
                                                        
                                                        
                                                        -Change
      in warrant liability
                                                        
                                                        
                                                        6,910,656
                                                        
                                                        
                                                        
                                                        -Interest
      income
                                                        
                                                        
                                                        15,658
                                                        
                                                        
                                                        
                                                        375,949Interest
      expense
                                                        
                                                        
                                                        (1,341,753
                                                        )
                                                        
                                                        
                                                        (72,304
                                                        )Loss
      from continuing operations before income taxes
                                                        
                                                        
                                                        (5,994,792
                                                        )
                                                        
                                                        
                                                        (26,107,943
                                                        )Income
      tax benefit
                                                        
                                                        
                                                        627,923
                                                        
                                                        
                                                        
                                                        1,635,214Loss
      from continuing operations
                                                        
                                                        
                                                        (5,366,869
                                                        )
                                                        
                                                        
                                                        (24,472,729
                                                        )Loss
      from discontinued operations
                                                        
                                                        
                                                        (94,894
                                                        )
                                                        
                                                        
                                                        (5,801,076
                                                        )Net
      loss
                                                        
                                                        
                                                        (5,461,763
                                                        )
                                                        
                                                        
                                                        (30,273,805
                                                        )Preferred
      stock deemed dividend
                                                        
                                                        $
                                                        (5,066,702
                                                        )
                                                        
                                                        $
                                                        -Preferred
      stock cash dividend
                                                        
                                                        $
                                                        (192,100
                                                        )
                                                        
                                                        $
                                                        -Net
      loss attributable to common shareholders
                                                        
                                                        $
                                                        (10,720,565
                                                        )
                                                        
                                                        $
                                                        (30,273,805
                                                        )Basic
      and diluted net loss per share:Loss
      from continuing operations
                                                        
                                                        $
                                                        (0.42
                                                        )
                                                        
                                                        $
                                                        (1.95
                                                        )Loss
      from discontinued operations
                                                        
                                                        
                                                        (0.01
                                                        )
                                                        
                                                        
                                                        (0.46
                                                        )Net
      loss
                                                        
                                                        $
                                                        (0.43
                                                        )
                                                        
                                                        $
                                                        (2.41
                                                        )Net
      loss attributable to common shareholders
                                                        
                                                        $
                                                        (0.84
                                                        )
                                                        
                                                        $
                                                        (2.41
                                                        )Weighted
      average number of common shares:Basic
      and diluted
                                                        
                                                        
                                                        12,693,648
                                                        
                                                        
                                                        
                                                        12,550,872





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


53


MERRIMAN
CURHAN FORD GROUP, INC.




CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION


2009
                
                
                2008AssetsCash
      and cash equivalents
                
                $
                5,656,750
                
                
                $
                6,358,128Securities
      owned:Marketable,
      at fair value
                
                
                4,728,940
                
                
                
                4,622,577Not
      readily marketable, at estimated fair value
                
                
                272,463
                
                
                
                366,061Other
                
                
                67,448
                
                
                
                185,065Restricted
      cash
                
                
                1,072,086
                
                
                
                1,131,182Due
      from clearing broker
                
                
                2,546,581
                
                
                
                1,752,535Accounts
      receivable, net
                
                
                470,992
                
                
                
                612,234Prepaid
      expenses and other assets
                
                
                801,946
                
                
                
                619,759Equipment
      and fixtures, net
                
                
                506,535
                
                
                
                1,260,011Assets
      held for sale
                
                
                -
                
                
                
                1,958,038Total
      assets
                
                $
                16,123,741
                
                
                $
                18,865,590Liabilities
      and Stockholders’ EquityLiabilities:Accounts
      payable
                
                $
                346,220
                
                
                $
                712,591Commissions
      and bonus payable
                
                
                4,133,924
                
                
                
                3,182,941Accrued
      expenses
                
                
                2,755,831
                
                
                
                3,637,345Due
      to clearing and other brokers
                
                
                7,185
                
                
                
                28,022Securities
      sold, not yet purchased
                
                
                161,461
                
                
                
                903,217Deferred
      revenue
                
                
                304,334
                
                
                
                709,691Capital
      lease obligation
                
                
                397,958
                
                
                
                923,683Liabilities
      held for sale
                
                
                -
                
                
                
                1,052,899Total
      liabilities
                
                
                8,106,913
                
                
                
                11,150,389Stockholders’
      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 December 31, 2009 and 2008; 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 December 31, 2009 and 2008; 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 December 31, 2009 and 2008; 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 23,720,916 shares outstanding as of December
      31, 2009; and 0 shares authorized, issued and outstanding as of
      December 31, 2008; aggregate liquidation preference of $10,199,994 prior
      to conversion, and pari passu with common stock on
    conversion
                
                
                2,372
                
                
                
                -Common
      stock, $0.0001 par value; 300,000,000 shares authorized; 12,988,073 and
      12,756,656 shares issued and 12,786,496 and 12,730,218 shares outstanding
      as of December 31, 2009 and 2008, respectively
                
                
                1,299
                
                
                
                1,278Additional
      paid-in capital
                
                
                133,054,192
                
                
                
                127,193,195Treasury
      stock
                
                
                (225,613
                )
                
                
                (125,613
                )Accumulated
      deficit
                
                
                (124,815,422
                )
                
                
                (119,353,659
                )Total
      stockholders’ equity
                
                
                8,016,828
                
                
                
                7,715,201Total
      liabilities and stockholders’ equity
                
                $
                16,123,741
                
                
                $
                18,865,590





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


54


MERRIMAN
CURHAN FORD GROUP, INC.





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY





AdditionalPreferred
      Stock
                                    
                                    Common
      Stock
                                    
                                    Treasury
      Stock
                                    
                                    Paid-in
                                    
                                    AccumulatedShares
                                    
                                    
                                    Amount
                                    
                                    Shares
                                    
                                    
                                    Amount
                                    
                                    Shares
                                    
                                    
                                    Amount
                                    
                                    Capital
                                    
                                    Deficit
                                    
                                    TotalBalance
      at January 1, 2008
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    12,310,886
                                    
                                    
                                    $
                                    1,232
                                    
                                    
                                    (26,438
                                    )
                                    
                                    $
                                    (125,613
                                    )
                                    $
                                    124,010,283
                                    
                                    $
                                    (89,079,854
                                    )
                                    $
                                    34,806,048Net
      loss
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (30,273,805
                                    )
                                    
                                    (30,273,805
                                    )Conversion
      of debt to common stock
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    142,858
                                    
                                    
                                    
                                    14
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    199,986
                                    
                                    
                                    -
                                    
                                    
                                    200,000Issuance
      of common stock for MedPanel acquisition
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    47,623
                                    
                                    
                                    
                                    5
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    193,345
                                    
                                    
                                    -
                                    
                                    
                                    193,350Issuance of
      common stock
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    52,938
                                    
                                    
                                    
                                    5
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    95,298
                                    
                                    
                                    -
                                    
                                    
                                    95,303Issuance
      of restricted common stock
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    79,265
                                    
                                    
                                    
                                    8
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    (8
                                    )
                                    
                                    -
                                    
                                    
                                    -Exercise of
      stock warrants
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    188,582
                                    
                                    
                                    
                                    20
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    374,980
                                    
                                    
                                    -
                                    
                                    
                                    375,000Common
      stock returned from restricted stock Shareholder
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    (65,496
                                    )
                                    
                                    
                                    (6
                                    )
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    6
                                    
                                    
                                    -
                                    
                                    
                                    -Tax
      benefits from employee stock option plans
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    (34,078
                                    )
                                    
                                    -
                                    
                                    
                                    (34,078
                                    )Stock-based
      compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    2,353,383
                                    
                                    
                                    -
                                    
                                    
                                    2,353,383Balance
      at December 31, 2008
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    12,756,656
                                    
                                    
                                    
                                    1,278
                                    
                                    
                                    (26,438
                                    )
                                    
                                    
                                    (125,613
                                    )
                                    
                                    127,193,195
                                    
                                    
                                    (119,353,659
                                    )
                                    
                                    7,715,201Net
      loss
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    (5,461,763
                                    )
                                    
                                    (5,461,763
                                    )Issuance
      of Series D Convertible Preferred Stock
                                    
                                    
                                    23,720,916
                                    
                                    
                                    
                                    2,372
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    2,372Issuance
      of common stock for MedPanel acquisition
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    154,786
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    -Preferred
      stock dividend
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    (5,258,802
                                    )
                                    
                                    -
                                    
                                    
                                    (5,258,802
                                    )Issuance
      of restricted common stock
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    76,631
                                    
                                    
                                    
                                    21
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    83,359
                                    
                                    
                                    -
                                    
                                    
                                    83,380Reclass
      of warrant liability
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    10,072,684
                                    
                                    
                                    -
                                    
                                    
                                    10,072,684Issuance
      of warrant to board member
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    83,671
                                    
                                    
                                    -
                                    
                                    
                                    83,671Issuance
      of warrant in connection with issuance of debt
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    386,278
                                    
                                    
                                    -
                                    
                                    
                                    386,278Common
      stock returned from Panel Shareholder
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    (175,139
                                    )
                                    
                                    
                                    (100,000
                                    )
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    (100,000
                                    )Tax
      benefits from employee stock option plans
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    (176,964
                                    )
                                    
                                    -
                                    
                                    
                                    (176,964
                                    )Stock-based
      compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    670,771
                                    
                                    
                                    -
                                    
                                    
                                    670,771Balance
      at December 31, 2009
                                    
                                    
                                    23,720,916
                                    
                                    
                                    $
                                    2,372
                                    
                                    
                                    12,988,073
                                    
                                    
                                    $
                                    1,299
                                    
                                    
                                    (201,577
                                    )
                                    
                                    $
                                    (225,613
                                    )
                                    $
                                    133,054,192
                                    
                                    $
                                    (124,815,422
                                    )
                                    $
                                    8,016,828





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


55


MERRIMAN
CURHAN FORD GROUP, INC.




CONSOLIDATED
STATEMENTS OF CASH FLOWS





2009
                                        
                                        
                                        2008Cash
      flows from operating activities:Net
      loss
                                        
                                        $
                                        (5,461,763
                                        )
                                        
                                        $
                                        (30,273,805
                                        )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Reversal
      of ASC Topic 740 (formerly FIN 48) liability
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,838,743
                                        )Gain
      on sale of Institutional Cash Distributors
                                        
                                        
                                        (2,000,000
                                        )
                                        
                                        
                                        -Depreciation
      and amortization
                                        
                                        
                                        488,339
                                        
                                        
                                        
                                        828,598Stock-based
      compensation
                                        
                                        
                                        837,822
                                        
                                        
                                        
                                        2,353,383Amortization
      of beneficial conversion feature
                                        
                                        
                                        180,639
                                        
                                        
                                        
                                        -Tax
      benefits (expense) from employee stock option plans
                                        
                                        
                                        (176,964
                                        )
                                        
                                        
                                        (34,078
                                        )Amortization
      of discounts on convertible notes payable
                                        
                                        
                                        552,639
                                        
                                        
                                        
                                        2,584Amortization
      of debt issuance costs
                                        
                                        
                                        346,995
                                        
                                        
                                        
                                        -Impairment
      of goodwill
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,338,016Impairment
      of intangible assets
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,200,929Impairment
      of securities
                                        
                                        
                                        -
                                        
                                        
                                        
                                        230,556Change
      in value of warrant derivative liability
                                        
                                        
                                        (6,910,656
                                        )
                                        
                                        
                                        -Amortization
      of intangible asset
                                        
                                        
                                        -
                                        
                                        
                                        
                                        466,142Noncash
      legal settlement and fees
                                        
                                        
                                        1,230,953
                                        
                                        
                                        
                                        -Noncash
      professional services
                                        
                                        
                                        125,089
                                        
                                        
                                        
                                        -Loss
      on disposal of equipment and fixtures
                                        
                                        
                                        285,069
                                        
                                        
                                        
                                        2,921Provision
      for uncollectible accounts receivable
                                        
                                        
                                        128,073
                                        
                                        
                                        
                                        820,417Common
      stock received for services
                                        
                                        
                                        (369,200
                                        )
                                        
                                        
                                        (1,752,625
                                        )Unrealized
      loss (gain) on securities owned
                                        
                                        
                                        1,295,475
                                        
                                        
                                        
                                        9,774,573Changes
      in operating assets and liabilities:Securities
      owned and sold, but not purchased
                                        
                                        
                                        (1,563,179
                                        )
                                        
                                        
                                        2,292,261Restricted
      cash
                                        
                                        
                                        59,096
                                        
                                        
                                        
                                        (442,025
                                        )Due
      from clearing broker
                                        
                                        
                                        (794,046
                                        )
                                        
                                        
                                        (501,089
                                        )Accounts
      receivable
                                        
                                        
                                        242,284
                                        
                                        
                                        
                                        1,458,397Prepaid
      expenses and other assets
                                        
                                        
                                        119,067
                                        
                                        
                                        
                                        910,840Accounts
      payable
                                        
                                        
                                        (559,727
                                        )
                                        
                                        
                                        (18,166
                                        )Commissions
      and bonus payable
                                        
                                        
                                        945,770
                                        
                                        
                                        
                                        (14,223,458
                                        )Accrued
      liabilities
                                        
                                        
                                        (1,629,010
                                        )
                                        
                                        
                                        437,960Due
      to clearing and other brokers
                                        
                                        
                                        (20,837
                                        )
                                        
                                        
                                        21,157Net
      cash used in operating activities
                                        
                                        
                                        (12,648,072
                                        )
                                        
                                        
                                        (24,945,255
                                        )Cash
      flows from investing activities:Purchase
      of equipment and fixtures
                                        
                                        
                                        (18,632
                                        )
                                        
                                        
                                        (203,566
                                        )Prodeeds
      from sale of equipment and fixtures
                                        
                                        
                                        9,311
                                        
                                        
                                        
                                        -Sale
      of Panel Intelligence
                                        
                                        
                                        925,858
                                        
                                        
                                        
                                        -Sale
      of Institutional Cash Distributors
                                        
                                        
                                        2,000,000
                                        
                                        
                                        
                                        -Net
      cash provided by (used in) investing activities
                                        
                                        
                                        2,916,537
                                        
                                        
                                        
                                        (203,566
                                        )Cash
      flows from financing activities:Proceeds
      from the exercise of stock options and warrants
                                        
                                        
                                        -
                                        
                                        
                                        
                                        470,303Convertible
      debt fundraising (related party)
                                        
                                        
                                        625,000
                                        
                                        
                                        
                                        -Payment
      of convertible debt (related party)
                                        
                                        
                                        (125,000
                                        )
                                        
                                        
                                        -Bridge
      note (related party)
                                        
                                        
                                        500,000
                                        
                                        
                                        
                                        -Note
      payable (related party)
                                        
                                        
                                        800,000
                                        
                                        
                                        
                                        -Payment
      of note payable (related party)
                                        
                                        
                                        (800,000
                                        )
                                        
                                        
                                        -Proceeds
      from subordinated borrowings (related party)
                                        
                                        
                                        1,328,614
                                        
                                        
                                        
                                        -Payment
      on subordinated borrowings (related party)
                                        
                                        
                                        (1,328,614
                                        )
                                        
                                        
                                        -Issuance
      of preferred stock
                                        
                                        
                                        8,808,256
                                        
                                        
                                        
                                        -Preferred
      stock dividend
                                        
                                        
                                        (141,100
                                        )
                                        
                                        
                                        -Debt
      service principal payments
                                        
                                        
                                        (636,999
                                        )
                                        
                                        
                                        (702,663
                                        )Net
      cash provided by (used in) financing activities
                                        
                                        
                                        9,030,157
                                        
                                        
                                        
                                        (232,360
                                        )Decreases
      in cash and cash equivalents
                                        
                                        
                                        (701,378
                                        )
                                        
                                        
                                        (25,381,181
                                        )Cash
      and cash equivalents at beginning of year
                                        
                                        
                                        6,358,128
                                        
                                        
                                        
                                        31,962,201Cash
      and cash equivalents, assets held for sale
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (222,892
                                        )Cash
      and cash equivalents at end of year
                                        
                                        $
                                        5,656,750
                                        
                                        
                                        $
                                        6,358,128





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


56


MERRIMAN
CURHAN FORD GROUP, INC.





CONSOLIDATED
STATEMENTS OF CASH FLOWS — (Continued)




2009
                
                
                2008Supplementary
      disclosure of cash flow information:Cash
      paid during the year:Interest
                
                $
                261,481
                
                
                $
                79,941Income
      taxes
                
                $
                5,200
                
                
                $
                565,959Noncash
      investing and financing activities:Reclass
      of warrant derivative upon amendment
                
                $
                10,072,684
                
                
                $
                -Deemed
      dividend on Series D Convertible Preferred Stock
                
                $
                5,066,702
                
                
                $
                -Stock
      received as part of Panel sale
                
                $
                100,000
                
                
                $
                -Conversion
      of Note into Series D Convertible Preferred Stock
                
                $
                1,060,717
                
                
                $
                -Conversion
      of legal settlement into Series D Convertible Preferred
    Stock
                
                $
                296,027
                
                
                $
                -Conversion
      of legal services into Series D Convertible Preferred
Stock
                
                $
                35,000
                
                
                $
                -Conversion
      of note payable into common stock
                
                $
                -
                
                
                $
                200,000Purchase
      of equipment and fixtures through capital lease
                
                $
                -
                
                
                $
                805,776Issuance
      of common stock for MedPanel
                
                $
                -
                
                
                $
                193,350





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


57





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





1.
Description of Business





Merriman
Curhan Ford Group, Inc. (formerly MCF Corporation) is a financial services
holding company that provides investment banking, capital markets services,
corporate and venture services, and investment banking through its primary
operating subsidiary, Merriman Curhan Ford & Co. (“MCF”).  MCF is
an investment bank and securities broker-dealer focused on fast-growing
companies and institutional investors. MCF is registered with the Securities and
Exchange Commission as a broker-dealer and is a member of the Financial Industry
Regulatory Authority and Securities Investor Protection
Corporation.





Institutional
Cash Distributors (“ICD”) is a division of MCF which brokers money market funds
serving the short-term investing needs of corporate finance departments at
companies throughout the United States and Europe.  In January 2009,
we sold the primary assets related to ICD operations to a group of investors
which included some of our employees.  To assist in the transition of
operations to the new owners, we are providing substantial services to ICD,
including collecting its revenues.  When ICD receives its
broker-dealer license, we will no longer provide such services and record ICD
revenues.





In
January 2009, Merriman Curhan Ford Group, Inc. sold its primary research
business, Panel Intelligence, LLC (“Panel”), and has presented its results of
operations as discontinued operations in its consolidated financial statements
for the years ended December 31, 2009 and 2008.  Panel offered primary
research services to biotechnology, pharmaceutical, medical device, clean
technology and financial services companies.





In the
fourth quarter of 2008, Merriman Curhan Ford Group, Inc. decided to begin the
process of liquidating the funds under management by MCF Asset Management, LLC
which is still consolidated in the accompanying financial statements as of and
for the years ended December 31, 2009 and 2008.  MCF Asset Management, LLC
managed absolute return investment products for institutional and high-net worth
clients.





Merriman
Curhan Ford Group, Inc., also referred to as the “Company”, formerly Ratexchange
Corporation, NetAmerica.com Corporation and Venture World, Ltd., is a Delaware
corporation incorporated on May 6, 1987. The Company’s common stock was listed
on the American Stock Exchange in July 2000 and was listed on Nasdaq in February
2008, where it currently trades under the symbol “MERR.” The Company’s corporate
office is located in San Francisco, California.





The
Company incurred substantial losses and negative cash flows from operations in
2009 and 2008.  The Company 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
December 31, 2009, the Company had a retained deficit of
$124,815,000.  While the Company believes its current funds will be
sufficient to enable it to meet its planned expenditures through at least
January 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 financing.  Failure to generate sufficient
cash flows from operations, raise additional capital or reduce certain
discretionary spending could have a material adverse effect on the Company’s
ability to achieve its intended business objectives.


58





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





2.
Summary of Significant Accounting Policies





Basis
and Presentation





The
accompanying financial statements are presented in accordance with accounting
principles generally accepted in the United States (“U.S. GAAP”).  The
preparation of U.S. GAAP financial statements requires management to make
certain estimates, judgments, and assumptions that affect the reported amounts
and disclosures in the financial statements.  Actual results could
differ from these estimates.





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





For the
purposes of presentation, dollar amounts displayed in these Notes to Financial
Statements will be rounded to the nearest thousand.





Principles
of Consolidation





As of
December 31, 2009, Merriman Curhan Ford Group, Inc. wholly owned two active U.S.
subsidiaries.  The subsidiaries MCF and MCF Asset Management, LLC have
been consolidated in the accompanying consolidated financial
statements.  All significant intercompany accounts and transactions
have been eliminated.





Segment
Reporting





The
Company has determined that it has only one operating and reportable segment,
MCF, for the purpose of making operating decisions and assessing performance,
which comprised most of the Company’s consolidated total assets as of December
31, 2009 and consolidated total revenues for the year ended December 31,
2009.  In the fourth quarter of 2008, Merriman Curhan Ford Group, Inc.
decided to liquidate the funds under management by MCF Asset Management, LLC,
which was no longer considered by management as an operating and reportable
segment.   In January 2009, the Company sold its primary research
business, Panel Intelligence, LLC and has presented its results of operations as
discontinued operations.





Advertising
Costs





Advertising
costs are expensed as incurred.  We recorded $139,000 and $465,000 for
the years ended December 31, 2009 and 2008, respectively, for advertising
costs.


59


MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





2.
Summary of Significant Accounting Policies - (continued)





Commissions
and Principal Transactions Revenue





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





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.





Advisory
and Other Revenue




Advisory
and Other Revenues consist primarily of revenues generated by the OTCQX Advisory
Services. In addition, immaterial amounts of revenue that do not conform to the
types described above are also recorded as Other Revenues.


60


MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





2.
Summary of Significant Accounting Policies - (continued)





Stock-Based
Compensation Expense





The
Company measures and recognizes compensation expense based on estimated fair
values for all stock-based awards made to employees and directors, including
stock options, restricted stock, and participation in the Company’s employee
stock purchase plan. 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 Statements 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 share-based compensation
expense because a valuation allowance was maintained for all net deferred tax
assets.





Income
Taxes





The
Company uses the asset and liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are 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.





(Loss)
Earnings Per Share





Basic
(loss) earnings per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding. Diluted earnings per share
is calculated by dividing net income by the weighted-average number of common
shares used in the basic earnings per share calculation plus the number of
common shares that would be issued assuming exercise or conversion of all
potentially dilutive common shares outstanding. Diluted loss per share is
unchanged from basic loss per share for the years ended December 31, 2009 and
2008, because the addition of common shares and share equivalents that would be
issued assuming exercise or conversion would be anti-dilutive.





Cash
and Cash Equivalents





The
Company considers all highly liquid investments purchased with original
maturities of ninety days or less to be cash equivalents.


61





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





2.
Summary of Significant Accounting Policies - (continued)





Restricted
Cash and Letters of Credit





Restricted
cash includes cash deposited with our clearing broker and cash collateral for a
stand-by letter of credit with a commercial bank.  The letters of
credit satisfy deposit requirements of the Company’s operating
leases.





Due
From/To Clearing Broker





The Company clears all of its brokerage
transactions through other broker-dealers on a fully disclosed basis. Due from
clearing broker amount relates to the aforementioned transactions. The Company
monitors the credit standing of the clearing organizations as deemed
necessary.





Securities
Owned





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





Fair
Value of Financial Instruments





Substantially
all of the Company’s financial instruments are recorded at fair value or
contract amounts that approximate fair value. Securities owned and securities
sold, not yet purchased are stated at fair value, with any related changes in
unrealized appreciation or depreciation reflected in Principal Transactions in
the consolidated statements of operations.  The carrying amounts of
the Company’s financial instruments, which include cash and cash equivalents,
securities owned, restricted cash, due from clearing broker, accounts
receivable, assets held for sale, accounts payable, commissions and bonus
payable, accrued expenses, due to clearing and other brokers, securities sold,
not yet purchased, and liabilities held for sale, approximate their fair
values.





Fair
Value Measurement—Definition and Hierarchy





The
Company adopted the provisions of the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 820,Fair Value Measurements and
Disclosures(“ASC 820”), effective January 1, 2008. Under this
guidance, 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:





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.


62





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





2.
Summary of Significant Accounting Policies - (continued)





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.  The valuation of these securities may require
management estimates of some or all the inputs, including
volatilities.





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 6.





Accounts
Receivable





Accounts
receivable are recorded at the invoiced amount and do not bear interest. To the
extent deemed necessary, the Company maintains an allowance for estimated losses
from the inability of clients to make required payments. The collectability of
outstanding invoices is continually assessed. In estimating the allowance, the
Company considers factors such as historical collections, a client’s current
creditworthiness, age of the receivable balance and general economic conditions
that may affect a client’s ability to pay.





We
recorded $244,000 and $733,000 as of December 31, 2009 and 2008, respectively,
as allowance for uncollectible accounts.





Equipment
and Fixtures





Equipment
and fixtures are reported at historical cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over useful lives of three to five years. Leasehold
improvements are amortized using the straight-line method over the lesser of the
life of the lease or the service lives of the improvements.





Long-Lived
Assets





The
Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. When assets are considered to be
impaired, the impairment to be recognized is measured as the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.


63





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





2.
Summary of Significant Accounting Policies - (continued)





Discontinued Operations and Assets
Held For Sale





For those
businesses where management has committed to a plan to divest, each business is
valued at the lower of its carrying amount or estimated fair value less
estimated cost to sell. If the carrying amount of the business exceeds its
estimated fair value, a loss is recognized. For businesses classified as
discontinued operations, statement of operations results are reclassified from
their historical presentation to discontinued operations in the consolidated
statements of operations for all periods presented. The gains or losses
associated with these divested businesses are recorded in loss from discontinued
operations in the consolidated statements of operations.  The cash
flow of discontinued operations and assets held for sale is aggregated with that
of continuing operations in the Consolidated Statements of Cash
Flows.





Goodwill
and Intangible Assets





In
accordance with ASC Topic 350, Intangible Assets – Goodwill and
Other, indefinite-life intangible assets and goodwill are not amortized.
Rather, they are subject to impairment testing on an annual basis or more often
if events or circumstances indicate there may be impairment. This test involves
assigning tangible assets and liabilities, identified intangible assets and
goodwill to reporting units and comparing the fair value of each reporting unit
to its carrying amount. If the fair value is less than the carrying amount, a
further test is required to measure the amount of the
impairment.  When available, recent, comparable transactions are used
to estimate the fair value of the respective reporting unit. The Company
calculates an estimated fair value based on multiples of revenue, earnings, and
book value of comparable transactions. However, when such comparable
transactions are not available or have become outdated, discounted cash flow
scenarios are used to estimate the fair value of the reporting
units.





The
goodwill and intangible assets recorded by the Company during the fiscal year
ended December 31, 2008 are related to its acquisition of Panel.  Panel was
sold in January 2009 and the goodwill and intangible assets previously recorded
were removed from the Company’s consolidated financial statements upon the sale.
Accordingly, the Company does not have goodwill or intangible assets as of
December 31, 2009, see Note 9.





Deferred
Revenue





The
Company provides OTCQX Advisory Services, in the form of assistance to its
clients in listing on OTCQX, a tier of Pink Sheets, along with other services
that facilitate their access to institutional capital markets.





Deferred
revenue mainly represents customer billings made in advance to certain clients
for due diligence services, and annual support contract for providing services
as their Principal American Liaison (PAL) if a non-U.S. company or a Designated
Advisor for Disclosure (DAD), if a U.S. company. The revenue for due diligence
work is recognized at its completion, typically a three-month period. The
revenue for advisory services is recognized on a monthly basis in the period
after due diligence is completed and before the end of the engagement
term.


64





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





2.
Summary of Significant Accounting Policies - (continued)





Change
in Warrant Liabilities





Stock
warrants to purchase the Company’s common stock issued to our investors and
creditors are rights to purchase our common stock.  Such positions are
considered illiquid and do not have readily determinable fair values, and
therefore require significant management judgment or estimation. For the warrant
derivative liabilities, we use the Black-Scholes valuation methodology or
similar techniques.





On
December 28, 2009, we received binding agreements from 100% of the holders of
our warrants agreeing to amend the warrants to remove the ratchet provision
which had triggered the derivative accounting giving rise to the warrant
liability.  As of the date of amendment, the Company marked the
warrant liability on its Consolidated Statements of Financial Condition to
market value and reclassified the market value of $10,073,000 to additional
paid-in capital. The change in warrant liability market value of $6,911,000 was
recorded to change in fair value of warrant liability on the Consolidated
Statements of Operations. We no longer account for the warrants as derivatives
and no longer carry a warrant liability as of December 31, 2009 and all other
future periods.  At December 31, 2009, the Company included $139,000
due to the warrant holders in accrued liabilities in consideration for the
amendment.





Concentrations





Substantially
all of the Company’s cash and cash equivalents are held at three major U.S.
financial institutions. The majority of the Company’s cash equivalents consist
of short-term marketable securities. Deposits held with banks may exceed the
amount of insurance provided on such deposits. Generally, these deposits may be
redeemed upon demand.





As of
December 31, 2009 and 2008, the Company held concentrated positions in two
securities with a total value in the amount of $2,368,000 and $2,749,000,
respectively. The stock prices of these equity securities are highly
volatile.





As of
December 31, 2009 and 2008, the Company held concentrated positions in accounts
receivable with four clients, each of which exceeded 10% of total accounts
receivable in each year.  The clients referred to as of 2008 were not
the same ones as the clients as of 2009.





During
2009, no single sales professional accounted for more than 10% of total
revenue.  During 2008, two sales professionals accounted for 21% and
20% of revenue, respectively.  During the year ended December 31,
2009, no single customer accounted for more than 10% of
revenue.  During the year ended December 31, 2008, one customer
accounted for 18% of total revenue.


65





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





2.
Summary of Significant Accounting Policies - (continued)





Newly
Issued Accounting Standards





On July
1, 2009, the Company adopted FASB Statement of Financial Accounting Standards
(SFAS) No. 168, Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, which was
primarily codified into ASC 105, “Generally Accepted Accounting Principles.” The
ASC does not alter current U.S. GAAP, but rather integrated existing accounting
standards with other authoritative guidance. The ASC provides a single source of
authoritative U.S. GAAP for nongovernmental entities and supersedes all other
previously issued non-SEC accounting and reporting guidance. The adoption of the
ASC did not have any effect on the Company’s results of operations or financial
position. All prior references to U.S. GAAP have been revised to conform to the
ASC. Updates to the ASC are issued in the form of Accounting Standards Updates
(ASU).





In
January 1, 2009, the Company adopted the revisions to U.S. GAAP accounting
standards included in ASC Topic 815, Derivatives and Hedging(“ASC 815”). ASC 815 applies to
any freestanding financial instruments or embedded features that have the
characteristics of a derivative and to any freestanding financial instruments
that are potentially settled in an entity’s own common stock. As a result of
adopting ASC 815, warrants to purchase shares of the Company’s common stock
previously treated as equity pursuant to the derivative treatment exemption were
no longer afforded equity treatment.  The adoption of the revised
guidance related to derivatives and hedging resulted in classification of
certain warrants issued during the quarter in connection with financing
activities as derivative liabilities with mark to market accounting. See Note 5
for additional information regarding the accounting for the warrant
liabilities.





In April
2009, the Company adopted the revisions to U.S. GAAP accounting standards
included in ASC Topic 825, Financial Instruments(“ASC 825”), which
requires public companies to include disclosures required for all financial
instruments within the scope of ASC 825 in their interim financial
statements. In addition, this guidance requires disclosure about the method and
significant assumptions to estimate fair value of financial instruments and
disclosure of changes in the methods or significant assumptions, if any, during
the period. The adoption of the revised guidance related to financial statement
disclosure only and did not have any effect on the Company’s results of
operations or financial position.





Also in
April 2009, the Company adopted the revisions to U.S. GAAP accounting standards
included in ASC 820, which provides additional guidance in determining
whether a market for a financial asset is not active and a transaction is not
distressed for fair value measurement purposes. This guidance does not have
a significant impact on the Company’s financial position, results of operations,
or cash flows.





The
Company adopted the revisions to U.S. GAAP accounting standards included in ASC
Topic 855 (“ASC 855”), Subsequent Events, and the
FASB amendment ASU 2010-09, which establish the accounting and disclosure of
events that occur after the balance sheet date but before financial statements
are issued. This guidance did not have any impact on the Company’s financial
position, results of operations, or cash flows.





ASC Topic
810, Consolidation(“ASC 810”), as amended
in June 2009, is a revision to pre-existing guidance pertaining to the
consolidation and disclosures of variable interest entities. Specifically,
it changes how a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a reporting entity
is required to consolidate another entity is based on, among other things, the
other entity’s purpose and design and the reporting entity’s ability to direct
the activities of the other entity that most significantly impact the other
entity’s economic performance. This guidance will require a reporting
entity to provide additional disclosures about its involvement with variable
interest entities and any significant changes in risk exposure due to that
involvement. A reporting entity will be required to disclose how its involvement
with a variable interest entity affects the reporting entity’s financial
statements. This guidance will be effective at the start of a reporting entity’s
first fiscal year beginning after November 15, 2009. Early application is not
permitted. The Company is currently evaluating the impact on its financial
statements, if any, upon adoption.


66





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





2.
Summary of Significant Accounting Policies - (continued)





In
January 2010, the FASB amended ASC 820 to require new disclosures for fair value
measurements and provides clarification for existing disclosures requirements.
More specifically, this update will require (a) an entity to disclose
separately the amounts of significant transfers in and out of Levels 1 and
2 fair value measurements and to describe the reasons for the transfers; and
(b) information about purchases, sales, issuances and settlements to be
presented separately (i.e., present the activity on a gross basis rather than
net) in the reconciliation for fair value measurements using significant
unobservable inputs (Level 3 inputs). This update clarifies existing
disclosure requirements for the level of disaggregation used for classes of
assets and liabilities measured at fair value and requires disclosures about the
valuation techniques and inputs used to measure fair value for both recurring
and nonrecurring fair value measurements using Level 2 and Level 3
inputs. The amendment to ASC 820 is effective for interim and annual fiscal
years beginning after December 15, 2009. The Company does not anticipate
that the adoption of this statement will materially expand its consolidated
financial statement footnote disclosures.





3. Issuance of
Debt





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
carried an interest rate of 11% per annum, payable in cash quarterly, and were
due upon the earlier of two years from issuance or a change in control of the
Company.  As part of this transaction, the Company entered into a
security agreement with the investors in the Notes by which the Company pledged
all assets of the Company as collateral for the Notes.  If the Company
were to liquidate, the note holders would receive payment before any other
obligations of the Company, which would reduce the amount of assets available
for distribution to the Company’s Stockholders.





The Notes
were convertible into common stock of the Company at a price of $0.50 per share
and came 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 Notes would have been convertible beginning six months
after issuance while the Warrants are exercisable at any time.





Both the
Notes and the Warrants have anti-dilution features so that if the Company pays
dividends, splits (forward or reverse) its common shares, or adjusts its shares
outstanding due to a combination, the conversion and exercises prices,
respectively, would also adjust proportionally.  The Notes had a
two-year maturity and the warrants will expire 10 years from the date of the
transaction.





The total
proceeds of $625,000 raised in the transaction described above were accounted
for under generally accepted accounting principles, ASC Topic 470, Debt. The Company has
accounted for this transaction as the issuance of convertible debt and a
detachable stock warrant.  The total proceeds of $625,000 have been
allocated to these individual instruments based on their relative fair value as
determined by management.





The
Company estimated the fair value of its convertible debt and warrants at the
time of issuance.  As a result, the Notes and the Warrants were
carried at fair values of $419,000 and $206,000, respectively, at
inception.  The Notes had an embedded beneficial conversion option and the
$419,000 value was bifurcated into a host valued at $239,000 and a beneficial
conversion option valued at $180,000.  The value of the Warrant was
recorded as a debt discount and an increase to additional paid-in
capital.


67





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





3.
Issuance of Debt - continued





In
September 2009, $500,000 of the Notes was converted into Series D Convertible
Preferred Stock (see Note 4) and the remaining notes, $150,000 were repaid in
cash. The remaining balance of the debt discount and the beneficial conversion
feature were expensed at the time that the Notes were converted or
repaid.  No Notes remain outstanding.





Unsecured
Promissory Notes





On June
30, 2009, the Company issued $300,000 in unsecured promissory notes to three of
its employees at an interest rate of 3.25%.  The maturity date of the
notes was October 31, 2009. These notes were paid in full in cash in September
2009.  No unsecured promissory notes remain outstanding.





Unsecured
Debt





On July
29, 2009, Messrs. Jonathan Merriman and Brock Ganeles made short-term loans to
the Company in the amounts of $200,000 and $300,000,
respectively.  Mr. Merriman’s loan was repaid on August 5,
2009.  Mr. Merriman forgave the interest on his loan.  Mr.
Ganeles’ loan was repaid on August 20, 2009.  The Company paid Mr.
Ganeles interest in the amount of $9,403.  No unsecured debt remains
outstanding.





Bridge
Note





On July
31, 2009, the Company issued Mr. Ronald L. Chez, the lead investor in the Series
D Transaction, a Secured Promissory Note (the “Bridge Note”) in the amount of
$500,000 at an annual interest rate of 9.00%.  The term of the Bridge
Note was three years, redeemable by Mr. Chez upon presentation of written
demand.  The Bridge Note was guaranteed personally by Messrs. Jonathan
Merriman (CEO) and Peter Coleman (CFO).  The Company issued 10-year
warrants to purchase 1,162,791 shares of the Company’s common stock at an
exercise price of $0.65 per share to Mr. Chez in connection with this
transaction. (See Note 5 regarding the accounting for the
warrants.)  Each of the two members of management was compensated for
the guarantee with identical warrants to purchase 581,395 shares of the
Company’s common stock.





The grant
date fair value of the warrants issued in connection with the Bridge Note to the
note holder and the members of management was $347,000 and $347,000,
respectively. The Company allocated all of the proceeds to the warrant liability
and recorded a full debt discount to be applied against the note using the
residual method. The fair value of the warrants issued to members of management
in compensation for the note guarantee was recorded as a debt issuance cost.
Both the debt discount and the debt issuance costs were to be amortized to
interest expense over the term of the note. (See Note 5 regarding accounting for
the warrants issued.)





In
September 2009, the Bridge Note was converted into Series D Convertible
Preferred Stock. At the date of conversion, there was $503,000 of principal and
interest outstanding on the Bridge Note which was converted into 1,171,000
shares of Series D Convertible Preferred Stock. Additionally, as of the
conversion date, the entire debt discount and debt issuance costs related to the
Bridge Note were expensed and no outstanding balance remains.





Secured
Demand Note





On August
12, 2009, the Company obtained a Temporary Secured Demand Note (“Demand Note”)
in the amount of $1,329,000 from the D. Jonathan Merriman Living Trust as a
subordinated loan.  The trustee of the Trust, D. Jonathan Merriman, is
also the Chief Executive Officer of the Company.  The Demand Note was
collateralized by securities held in a brokerage account held at a third party
by the Trust.  The Demand Note was repaid on September 23, 2009 and
the securities were transferred back to the Trust.  The Company
compensated the Trust with total interest and fees in the amount of $179,000,
the majority of which was reinvested in the Series D Convertible Preferred Stock
transaction.


68





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





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 constituted of 56 individuals and entities, including certain
officers, directors and employees of the Company, as well as outside
investors.  A portion of the principal and accrued interest of the May
29, 2009 Convertible Notes and all of the July 31 Bridge Note were converted
into the Series D Convertible Preferred Stock shares.  None of these
debt instruments remain outstanding after September 8, 2009.  The
warrants issued in conjunction with the May 29 Convertible Notes and with the
July 31 Bridge Note remain outstanding. (See Note 5 regarding the accounting for
the warrants issued.)





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 December 31, 2009, the Company recorded a cash
dividends payable of $51,000 which was included in accounts payable as of
December 31, 2009.





Both the
Series D Convertible Preferred Stock and the warrants issued in connection with
the Series D Convertible Preferred Stock had, when issued, anti-dilution
features including a full ratchet provision so that if the Company pays
dividends, splits its common shares forward or reverse, issues additional shares
at a lower price than the Series D Convertible Preferred Stock price, or adjusts
its shares outstanding due to a combination, the conversion and exercises prices
would also adjust proportionally.  The full ratchet provision resulted
in the warrants being accounted for as derivative instruments, since the
exercise price was not fixed and could be lowered if the Company had issued
securities at prices lower than the original exercise price of the warrant. On
December 28, 2009, 100% of the holders of the warrants issued in connection with
the Series D convertible Preferred Stock agreed to amend their warrants to
remove the full ratchet provision (see Note 5 for warrant
accounting).





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 (see Note 3) and legal services,have
been allocated to these individual instruments based on the residual
method.





As
discussed above, the Company issued warrants to purchase 23,720,916 shares of
common stock in conjunction with the sale of the Series D Convertible Preferred
Stock. The proceeds of the transaction were allocated between the Series D
Convertible Preferred Stock and the warrants using the residual method in which
proceeds are first allocated to the warrant liability and any remaining value is
then allocated to the preferred stock.  The warrants were valued using
the Black-Scholes fair value model. The grant date fair value of the warrants
issued with the Series D Convertible Preferred Stock was $15,264,000. As the
fair value of the warrants exceeds the proceeds received, the Company allocated
all of the proceeds, with the exception of the par value of the Series D
Convertible Preferred Stock, to the warrant liability. The additional value
needed to record the warrants at fair value was recorded as a charge to
additional paid-in capital (APIC) and shown as deemed dividend on the
Consolidated Statements of Operations. (See Note 5 below for more information
regarding the accounting for the warrant liability.)


69





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





5.  Accounting
for Warrant Liabilities





The
accounting for the liabilities arising out the issuance of the Company’s
warrants is discussed below under the following sections:





•
            Overview
      of warrant liability accounting;





•
            Series
      D Convertible Preferred Stock warrant
  liabilities;





•
            July
      31, 2009 Bridge Note warrant
liabilities;





•
            Settlement
      warrant liabilities;





•
            Warrant
      amendment;





•
            Summary
      of effects of warrants on the Consolidated Statements of
      Operations.





Overview
of Warrant Liability Accounting





Under ASC
Topic 815, Derivatives and
Hedging, instruments which do not have fixed settlement provisions are
deemed to be derivative instruments. The exercise price of the detachable
warrants issued with the Company’s Series D Convertible Preferred Stock were not
fixed because the exercise prices could have been lowered if the Company issues
securities at prices lower than the price on which the exercise price for the
warrant was based. This was also the case with the warrants issued in connection
with the $500,000 Bridge Note issued on July 31, 2009 and the warrants issued to
the litigants in the settlement (see Note 15 for additional information on the
legal settlement).  The Company had included the reset provisions in
order to protect the warrant holders from potential dilution associated with
future financings. In accordance with ASC 815, the warrants were recognized as a
derivative instrument and had been characterized as warrant liabilities carried
at their fair value. ASC 815 requires that the fair value of these liabilities
be re-measured at the end of every reporting period, with the change in value
reported in the Consolidated Statements of Operations.





On
December 28, 2009, the Company successfully amended the warrants that triggered
liability accounting by removing the anti-dilution ratchet provision. On that
date, the Company received binding agreements from all the warrant holders
agreeing to amend their warrants as requested by the Company.  In
consideration for their agreements, the Company agreed to pay each warrant
holder $0.005 per warrant share, payable when the Company generates non-GAAP
quarterly operating profit which excludes unrealized gains and losses and other
items not directly related to operations, but no earlier than the filing of the
Form 10-Q for the period ended June 30, 2010. As of the date of amendment, the
Company marked the warrant liability to market value and reclassified the market
value of $10,073,000 to additional paid-in capital. The decrease in warrant
liability market value of $6,911,000 was recorded to change in fair value of
warrant liability on the Consolidated Statements of Operations. The Company no
longer accounts for the warrants as derivatives and no longer has a warrant
liability as of December 31, 2009.  At December 31, 2009, the Company
included $139,000 due to the warrant holders in accrued liabilities in
consideration for the amendment.


70





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





5.  Accounting
for Warrant Liabilities — continued





Series
D Convertible Preferred Stock Warrant Liabilities





The
warrant liabilities related to outstanding warrants issued in connection with
the Series D Convertible Preferred Stock were valued using the Black-Scholes
option valuation model.





Septmeber 8,
                  
                  
                  December 28,Grant
      Date/Measurement Date
                  
                  2009
                  
                  
                  2009Number
      of warrants
                  
                  
                  23,720,916
                  
                  
                  
                  23,720,916Fair
      value–warrant liability
                  
                  $
                  15,264,330
                  
                  
                  $
                  8,674,699Change
      in value since inception
                  
                  
                  
                  
                  
                  $
                  6,589,631





As of
December 28, 2009, the Series D Convertible Preferred Stock warrant liability
had a fair value of $8,675,000 which was reclassified to additional paid-in
capital as of that date. The decrease in market value of $6,590,000 is included
in the Consolidated Statements of Operations, in accordance with ASC 815, Derivatives and Hedging.
Other warrants to purchase 140,000 shares of common stock were issued in
connection with the Series D Convertible Preferred Stock. These other warrants
had the same ratchet provision which was also removed upon warrant amendment on
December 28, 2009. These warrants had a fair value of $51,000 as of December 28,
2009.  The total decrease in market value related to these other
warrants was $39,000 and is included in the Consolidated Statements of
Operations in accordance with ASC 815, Derivatives and Hedging.





Bridge
Note Warrant Liabilities





The
warrant liabilities related to outstanding warrants issued in connection with
the July 31, 2009 Bridge Note were valued using the Black-Scholes option
valuation model.





July 31,
                      
                      
                      December 28,Grant
      Date/Measurement Date
                      
                      2009
                      
                      
                      2009Number
      of warrants
                      
                      
                      2,325,581
                      
                      
                      
                      2,325,581Fair
      value–warrant liability
                      
                      $
                      693,994
                      
                      
                      $
                      851,032Change
      in value since inception
                      
                      
                      
                      
                      
                      $
                      157,038





As of
December 28, 2009, the Bridge Note warrant liability had a fair value of
$851,000 which was reclassified to additional paid-in capital as of that date.
The increase in market value of $157,000 is included in the Consolidated
Statements of Operations, in accordance with ASC 815, Derivatives and
Hedging.


71





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





5.  Accounting
for Warrant Liabilities — continued





Settlement
Warrant Liabilities





As
discussed in Note 15, concurrent with the Series D Convertible Preferred Stock
strategic transaction, the Company issued five-year warrants to purchase
1,538,461 shares of common stock at $0.65 in connection with a legal settlement.
The warrants contained the same anti-dilution provision as the Series D
Convertible Preferred Stock warrants and the Bridge Note warrants.  In
accordance with ASC topic 815, Derivatives and Hedging the
Company recorded the fair value of the settlement warrants as a warrant
liability on the date of grant and marked the warrants to market on each
reporting date with the change in value recorded in the Consolidated Statements
of Operations.





The
warrant liabilities related to outstanding warrants issued in connection with
the settlement of litigation were valued using the Black-Scholes option
valuation model.





September 8,
                  
                  
                  December 28,Grant
      Date/Measurement Date
                  
                  2009
                  
                  
                  2009Number
      of warrants
                  
                  
                  1,538,461
                  
                  
                  
                  1,538,461Fair
      value–warrant liability
                  
                  $
                  934,926
                  
                  
                  $
                  495,757Change
      in value since inception
                  
                  
                  
                  
                  
                  $
                  439,169





As of
December 28, 2009, the total settlement warrant liability had a fair market
value of $496,000 which was reclassified to additional paid-in capital as of
that date. The decrease in value of $439,000 is included in the Consolidated
Statements of Operations in accordance with ASC Topic 815, Derivatives and
Hedging.





Summary
of Effects of Warrants on the Consolidated Statements of Operations





Operating
                      
                      
                      Non-OperatingExpense
                      
                      
                      (Income) ExpenseSettlement
      warrant liability
                      
                      $
                      934,926
                      
                      
                      $
                      -Change
      in value - Series D Convertible PreferredStock
      warrant liability
                      
                      
                      -
                      
                      
                      
                      (6,628,525
                      )Change
      in value - Bridge note warrant liability
                      
                      
                      -
                      
                      
                      
                      157,038Change
      in value - Settlement warrant liability
                      
                      
                      -
                      
                      
                      
                      (439,169
                      )Net
      effect of warrant liabilities
                      
                      $
                      934,926
                      
                      
                      $
                      (6,910,656
                      )


72





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





6. Fair Value of Assets and
Liabilities





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





Securities
Owned





Corporate
Equities





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





Stock
Warrants





Stock
warrants represent warrants to purchase equity in a publicly-traded
company.  Frequently, the underlying shares are unregistered
restricted stock and are considered “not readily marketable”.  Such
positions are considered illiquid.  When the underlying shares have
been registered or can be sold under the Rule 144 exemption, the position is
then considered to be “marketable.”  In either event, the positions 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 overallotment of units for a publicly-traded
company for which the Company acted as an underwriter.  Such positions
are considered illiquid and do not have readily determinable fair values, and
therefore require significant management judgment or estimation. For these
securities, the Company uses the Black-Scholes valuation methodology. They are
classified within Level 3 of the fair value hierarchy.


73





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





6.
Fair Value of Assets and Liabilities - (continued)





Preferred
Stock





Preferred
stock represents preferred equity in a publicly-traded company.  The
preferred stock owned by the Company is convertible at the Company’s discretion.
For these securities, the Company uses the exchange-quoted price to value the
security. They are classified within Level 1 of the fair value
hierarchy.





Securities
Sold, Not Yet Purchased





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





Summary





In
accordance with ASC 820, assets measured at fair value on a recurring basis are
categorized in the tables below based upon the lowest level of significant input
to the valuations.





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


74





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





6.
Fair Value of Assets and Liabilities - (continued)





Assets at Fair Value at December 31, 2008Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  TotalAssets:Corporate
      equities
                  
                  $
                  3,353,784
                  
                  
                  $
                  650
                  
                  
                  $
                  695
                  
                  
                  $
                  3,355,129Stock
      warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,605,451
                  
                  
                  
                  1,605,451Underwriters’
      purchase option
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  27,995
                  
                  
                  
                  27,995Preferred
      stock
                  
                  
                  63
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  63Total
      securities owned
                  
                  $
                  3,353,847
                  
                  
                  $
                  650
                  
                  
                  $
                  1,634,141
                  
                  
                  $
                  4,988,638Liabilities:Securities
      sold, not yet purchased
                  
                  
                  903,217
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  903,217Total
      fair value liabilities
                  
                  $
                  903,217
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  903,217





The
following table presents additional information about Level 3 assets measured at
fair value on a recurring basis for fiscal year
2009.  The unrealized gains or losses during the period for
assets within the Level 3 category presented in the table
below may include changes in fair value during the period that were attributable
to both observable and unobservable inputs.


75





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





6.
Fair Value of Assets and Liabilities - (continued)





Underwriters’Corporate
                  
                  
                  Stock
                  
                  
                  PurchaseEquities
                  
                  
                  Warrants
                  
                  
                  Option
                  
                  
                  TotalBalance
      at January 1, 2008
                  
                  $
                  489,453
                  
                  
                  $
                  1,756,580
                  
                  
                  $
                  194,957
                  
                  
                  $
                  2,440,990Purchases,
      issuances, settlements and sales
                  
                  
                  920,412
                  
                  
                  
                  807,449
                  
                  
                  
                  -
                  
                  
                  
                  1,727,861Net
      transfers in (out)
                  
                  
                  (1,299,696
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,299,696
                  )Gains
      (losses):Realized
                  
                  
                  -
                  
                  
                  
                  107,310
                  
                  
                  
                  -
                  
                  
                  
                  107,310Unrealized
                  
                  
                  (109,474
                  )
                  
                  
                  (1,065,888
                  )
                  
                  
                  (166,962
                  )
                  
                  
                  (1,342,324
                  )Balance
      at December 31, 2008
                  
                  $
                  695
                  
                  
                  $
                  1,605,451
                  
                  
                  $
                  27,995
                  
                  
                  $
                  1,634,141Purchases,
      issuances, settlements and sales
                  
                  
                  71,464
                  
                  
                  
                  311,515
                  
                  
                  
                  -
                  
                  
                  
                  382,979Net
      transfers in (out)
                  
                  
                  (51,694
                  )
                  
                  
                  (155,331
                  )
                  
                  
                  -
                  
                  
                  
                  (207,025
                  )Gains
      (losses):Realized
                  
                  
                  -
                  
                  
                  
                  (79,093
                  )
                  
                  
                  (91,058
                  )
                  
                  
                  (170,151
                  )Unrealized
                  
                  
                  1,266
                  
                  
                  
                  (107,061
                  )
                  
                  
                  63,063
                  
                  
                  
                  (42,732
                  )Balance
      at December 31, 2009
                  
                  $
                  21,731
                  
                  
                  $
                  1,575,481
                  
                  
                  $
                  -
                  
                  
                  $
                  1,597,212Change
      in unrealized gains (losses) relating to instruments still
      held at December 31, 2009
                  
                  $
                  1,266
                  
                  
                  $
                  (33,657
                  )
                  
                  $
                  -
                  
                  
                  $
                  (32,391
                  )





The
amounts of unrealized losses for the years ended December 31, 2009 and 2008
included in the table above are all attributable to those assets held as of
December 31, 2009 and 2008, respectively. Net gains and losses (both realized
and unrealized) for Level 3 financial assets (securities owned by the
Company) are a component of “Principal transactions” in the Consolidated
Statements of Operations.





Changes
in value of the warrant liabilities (warrants issued by the Company) constitute
“Change in fair value of warrant liability” in the Consolidated Statements of
Operations.


76





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





7.
Equipment and Fixtures





Equipment
and fixtures consisted of the following:





December 31,2009
                  
                  
                  2008Computer
      equipment
                  
                  $
                  532,195
                  
                  
                  $
                  568,116Furniture
      and equipment
                  
                  
                  930,151
                  
                  
                  
                  1,223,050Software
                  
                  
                  190,522
                  
                  
                  
                  183,098Leasehold
      improvements
                  
                  
                  1,113,769
                  
                  
                  
                  1,641,4972,766,637
                  
                  
                  
                  3,615,761Less
      accumulated depreciation
                  
                  
                  (2,260,102
                  )
                  
                  
                  (2,355,750
                  )$
                  506,535
                  
                  
                  $
                  1,260,011





There
were no equipment or fixtures purchased with capital lease financing during
2009. Equipment and fixtures purchased with capital lease financing during 2008
was $806,000. At December 31, 2009, the Company had $1,121,000 of computer
equipment, furniture and equipment, and leashold improvements purchased under
capital lease equipment with accumulated depreciation of $810,000 which are
included in the table above. See Note 15 for additional information on
capital leases.





8.
Notes Payable and Convertible Notes Payable





Convertible
Notes Payable Issued in 2003





In April
2003, the Company completed a private placement financing that included
convertible notes payable with aggregate principal of $1,000,000, due April
2008. The notes had an interest rate of 3% per annum payable quarterly on
January 1, April 1, July 1 and October 1 beginning July 1, 2003. The notes were
convertible to common stock at a rate of $1.40 per share. In connection with the
private placement, the Company issued warrants to purchase 178,300 shares of
common stock with an exercise price of $2.10 per share and a five-year term. The
convertible notes were recorded in the Consolidated Statements of Financial
Condition net of discounts resulting from the relative fair value of the stock
warrants and beneficial conversion feature totaling $258,000. The discount was
being amortized over the five-year term. In October 2003, notes payable with a
face amount of $500,000 were converted under their original terms into 51,021
shares of common stock resulting in the accelerated amortization of discounts in
the amount of $118,000. In December 2004, notes payable with a face amount of
$300,000 were converted under their original terms into 30,613 shares of common
stock resulting in the accelerated amortization of discounts in the amount of
$50,000. Amortization of discounts during 2007 and 2006 was approximately
$10,000 and $10,000, respectively.





In April
2008, the remaining balance of $200,000 was converted in the Company’s common
stock in the amount of 142,858 shares.  As of April 2008, the
remaining unamortized discount was expensed and the warrants exercisable reached
the end of their contractual life and expired.


77





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





8.
Notes Payable and Convertible Notes Payable - (continued)





Note
Payable Held By Donald Sledge





During
2001, the Company renegotiated the severance terms included in its employment
agreement with Donald Sledge, the former Chairman and CEO of the Company. Upon
his leaving the Company in May 2001, the Company issued to Mr. Sledge a 7%
convertible note, in an aggregate principal amount of $400,000, due May 2003.
Interest was payable at the maturity of the two-year term. In May 2003, the
Company and Mr. Sledge agreed to convert the principal and interest due at
maturity into a fully amortizing note payable over five years using an effective
interest rate of 4.0%. Mr. Sledge was a member of the Company’s Board of
Directors until March 2007.





In
May 2008, the remaining balance of the convertible note was paid
off.  As of December 31, 2008, there is no balance on the
note.





Midsummer
Convertible Note





In
December 2006, the Company repaid the $7.5 million variable rate secured
convertible note. The proceeds to repay the $7.5 million convertible note were
provided by redemption from the MCF Navigator fund. Midsummer Investment, Ltd.
(“Midsummer”) retained the stock warrant to purchase 267,858 shares of common
stock. The Company recorded a loss on the repayment of the convertible note in
the amount of $1,349,000 which consisted of $1,154,000 for the write-off of the
unamortized discount related to the stock warrant and $195,000 for the write-off
of the unamortized debt issuance costs in 2006.  All of the 267,858
warrants issued are still outstanding as of December 31, 2009 and
2008.





9. Discontinued
Operations





Panel
Intelligence, LLC





On April
17, 2007, Merriman Curhan Ford Group, Inc. acquired 100% of the outstanding
common shares of MedPanel Corp. which was subsequently renamed Panel
Intelligence, LLC (“Panel”) and made into a subsidiary of the Company. The
results of Panel’s operations have been included in the consolidated financial
statements since that date through the Company’s Form 10-Q for the three months
ended September 30, 2009. As a result of the acquisition, the Company began
providing independent market data and information to clients in the
biotechnology, pharmaceutical, medical device, and financial industries by
leveraging Panel’s proprietary methodology and vast network of medical
experts.





The
Company paid $6.1 million in common stock for Panel. The value of the 1,547,743
shares of common shares issued was determined based on the average market price
of the Company’s common stock over the period including three days before and
after the terms of the acquisition were agreed to and announced. The selling
stockholders were also entitled to additional consideration on the third
anniversary from the closing which is based upon Panel Intelligence achieving
specific revenue and profitability milestones.





In
December 2008, the Company determined that the sale of Panel would reduce
investments required to develop Panel’s business.  Its sale would also
generate capital necessary for its core business.   The Company
determined that the plan of sale criteria in ASC Topic 360, Property, Plant and Equipment
had been met. Accordingly, the carrying value of the Panel assets was adjusted
to their fair value less costs to sell.  As a result, an impairment
loss in the amount of $1,937,000 was recorded and is included in “Other
expenses” in 2008.  In January 2009, the Company sold Panel to Panel
Intelligence, LLC (Newco) for $1,000,000 and shares of the Company’s common
stock in the amount of $100,000.





The
revenue and expenses of Panel were reclassified and included in discontinued
operations in the Consolidated Statements of Operations for the year ending
December 31, 2008.  Certain assets and liabilities of Panel have been
reclassified and included in assets and liabilities held for sale in the
Consolidated Statements of Financial Condition as of December 31,
2008.


78





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





9. Discontinued Operations -
(continued)





The
following revenue and expenses have been reclassified as discontinued operations
for the years ended December 31, 2009 and 2008:





December 31,2009
                  
                  
                  2008Revenue
                  
                  $
                  217,141
                  
                  
                  $
                  6,304,420Operating
      expenses:Compensation
      and benefits
                  
                  
                  193,723
                  
                  
                  
                  3,533,175Cost
      of primary research services
                  
                  
                  64,179
                  
                  
                  
                  2,295,510Professional
      services
                  
                  
                  42,180
                  
                  
                  
                  188,157Occupancy
      and equipment
                  
                  
                  27,775
                  
                  
                  
                  354,388Communications
      and technology
                  
                  
                  1,179
                  
                  
                  
                  132,384Depreciation
      and amortization
                  
                  
                  10,610
                  
                  
                  
                  588,858Travel
      and entertainment
                  
                  
                  8,123
                  
                  
                  
                  140,399Impairment
      of goodwill and intangible assets
                  
                  
                  -
                  
                  
                  
                  4,538,945Other
      expenses
                  
                  
                  (36,436
                  )
                  
                  
                  323,458311,333
                  
                  
                  
                  12,095,274Operating
      loss
                  
                  
                  (94,192
                  )
                  
                  
                  (5,790,854
                  )Interest
      expense, net
                  
                  
                  (702
                  )
                  
                  
                  (10,222
                  )Net
      loss
                  
                  $
                  (94,894
                  )
                  
                  $
                  (5,801,076
                  )





At December 31, 2009,
there were no assets or liabilities of operations held for sale included on the
Consolidated Statements of Financial Condition. The assets and liabilities of
operations held for sale as of December 31, 2008 are as follows:





Assets:Cash
      and cash equivalents
                          
                          $
                          222,892Accounts
      receivable
                          
                          
                          1,102,681Furniture
      and equipment
                          
                          
                          163,505Intangible
      assets, net of accumulated amortization and impairment
                          
                          
                          282,744Prepaid
      expenses and other assets
                          
                          
                          186,216$
                          1,958,038Liabilities:Accounts
      payable
                          
                          $
                          227,213Commissions
      and bonus payable
                          
                          
                          110,632Accrued
      liabilities
                          
                          
                          603,780Capital
      leases
                          
                          
                          111,274$
                          1,052,899


79





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





9.
Discontinued Operations - (continued)





Goodwill





During
the year ended December 31, 2007, the Company recorded $3,130,000 of
goodwill on the Consolidated Statements of Financial Condition that related to
the Company’s acquisition of Panel in April 2007. In March 2008, shares were
released from escrow pursuant to the acquisition agreement and the value of the
goodwill increased to $3,338,000.  In conjunction with the annual
impairment testing in April 2008, the Company recorded a total impairment of
$2,209,000.  In December 2008, goodwill was further impaired by
$1,129,000 which reduced the goodwill to zero.  No goodwill impairment
charge was recognized in 2009.





Intangible
Assets





The
components of intangible assets, all of which are related to the April 2007
Panel acquisition, consist of the following:





As
      ofDecember 31,2008Depreciable
      intangible assets:Customer
      relationships
                    
                    $
                    990,000Database
      of panelists
                    
                    
                    220,000Technology
      platform
                    
                    
                    360,000Customer
      backlog
                    
                    
                    420,0001,990,000Less:
      accumulated amortization
                    
                    
                    (1,216,327
                    )Less:
      impairment
                    
                    
                    (490,929
                    )282,744Non-depreciable
      intangible asset–Tradenames
                    
                    
                    710,000Less:
      impairment
                    
                    
                    (710,000
                    )Total
      intangible assets, net ofamortization
      and impairment
                    
                    $
                    282,744





As noted
above, all of the Company’s intangible assets included on the Consolidated
Statements of Financial Condition as of December 31, 2008 were related to Panel.
Also noted above, Panel was sold during the year ended December 31, 2009, and as
a result of the sale, the Company does not have any intangible assets recorded
in the Consolidated Statements of Financial Condition as of December 31, 2009.
Total amortization expense for the above intangibles in 2008 was
$466,000.  Total impairment loss related to intangible assets in 2008
amounted to $1,201,000.  For the year ended December 31, 2009, there was no
material amortization expense or impairment loss.


80





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





10. Sale of a Component of an
Entity





On
January 16, 2009, the Company entered into an agreement to sell the assets of
ICD, a division of MCF, to a group of investors who are also its employees in
order to raise capital. The assets being sold include MCF’s rights in trademark,
copyright, and other intellectual property used in the business, customer lists,
marketing materials, and books and records. As of December 31, 2009, the Company
determined that the discontinued operations criteria in ASC Topic 205, Discontinued Operations, had
not been met, as such the revenues and expenses of ICD are still presented as
part of continuing operations.  In accordance with Securities and Exchange
Commission (SEC) Staff Accounting Bulletin (SAB) 104,“Revenue Recognition”,
the Company recognized $2,000,000 as Other Income for the year ended December
31, 2009.





To assist
in the transition of operations to the new owners, the Company is providing
substantial services to ICD, including collecting its revenues. Under guidance
provided in ASC Subtopic 605-45, “Principal Agent Considerations,” the Company
records ICD’s revenues and expenses at gross levels. In 2010, the Company
expects to no longer provide such services and will no longer record ICD
revenues.





For the
year ended December 31, 2009, $27,789,000 of the Company’s brokerage revenue of
$40,180,000  and $27,579,000 of the Company’s operating expenses of
$62,842,000 can be attributed to ICD and would not have been recorded as the
Company’s revenue had the sale of ICD met the discontinued operations criteria.
ICD represented 56% of the Company’s total revenue and 44% of its total expense
for the period. As of December 31, 2009, $2,492,000 and $2,268,000 of Due from
Clearing Broker and Commissions and Bonus Payable balances are attributed to
ICD, respectively.





11.
Stock-Based Compensation Expense





Stock
Options





In 2009,
the Company, with shareholder approval, adopted the 2009 Stock Incentive Plan
(the “2009 Plan”).  Up to 8,000,000 new shares of its common stock may
be issued pursuant to awards granted under the 2009 Plan.  The Company
will no longer grant options under any of its existing option
plans.  Any shares of the Company’s common stock which become
available for new grant, upon the termination of employees holding unvested
option grants under existing plans, will be added to the 2009 Plan.





The 2009
Plan, 1999 Stock Option Plan, 2000 Stock Option and Incentive Plan, 2001 Stock
Option and Incentive Plan, 2003 Stock Option and Incentive Plan, 2004
Non-Qualified Stock Option and Inducement Plan and 2006 Directors’ Stock Option
and Incentive Plan, collectively the Option Plans, permit the Company to grant
employees, outside directors, and consultants incentive stock options,
nonqualified stock options or stock purchase rights to purchase shares of the
Company’s common stock. The Option Plans do not permit the exercise of
restricted stock options, and therefore as of December 31, 2009 and 2008, there
were no shares subject to repurchase.





As of
December 31, 2009, there were 15,091,430 shares authorized for issuance under
the Option Plans, and 612,858 shares authorized for issuance outside of the
Option Plans. As of December 31, 2009, 3,832,628 shares were available for
future grants under the Option Plans. There were no shares available for future
grants outside of the Options Plans.





As of
December 31, 2008, there were 7,091,430 shares authorized for issuance under the
Option Plans, and 612,858 shares authorized for issuance outside of the Option
Plans. As of December 31, 2008, 4,576,509 shares were available for future
grants under the Option Plans. There were no shares available for future grants
outside of the Options Plans. Compensation expense for stock options during the
years ended December 31, 2009 and 2008 was $573,000 and $2,139,000,
respectively.


81


MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





11.
Stock-Based Compensation Expense - (continued)





The
following table is a summary of the Company’s stock option activity for the two
years ended December 31, 2009:





2009
                    
                    
                    2008Weighted-
                    
                    
                    
                    
                    
                    Weighted-Average
                    
                    
                    
                    
                    
                    AverageExercise
                    
                    
                    
                    
                    
                    ExerciseShares
                    
                    
                    Price
                    
                    
                    Shares
                    
                    
                    PriceOutstanding
      at beginning of year
                    
                    
                    1,167,117
                    
                    
                    $
                    5.85
                    
                    
                    
                    4,066,259
                    
                    
                    $
                    6.00Granted
                    
                    
                    9,445,209
                    
                    
                    
                    0.83
                    
                    
                    
                    717,780
                    
                    
                    
                    3.41Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (64,628
                    )
                    
                    
                    (2.36
                    )Canceled
                    
                    
                    (1,062,209
                    )
                    
                    
                    (2.64
                    )
                    
                    
                    (3,552,294
                    )
                    
                    
                    (5.59
                    )Outstanding
      at end of year
                    
                    
                    9,550,117
                    
                    
                    
                    1.25
                    
                    
                    
                    1,167,117
                    
                    
                    
                    5.85Exercisable
      at end of year
                    
                    
                    556,102
                    
                    
                    $
                    5.96
                    
                    
                    
                    646,907
                    
                    
                    $
                    7.39





The
following table summarizes information with respect to stock options outstanding
at December 31, 2009, based on the Company’s closing stock price on December 31,
2009 of $0.87 per share:





Options Outstanding at December 31, 2009
                  
                  
                  Vested Options at December 31, 2009Weighted-Average
                  
                  
                  Weighted-
                  
                  
                  
                  
                  
                  
                  
                  
                  Weighted-Remaining
                  
                  
                  Average
                  
                  
                  Aggregate
                  
                  
                  
                  
                  
                  Average
                  
                  
                  AggregateRange
      of
                  
                  
                  
                  
                  Contractual
                  
                  
                  Exercise
                  
                  
                  Intrinsic
                  
                  
                  
                  
                  
                  Exercise
                  
                  
                  IntrinsicExercise
      Price
                  
                  Number
                  
                  
                  Life
      (Years)
                  
                  
                  Price
                  
                  
                  Value
                  
                  
                  Number
                  
                  
                  Price
                  
                  
                  Value$0 –
      $1.00
                  
                  
                  4,361,172
                  
                  
                  
                  9.44
                  
                  
                  $
                  0.49
                  
                  
                  $
                  1,641,981
                  
                  
                  
                  102,212
                  
                  
                  $
                  0.44
                  
                  
                  $
                  44,012$1.01
      – $3.50
                  
                  
                  4,720,940
                  
                  
                  
                  9.50
                  
                  
                  
                  1.28
                  
                  
                  
                  -
                  
                  
                  
                  224,754
                  
                  
                  
                  2.57
                  
                  
                  
                  -$3.51
      – $7.00
                  
                  
                  345,192
                  
                  
                  
                  7.62
                  
                  
                  
                  4.29
                  
                  
                  
                  -
                  
                  
                  
                  109,598
                  
                  
                  
                  4.86
                  
                  
                  
                  -$7.01
      – $14.00
                  
                  
                  96,665
                  
                  
                  
                  4.36
                  
                  
                  
                  9.77
                  
                  
                  
                  -
                  
                  
                  
                  93,390
                  
                  
                  
                  9.84
                  
                  
                  
                  -$14.01
      – $28.00
                  
                  
                  1,147
                  
                  
                  
                  0.99
                  
                  
                  
                  15.34
                  
                  
                  
                  -
                  
                  
                  
                  1,147
                  
                  
                  
                  15.34
                  
                  
                  
                  -$28.01
      – $49.00
                  
                  
                  25,001
                  
                  
                  
                  0.15
                  
                  
                  
                  49.00
                  
                  
                  
                  -
                  
                  
                  
                  25,001
                  
                  
                  
                  49.00
                  
                  
                  
                  -9,550,117
                  
                  
                  
                  9.33
                  
                  
                  $
                  1.25
                  
                  
                  $
                  1,641,981
                  
                  
                  
                  556,102
                  
                  
                  $
                  5.96
                  
                  
                  $
                  44,012





As of
December 31, 2009, total unrecognized compensation expense related to unvested
stock options was $4,929,000. This amount is expected to be recognized as
expense over a weighted-average period of 3.62 years.


82





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





11.
Stock-Based Compensation Expense - (continued)





Restricted
Stock





At the
date of grant, the recipients of restricted stock have most of the rights of a
stockholder other than voting rights, subject to certain restrictions on
transferability and a risk of forfeiture. Restricted shares typically vest over
a two to four year period beginning on the date of grant. The fair value of
restricted stock is equal to the market value of the shares on the date of
grant. The Company recognizes the compensation expense for restricted stock on a
straight-line basis over the requisite service period. Compensation expense for
restricted stock during the years ended December 31, 2009 and 2008 was $181,000
and $215,000, respectively.





The
following table is a summary of the Company’s restricted stock activity, based
on the Company’s closing stock price on December 31, 2009 of $0.87 per
share:





Weighted-Non-Vested
                      
                      
                      Average
                      
                      
                      AggregateStock
                      
                      
                      Grant Date
                      
                      
                      IntrinsicOutstanding
                      
                      
                      Fair Value
                      
                      
                      ValueBalance
      as of January 1, 2008
                      
                      
                      180,620
                      
                      
                      
                      7.51
                      
                      
                      $
                      960,898Granted
                      
                      
                      79,265
                      
                      
                      
                      2.34Vested
                      
                      
                      (145,610
                      )
                      
                      
                      (5.05
                      )Canceled
                      
                      
                      (65,496
                      )
                      
                      
                      (5.00
                      )Balance
      as of December 31, 2008
                      
                      
                      48,779
                      
                      
                      
                      9.84
                      
                      
                      $
                      29,267Granted
                      
                      
                      76,631
                      
                      
                      
                      1.09Vested
                      
                      
                      (87,044
                      )
                      
                      
                      (1.68
                      )Canceled
                      
                      
                      -
                      
                      
                      
                      -Balance
      as of December 31, 2009
                      
                      
                      38,366
                      
                      
                      $
                      9.84
                      
                      
                      $
                      33,378





The total
fair value of restricted stock that vested during the years ended December 31,
2009 and 2008 was $90,000 and $465,000, respectively.





As of
December 31, 2009, total unrecognized compensation expense related to restricted
stock was $66,000. This expense is expected to be recognized over a
weighted-average period of 0.43 year.


83





MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





11.
Stock-Based Compensation Expense - (continued)





Warrants
issued to Board member





The
Company formed a Strategic Advisory Committee of the Board of Directors chaired
by Mr. Ronald Chez, the lead investor in the Series D Convertible Preferred
Stock strategic transaction.  During the first year, the Chair of the
Committee will be compensated with warrants to purchase 300,000 shares the
Company’s common stock at $0.65, to be issued pro rata on a monthly
basis.  To date, Mr. Chez is the sole member of the
Committee.  No other compensation arrangement for service on the
Committee has been made. During the year, the Company issued warrants to
purchase 93,333 shares of common stock to Mr. Chez. The Company calculated the
fair value of the warrants to be $84,000 using Black-Scholes options valuation
model.





Employee
Stock Option Give-Back Program





In
October 2008, the Company implemented a Stock Option Give-Back Program which
allowed all employees to give back stock options he or she was granted, whether
vested or unvested.  Employees were notified that there would be
noquid-pro-quo and that any employee who elected to give back any
shares of stock options would not receive a grant for the period of six months
and one day following the end of the program on October 31, 2008.





Sixteen
employees elected to participate in the program collectively giving back
3,011,511 shares of stock options granted under the Company’s various plans in
2008.  The Company recorded a compensation expense of $993,000 related
to the give-back program.





Fair
Value and Assumptions Used to Calculate Fair Value under ASC Topic
820





The
weighted-average grant date fair value of stock options granted during 2009 and
2008 was $0.58 and $2.16, respectively.





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 2009 and 2008:





2009
                  
                  
                  2008Volatility
                  
                  
                  128.48
                  %
                  
                  
                  70
                  %Average
      expected term (years)
                  
                  
                  2.4
                  
                  
                  
                  6.3Risk-free
      interest rate
                  
                  
                  1.23
                  %
                  
                  
                  3.10
                  %Dividend
      yield
                  
                  
                  -
                  
                  
                  
                  -


84


MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





11.
Stock-Based Compensation Expense - (continued)





Assumptions
for Option-Based Awards under ASC Topic 718





Consistent
with ASC Topic 718, Stock
Compensation, the Company considered the historical volatility of its
stock price in determining its expected volatility, and, finding this to be
reliable, determined that the historical volatility would result in the best
estimate of expected volatility. Because the Company does not have any traded
options or other traded financial instruments such as convertible debt, implied
volatilities are not available.





The
expected life of employee stock options represents the weighted-average period
the stock options are expected to remain outstanding. The Company calculated the
expected term using the Black-Scholes model with specific assumptions about the
suboptimal exercise behavior, post-vesting termination rates and other relevant
factors.





The
risk-free interest rate assumption is based upon observed interest rates
appropriate for the term of the Company’s employee stock options.





The
dividend yield assumption is based on the Company’s history and expectation of
dividend payouts. The Company has not paid and currently does not plan to
declare dividends on its common stock.





As
share-based compensation expense recognized in the Consolidated Statements of
Operations for the years ended December 31, 2009 and 2008, is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures.
Forfeitures were estimated based on the Company’s historical
experience.





Assumptions
for Restricted Stock Awards under ASC Topic 718





The fair
value of each restricted stock award is based on the market value of the
Company’s stock on the date of grant.





12.
Employee Benefit Plans





The
Company has a 401(k) defined contribution plan. The 401(k) plan allows eligible
employees to contribute up to 15% of their compensation, subject to a statutory
prescribed annual limit. Employee contributions and earnings thereon vest
immediately. Although the Company may make discretionary contributions to the
401(k) plan, none were made during the two years ended December 31,
2009.


85


MERRIMAN
CURHAN FORD GROUP, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





13.
Income Taxes





Income
tax benefit consisted of the following for the two years ended December 31,
2009:





2009
                  
                  
                  2008Current:Federal
                  
                  $
                  (397,395
                  )
                  
                  $
                  (1,627,734
                  )State
                  
                  
                  (230,528
                  )
                  
                  
                  (7,480
                  )Total
                  
                  $
                  (627,923
                  )
                  
                  $
                  (1,635,214
                  )





The
following table reconciles the federal statutory rate to the effective tax rate
of the benefit from income taxes for the two years ended December 31,
2009:




2009
                  
                  
                  2008Federal
      statutory income tax rate (benefit)
                  
                  
                  (34
                  )%
                  
                  
                  (34
                  )%State
      income taxes
                  
                  
                  (6
                  )
                  
                  
                  (7
                  )Permanent
      differences
                  
                  
                  (42
                  )
                  
                  
                  3Valuation
      allowance
                  
                  
                  72
                  
                  
                  
                  33Effective
      tax rate
                  
                  
                  (10
                  )%
                  
                  
                  (5
                  )%





The effective tax rate is influenced by
the Company’s performance and tax planning opportunities available in the
various jurisdictions in which the Company operates.




The tax
effect of temporary differences that give rise to significant portions of the
deferred tax assets as of December 31, 2009 and 2008, are presented as
follows:





December
      31,2009
                  
                  
                  2008Deferred
      tax assets:Net
      operating loss carryforwards
                  
                  $
                  6,334,284
                  
                  
                  $
                  23,149,680Other
                  
                  
                  5,476,865
                  
                  
                  
                  3,148,077Total
      deferred tax assets
                  
                  
                  11,811,149
                  
                  
                  
                  26,297,757Valuation
      allowance
                  
                  
                  (11,811,149
                  )
                  
                  
                  (26,297,757
                  )Net
      deferred tax asset
                  
                  $
                  -
                  
                  
                  $
                  -





86




MERRIMAN
CURHAN FORD GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




13.
Income Taxes - (continued)





The net
change in the valuation allowance for the year ended December 31, 2009 was a
decrease of $14,487,000. This reduction was primarily the result Sec 382
limitations on net operating loss carryovers. The Company has established a
valuation allowance against that portion of deferred tax assets where management
was not able to determine that it is more likely than not that the asset will be
realized.




As of
December 31, 2009, the Company had federal and state operating loss
carryforwards of approximately $14,847,000 and $22,647,000, respectively. If not
earlier utilized, the federal net operating loss carryforwards will expire
between 2021 and 2029 and the state loss carryforward will expire between 2011
and 2029. The Tax Reform Act of 1986 and similar state legislation impose
substantial restrictions on the utilization of net operating losses and tax
credits in the events of an "ownership change" of a
corporation.  Accordingly, the Company has analyzed the impact of
"ownership change" limitations on its ability to utilize net operating losses
and credit carryforwards.  As a result, the Company has reduced the
net operating losses.





The
Company adopted ASC Topic 740, Income Taxeson January 1,
2007.  As a result of the implementation of ASC 740, the Company
recognized no adjustment in the liability for unrecognized income tax benefits
and no corresponding change in retained earnings. During 2008, the Company
recognized $1,839,000 of unrecognized tax benefits previously established in
2007.  Accordingly, there were no unrecognized tax benefits as of December
31, 2008. The Company has no unrecognized tax benefit liabilities for the year
ended December 31, 2009.  The Company does not have any material
accrued interest or penalties associated with any unrecognized tax benefits. The
Company does not believe it is reasonably possible that the unrecognized tax
benefits will significantly change within the next twelve months.





The
Company is subject to taxation in the U.S. and various state and foreign
jurisdictions.  The Company’s tax years 2001-2009 will remain open for
three years for examination by the Internal Revenue Service from the date the
federal corporation tax returns were filed. The Company’s tax years 2000-2009
will remain open for all tax years with loss carryovers for examination by state
tax authorities. Net operating losses deducted are subject to review and
adjustment for three to four years after the net operating losses are deducted
on the U.S. and state returns filed.





14.
Loss per Share




The
following is a reconciliation of net loss to net loss attributable to common
stockholders:





2009
                      
                      
                      2008Net
      loss - basic and diluted
                      
                      $
                      (5,461,763
                      )
                      
                      $
                      (30,273,805
                      )Preferred
      stock deemed dividend
                      
                      
                      (5,066,702
                      )
                      
                      
                      -Preferred
      stock dividend
                      
                      
                      (192,100
                      )
                      
                      
                      -Net
      loss attributable to common stockholders - basic
                      
                      $
                      (10,720,565
                      )
                      
                      $
                      (30,273,805
                      )Weighted-average
      number of common shares - basic and diluted
                      
                      
                      12,693,648
                      
                      
                      
                      12,550,872Net
      loss per share attributable to common stockholders - basic and
      diluted
                      
                      $
                      (0.84
                      )
                      
                      $
                      (2.41
                      )




87




MERRIMAN
CURHAN FORD GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




14.
Loss per Share - (continued)





Basic
loss per share is computed by dividing net loss by the weighted-average number
of common shares outstanding, excluding unvested restricted stock. Diluted
earnings per share is calculated by dividing net income by the weighted-average
number of common shares used in the basic earnings per share calculation plus
the number of common shares that would be issued assuming exercise or conversion
of all potentially dilutive common shares outstanding. Diluted loss per share is
unchanged from basic loss per share for 2009 and 2008 because the addition of
common shares that would be issued, assuming exercise or conversion, would be
anti-dilutive.




The
Company excludes all potentially dilutive securities from its diluted net loss
per share computation when their effect would be anti-dilutive. The following
common stock equivalents were excluded from the earnings per share computation,
as their inclusion would have been anti-dilutive:





2009
                        
                        
                        2008Stock
      options and warrants excluded due to the exercise price exceeding the
      average fair value of the Company's common stock during the
      period
                        
                        
                        3,706,613
                        
                        
                        
                        1,354,525Weighted-average
      restricted stock, stock options and stock warrants, calculated using
      the treasury stock method, that were excluded due to the Company
      reporting a net loss during the period
                        
                        
                        1,223,722
                        
                        
                        
                        170,665Weighted-average
      shares issuable upon conversion of the Convertible Preferred
      stock, Series D
                        
                        
                        7,429,078
                        
                        
                        
                        -Weighted-average
      shares issuable upon conversion of the convertible notes
      payable
                        
                        
                        348,627
                        
                        
                        
                        46,576Total
      common stock equivalents excluded from diluted net income (loss) per
      share
                        
                        
                        12,708,040
                        
                        
                        
                        1,571,766




88




MERRIMAN
CURHAN FORD GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





15.
Commitments and Contingencies




The
following is a table summarizing significant commitments as of December 31,
2009, consisting of operating commitments, future minimum lease payments under
all non-cancelable operating leases and capital leases with initial or remaining
terms in excess of one year.





Operating
                      
                      
                      Operating
                      
                      
                      CapitalCommitments
                      
                      
                      Leases
                      
                      
                      Leases2010
                      
                      $
                      632,424
                      
                      
                      $
                      1,696,102
                      
                      
                      $
                      268,8532011
                      
                      
                      312,846
                      
                      
                      
                      1,616,545
                      
                      
                      
                      146,6472012
                      
                      
                      100,080
                      
                      
                      
                      1,096,230
                      
                      
                      
                      -2013
                      
                      
                      -
                      
                      
                      
                      616,000
                      
                      
                      
                      -2014
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Thereafter
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      commitments
                      
                      
                      1,045,350
                      
                      
                      
                      5,024,877
                      
                      
                      
                      415,500Interest
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (17,542
                      )Net
      commitments
                      
                      $
                      1,045,350
                      
                      
                      $
                      5,024,877
                      
                      
                      $
                      397,958




The
Company leases its San Francisco corporate office under a non-cancelable
operating lease which expires in August 2011. Future annual minimum lease
payments related to its various operating leases are included in the table
above. Rent expense was approximately $1,478,000 in 2009, net of $323,000 in
sublease rent received, and $1,587,000 in 2008, net of $81,000 in sublease rent
received.





During
2009, the Company exited businesses and closed two of its broker-dealer
offices.  The Company exited its primary research business when it
sold the assets of its subsidiary Panel, and discontinued MCF Asset
Management.  The Company subleased its Cambridge office to the buyers
of Panel Intelligence and subleased the office space in San Francisco,
previously occupied by MCF Asset Management, to a third party.  The
Cambridge lease and sublease expire in July 2012 while the San Francisco lease
and sublease expire in December 2011.





The
Company closed its offices in Portland, Oregon and Newport Beach, California
during 2008 and 2009 and subleased the spaces to third parties.  The
sublease agreements were structured to terminate concurrently with the leases,
for Portland in July 2009 and for Newport Beach in October 2009.





In
connection with its underwriting activities, the Company enters into firm
commitments for the purchase of securities in return for a fee.  These
commitments require it to purchase securities at a specified price. Securities
underwriting exposes the Company to market and credit risk, primarily in the
event that, for any reason, securities purchased by the Company cannot be
distributed at anticipated price levels.  As December 31, 2009 and
2008, the Company had no open underwriting commitments.





The
marketable securities owned and the restricted cash as well as the cash held by
the clearing broker may be used to maintain margin requirements.  At
December 31, 2009 and 2008, the Company had $250,000 of cash on deposit with its
clearing broker.  Furthermore, the marketable securities owned may be
hypothecated or borrowed by the clearing broker.





From
time to time, the Company may obtain funds through capital leases to purchase
furniture and equipment, to replace current ones or for
expansion.  The Company did not enter into any new capital lease
agreements in 2009 or 2008.





89




MERRIMAN
CURHAN FORD GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




15.
Commitments and Contingencies - (continued)




Legal
Proceedings





Settlement with the
Securities and Exchange Commission





On
November 10, 2009, the Securities and Exchange Commission (“SEC”) issued an
Order Instituting
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and
21(c) of the Securities and Exchange Act of 1934, Making Findings and Imposing
Remedial Sanctions and a Cease-and-Desist Order as to MCF, D. Jonathan Merriman,
and Christopher Aguilar (the “Order”).  The Order was issued in
connection with the conduct of a former broker of the Company, David Scott
Cacchione (“Cacchione”), from approximately March 2006 to April 2008 for
violation of the anti-fraud provisions of the federal securities
laws.  Cacchione was fired in May 2008, shortly after the underlying
facts became known.





The Order
censures and imposes sanctions for the failure of MCF to reasonably supervise
Cacchione with a view toward preventing future violations arising out of his
disseminating confidential customer information to third parties and executing
unauthorized orders for certain customers.  Pursuant to the Order, MCF
paid a penalty of $100,000 and will hire an Independent Consultant to review and
make recommendations as needed to MCF’s written policies and procedures relating
to the supervision of registered representatives.





The Order
also imposes sanctions on Jon Merriman, MCF’s former CEO and current CEO of
Merriman Curhan Ford Group, Inc., the Company’s parent, and Christopher Aguilar,
MCF’s former Chief Compliance Officer, for failure to adequately supervise
Cacchione.  Pursuant to the Order, Jon Merriman paid a penalty of
$75,000 and Chris Aguilar must pay a penalty of $40,000.  Both
individuals are also suspended from acting in a supervisory capacity for any
broker or dealer for a period of twelve months from the date of the
Order.





The Order
makes no finding or allegation of any fraudulent activity involving anyone in
MCF other than Cacchione.  MCF, Mr. Merriman, and Mr. Aguilar
cooperated fully with the SEC’s investigation and consented to the SEC’s Order
without admitting or denying the findings.





Del Biaggio/Cacchione
Matters





A number
of lawsuits has been filed against MCF in connection with the actions of William
Del Biaggio III (“Del Biaggio”), a former customer of MCF and Cacchione, a
former retail broker of MCF.  Del Biaggio and Cacchione pleaded guilty
to securities fraud and were sentenced to prison terms of 97 and 60 months,
respectively.





The
claims filed against the Company by DGB Investments, 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 in an aggregate amount of $43,577,000 related to the fraud were
settled as of September 8, 2009.  The amount for which the claims were
settled was $4,300,000, the issuance of five-year warrants to buy 1,538,461
shares of the Company’s common stock at $0.65 per share, and the assignment of
certain rights to collect potential insurance payments from the Company’s
insurers.





There are
additional lawsuits related to the fraud that the Company has elected not to
settle.  It intends to defend vigorously each case, other than matters
described as having been settled.  Although there can be no
assurance as to the ultimate outcome, the Company generally believes it has
meritorious defenses and denies liability in all litigation pending against it,
including the matters described below.  In accordance with applicable
accounting guidance, the Company establishes reserves for litigation and
regulatory matters when those matters present loss contingencies which are both
probable and estimable. When loss contingencies are not both probable and
estimable, the Company does not establish reserves. In the matters described
below, loss contingencies are not both probable and estimable in the view of
management, and accordingly, reserves have not been established for those
matters.





90




MERRIMAN
CURHAN FORD GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




15.
Commitments and Contingencies - (continued)





Don
Arata, et al. v. Merriman Curhan Ford & Co.





In July
2008, MCF and the Company were served with a complaint filed in the San
Francisco County, California Superior Court by several plaintiffs who invested
money with Del Biaggio and related entities.  In March 2009, MCF and the
Company were served with an amended consolidated complaint on behalf of 39
plaintiffs which consolidated several similar pending actions filed by the same
law firm.  Plaintiffs allege, among other things, fraud based on
Cacchione’s alleged assistance to Del Biaggio in connection with the allegedly
fraudulent investments and MCF’s failure to discover and stop the continuing
fraud.   Plaintiffs in this lawsuit seek damages of over $9
million.  MCF and the Company responded to the amended consolidated
complaint in June 2009 denying all liability.  MCF and the Company
believe that they have meritorious defenses and intend to contest these claims
vigorously.  (The previously disclosed Davis, Cook, and Bachelor cases
now are part of the consolidated cases.)





David
Hengehold v. Merriman Curhan Ford & Co.





In June
2008, the Company and MCF were served with a complaint filed in San Mateo
County, California Superior Court by David Hengehold. Plaintiff alleges fraud
based on Cacchione having induced plaintiff into making loans to Del Biaggio.
Plaintiff in this lawsuit seeks damages of over $500,000. The Company
believes it has meritorious defenses and intends to contest this claim
vigorously.





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,
and is continuing to follow up that demand.  The Company believes that
MCF has little or no remaining exposure in this matter, and intends to
contest this claim vigorously.





The
Private Bank of the Peninsula v. Merriman Curhan Ford & Co.





In July
2008, MCF was served with a complaint filed in the Santa Clara County Superior
Court by The Private Bank of the Peninsula.  Plaintiff alleges, among other
things, fraud based on Cacchione having induced plaintiff into making loans to
Del Biaggio.  Plaintiff in this lawsuit alleges damages of
$916,666.65.  The Company believe that MCF has meritorious defenses and
intends to contest this claim vigorously.





Pacific
Capital Bank v. Merriman Curhan Ford & Co.





In
October 2008, MCF was served with a complaint filed in the San Francisco County
Superior Court by Pacific Capital Bank.  Plaintiff alleges, among other
things, fraud based on Cacchione having induced plaintiff into making loans to
Del Biaggio.  Plaintiff in this lawsuit alleges damages of $1.84
million.  The Company believes that MCF has meritorious defenses and
intends to contest this claim vigorously.





91




MERRIMAN
CURHAN FORD GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




15.
Commitments and Contingencies - (continued)





Gary
Thornhill, et al. v. Merriman Curhan Ford & Co.




In May
2009, a complaint was filed in the San Francisco County Superior Court by Gary
Thornhill and several related family members and entities, naming as defendants
the Company and MCF.  The complaint alleges, , among other things,
fraud based on Cacchione’s alleged assistance to Del Biaggio in connection with
the allegedly fraudulent investments and MCF’s failure to discover and stop the
continuing fraud.  Plaintiffs in this lawsuit seek damages of
$230,000.  The Company believes that it and MCF have meritorious defenses
and intends to contest these claims vigorously. (This case was consolidated
with the Arata case disclosed above on February 5, 2010. See Note 21,
“Subsequent Events.”)





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





In early
2009, MCF and D. Jonathan Merriman were served with a FINRA arbitration claim
filed by Irving Bronstein and several related family members and entities. 
Claimants allege, among other things, that MCF benefited from the sale of a
particular security it held at the expense of its customers, including the
claimants, and fraud based on Cacchione’s alleged assistance to Del Biaggio in
connection with allegedly fraudulent investments and MCF’s failure to discover
and stop the fraud.  This case was settled on March 1, 2010. (See Note 21,
“Subsequent
Events”).





John
Zarich v. Merriman Curhan Ford & Co.





In or
around April 2009, John Zarich filed an arbitration claim with FINRA naming
MCF.   The statement of claim alleges that Zarich was convinced
by Cacchione to purchase shares of a small, risky stock in which MCF held a
position.  It further alleges that Cacchione convinced Zarich not to
sell the shares when the stock’s price fell.  The statement seeks
$265,000 in compensatory damages plus punitive damages of $200,000 and 10%
interest beginning January 2, 2008.   The Company believes that
MCF has meritorious defenses and intends to contest this claim
vigorously.





Demand
by Shelly Schaffer to Merriman Curhan Ford & Co. for Payment of Attorneys’
Fees





On April
24, 2009, former Vice President of Client Services, Shelly Schaffer, through her
attorney, Robert Shartsis, made a written demand for payment of attorneys’ fees
for Ms. Schaffer’s defense in a civil action by the Securities and Exchange
Commission.  Ms. Schaffer, who was hired by MCF on May 25, 2006,
retained Mr. Shartsis to respond to an SEC Enforcement action in which it is
alleged that Ms. Schaffer violated the antifraud provisions of federal
securities laws and applicable regulations.  Ms. Schaffer worked for
Cacchione prior to their coming to MCF.  MCF has denied Ms. Schaffer’s
requests for payment of her attorneys’ fees on the grounds that the accusations
against her concern activities outside the course and scope of her employment at
MCF.  Ms. Schaffer’s attorneys are claiming payment of their fees from
MCF in a total amount of approximately $150,000.  The Company believes
that MCF has meritorious defenses and intends to contest the claims
vigorously.





92




MERRIMAN
CURHAN FORD GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




15.
Commitments and Contingencies - (continued)





Other
Litigation





There
have been a number of legal cases that are unrelated to the Del
Biaggio/Cacchione matters. These are as follows:





Spare
Backup Inc. v. Merriman Curhan Ford & Co.





In April
2008, MCF entered into an engagement to provide investment banking services to
Spare Backup, Inc. (“Spare Backup”) MCF was able to close a round of bridge
financing in June 2008. MCF was successful in raising $1,300,000 in capital for
Spare Backup. As a result of closing the financing transaction, MCF was entitled
to reimbursement of its expenses, a convertible note with principal valued at
$161,100 and 370,370 shares of Spare Backup common stock. As of November 2008,
these transaction fees had not been paid to MCF. MCF hired counsel to seek
payment of the fees and to proceed to arbitration, as is specified in the
engagement letter. In January 2009, MCF filed a petition to compel arbitration
in the San Francisco County Superior Court. In response to the petition to
compel arbitration, Spare Backup filed a complaint in the Riverside County
Superior Court, Indio Branch, for fraud and declaratory relief alleging that MCF
fraudulently induced it to execute the investment banking engagement letter. The
petition for arbitration was granted and in May of 2009 and the Indio action was
stayed for all purposes pending the outcome of arbitration. The arbitration date
has been set for March 22, 2010.





Joy
Ann Fell v. Merriman Curhan Ford & Co.





In
November 2008, MCF received a demand letter from a former employee, Joy Ann
Fell. In January 2009, MCF received a claim filed by Ms. Fell in FINRA
arbitration. Ms. Fell worked in MCF’s investment banking department and was
terminated in October of 2008, as part of a reduction in force. Ms. Fell alleges
claims of breach of an implied employment contract, emotional distress and
work-place discrimination. The demand for money damages is approximately
$350,000. The Company believes that MCF has meritorious defenses and intends to
contest this claim vigorously. MCF has responded to the claim and the parties
have propounded, but not responded to, written discovery. The parties and FINRA
have jointly selected an arbitration panel of three New York-based
arbitrators:  Aaron Tyk, Caryl D. Feldman, and Beth Bird
Pocker.





Wesley
Rusch v. Merriman Curhan Ford & Co.





In
October 2008, MCF was served with a claim in FINRA Arbitration by Wesley Rusch.
Mr. Rusch is a former at-will employee of MCF and worked in the compliance
department. Mr. Rusch was terminated by MCF in July 2007. Mr. Rusch
alleges theories of discrimination and lack of cause for
termination.  Mr. Rusch filed a Statement of Claim seeking damages of
over $1 million.  The Company contested this claim at the arbitration
before a FINRA arbitration panel in March 2009 which resulted in a decision
in its favor in July 2009.  Mr. Rusch requested that the San
Francisco Superior Court vacate the decision, and the Company requested that it
be confirmed.





Peter
Marcil v. Merriman Curhan Ford & Co.





In
January 2009, MCF was served with a claim in FINRA Arbitration by Peter Marcil.
Mr. Marcil is a former at-will employee of MCF and worked in the investment
banking department. Mr. Marcil resigned from MCF in March of 2007.
Mr. Marcil alleges breach of an implied employment contract, wrongful
termination, and intentional infliction of emotional distress. Damages are not
specified in the arbitration claim. MCF has not replied to the claim and an
arbitration hearing date has not been set. The parties participated in mediation
with San Francisco Attorney/Mediator Mark Rudy on September 14, 2009 and agreed
to continue settlement negotiations. The Company believes that MCF has
meritorious defenses and intends to contest this claim vigorously. However, in
the event that MCF does not prevail, based upon the facts known to date, it does
not believe that the outcome will have a material effect on its financial
position, financial results or cash flows.





93




MERRIMAN
CURHAN FORD GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




15.
Commitments and Contingencies - (continued)





Dow
Corning Corporation vs. Merriman Curhan Ford & Co.





In late
July and early August 2009, counsel for Dow Corning Corporation (DCC) indicated
in correspondence and communications that DCC may have some type of claim
against MCF in connection with its purchases of auction rate securities through
MCF’s ICD Division. Counsel would not furnish any specifics about the purported
claim or any purported damages, but requested an agreement tolling any
applicable statute of limitations to allow the parties to undertake “settlement
discussions.” MCF, Institutional Cash Distributors, LLC and certain
representatives of MCF’s ICD Division entered into such a tolling agreement with
DCC for a period of 60 days, which was extended for a further 60
days.  MCF’s ICD Division has refused to extend the tolling agreement
further. No claim has been filed.  Accordingly, MCF is not aware
of the basis of any purported claim.





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





On
January 14, 2009, MCF and the Company (collectively “MCF”) filed a civil action
in the Superior Court for Los Angeles County (the “Coverage Lawsuit”) against
its directors’ and officers’ liability insurer, XL Specialty Insurance Company
(XL Specialty). In the Coverage Lawsuit, MCF had asserted claims for breach of
contract, tortious breach of contract, and declaratory relief, alleging that XL
Specialty wrongfully denied coverage for various ongoing third-party claims and
government investigations. This case was settled on February 12,
2010.  (Please see Subsequent Events.)





Midsummer
Investment, Ltd., v. Merriman Curhan Ford Group, Inc.





On
November 6, 2009, Midsummer Investment, Ltd. (“Midsummer”) filed a complaint in
federal court, Southern District of New York, alleging that Midsummer
was denied an anti-dilution adjustment to a warrant issued by the Company
to them, and that the Company refused to honor an exercise of that
warrant.  The Company believes that Midsummer is not entitled to any
anti-dilution adjustment and its attempted exercise was not accompanied by
proper payment.  The Company believes that it has meritorious defenses and
intends to contest this claim vigorously.





The
Company and MCF deny any liability and are vigorously contesting these lawsuits
and arbitrations. At this point, the Company cannot estimate the amount of
damages if they are resolved unfavorably or does not believe that the cases will
result in unfavorable outcomes and accordingly, management has not provided an
accrual for these lawsuits and arbitrations.





Based on
the facts presently known, the Company does not believe the outcome of these
proceedings will have a material adverse effect on its financial
condition.





Additionally,
from time to time, we are involved in ordinary routine litigation incidental to
our business.





The
expenses incurred by the Company in 2009 for legal services and litigation
settlements amounted to $7,777,000.





94




MERRIMAN
CURHAN FORD GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




16.
Financial Instruments, Off-Balance Sheet Arrangements and Credit
Risk




Financial
Instruments




The
Company’s broker-dealer entity trades securities that are primarily traded in
United States markets. As of December 31, 2009 and 2008, the Company had not
entered into any transactions involving financial instruments, such as financial
futures, forward contracts, options, swaps or derivatives that would expose the
Company to significant related off-balance-sheet risk.




In
addition, the Company, from time to time, has sold securities it does not
currently own in anticipation of a decline in the fair value of that security
(securities sold, not yet purchased). When the Company sells a security short
and borrows the security to make a delivery, a gain, limited to the price at
which the Company sold the security short, or a loss, unlimited in size, is
realized as the fair value of the underlying security decreases or increases,
respectively.




Market
risk is primarily caused by movements in market prices of the Company’s trading
and investment account securities. The Company’s trading securities and
investments are also subject to interest rate volatility and possible
illiquidity in markets in which the Company trades or invests. The Company seeks
to control market risk through monitoring procedures. The Company’s principal
transactions are primarily long and short equity transactions.




Off-Balance Sheet
Arrangements





The
Company was not a party to any off-balance sheet arrangements during the two
years ended December 31, 2009. In particular, the Company does not have any
interest in so-called limited purpose entities, which include special purpose
entities and structured finance entities.





Credit
Risk





The
Company’s broker-dealer subsidiary functions as an introducing broker that
places and executes customer orders. The orders are then settled by an unrelated
clearing organization that maintains custody of customers’ securities and
provides financing to customers. Through indemnification provisions in
agreements with clearing organizations, customer activities may expose the
Company to off-balance-sheet credit risk. Financial instruments may have to be
purchased or sold at prevailing market prices in the event a customer fails to
settle a trade on its original terms or in the event cash and securities in
customer margin accounts are not sufficient to fully cover customer obligations.
The Company seeks to control the risks associated with customer activities
through customer screening and selection procedures, as well as through
requirements on customers to maintain margin collateral in compliance with
various regulations and clearing organization policies.





The
Company is also exposed to credit risk as it relates to the collection of
receivables from third parties, including lead managers in underwriting
transactions and the Company’s corporate clients related to private placements
of securities and financial advisory services.





95




MERRIMAN
CURHAN FORD GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




17. Reductions in
Force





On
January 23, 2009, the Company performed a reduction in force (“RIF”) affecting
10 employees.  There were one-time termination benefits of
$41,000.  There was no disposal of assets or contract terminations
associated with the RIF.





The
Company performed two RIFs in 2008 – one on August 6, 2008 and one on October
15, 2008.  The August RIF affected 25 employees and the October RIF
affected 16 employees.  The one-time termination benefits expensed by
the Company for the RIFs were $216,000 and $170,000 for August and October,
respectively, which have been reported under compensation and benefits in the
consolidated statements of operations.  In addition, the October RIF
had associated contract termination costs related to the lease of office
space.  That cost was an additional $56,000 in expense which has been
reported under occupancy and equipment in the Consolidated Statements of
Operations.  There were no assets disposed of or any other expenses
incurred.  These expenses were recorded in the third and fourth
quarters of 2008.





18.
Regulatory Requirements




MCF is a
broker-dealer subject to Rule 15c3-1 of the Securities Exchange Act of 1934,
which specifies uniform minimum net capital requirements, as defined, for their
registrants. As of December 31, 2009, MCF had regulatory net capital, as
defined, of $2,685,000, which exceeded the amount required by $2,369,000. MCF is
exempt from Rules 15c3-3 and 17a-13 under the Securities Exchange Act of 1934
because it does not carry customer accounts, nor does it hold customer
securities or cash.





19.
Related Party Transactions




Unsecured
Promissory Notes





On
June 30, 2009, the Company issued $300,000 in unsecured promissory notes to
three of its employees at an interest rate of 3.25%.  The maturity
date of the notes was October 31, 2009, although they were repayable earlier on
the occurrence of certain events. These notes were paid in full in cash during
September 2009.





Unsecured
Debt





On July 29, 2009, Mr. Jonathan
Merriman, the Company’s CEO, and Mr. Brock Ganeles, MCF’s Head of Brokerage,
made short-term loans to the Company in the amounts of $200,000 and $300,000,
respectively.  Mr. Merriman’s loan was repaid on August 5,
2009.  Mr. Merriman forgave the interest on his loan.  Mr.
Ganeles’ loan was repaid on August 20, 2009.  The Company paid Mr.
Ganeles interest in the amount of $9,403.





Bridge
Note





On July
31, 2009, the Company issued Mr. Ronald L. Chez, the lead investor in the Series
D Transaction, a Secured Promissory Note in the amount of $500,000 at an annual
interest rate of 9.00%.  The term of the Note was three years,
redeemable by Mr. Chez upon presentation of written demand.  The Note
was guaranteed personally by Messrs. Jonathan Merriman (CEO) and Peter Coleman
(CFO).  The Company issued 10-year warrants to purchase 1,162,791
shares of the Company’s common stock at $0.65 per share to Mr. Chez in
connection with this transaction.  Identical warrants were issued to
purchase 581,395 shares of the Company’s common stock each to Messrs. Merriman
and Coleman for the guarantee. The Bridge Note was converted into the Series D
Convertible Preferred Stock on September 8, 2009.  Subsequent to the
Series D Transaction, Mr. Chez has joined the Company’s Board of
Directors.




96





MERRIMAN
CURHAN FORD GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





19.
Related Party Transactions - (continued)





Series
D Convertible Preferred Stock





Three
of investors in the Series D Convertible Preferred Stock transaction, Messrs.
Andrew Arno, Douglas Bergeron, and Ronald Chez, have since joined the Company’s
Board of Directors.  In addition, the Company’s CEO and CFO, along
with 11 other executives and senior managers of MCF, were also investors in the
Series D Convertible Preferred Stock transaction.  Finally, all five
members of the Company’s Board of Directors prior to the transaction were
investors in the Series D Convertible Preferred Stock transaction.





Secured
Demand Note





On August
12, 2009, the Company obtained a Temporary Secured Demand Note (“Demand Note”)
in the amount of $1,329,000 from the D. Jonathan Merriman Living Trust as a
subordinated loan.  The trustee of the Trust, D. Jonathan Merriman, is
also the Chief Executive Officer of the Company.  The Demand Note was
collateralized by securities held in a brokerage account held at a third party
by the Trust.  The Demand Note was repaid on September 23, 2009 and
the securities were transferred back to the Trust.  The Company
compensated the Trust with total interest and fees in the amount of $179,000,
the majority of which was reinvested in the Series D Convertible Preferred Stock
transaction.





Strategic
Advisory Committee





The
Company formed a Strategic Advisory Committee of the Board of Directors chaired
by Mr. Ronald Chez, the lead investor in the Series D Convertible Preferred
Stock strategic transaction. During the first year, the Chair of the Committee
will be compensated with warrants to purchase 300,000 shares the Company’s
common stock at $0.65, to be issued pro rata on a monthly basis. As of December
31, 2009, 93,333 warrants were issued to Mr. Chez in connection with his service
on the Committee. To date, Mr. Chez is the sole member of the Committee. No
other compensation arrangement for service on the Committee has been made. Mr.
Chez receives no additional compensation for his service on the Board of
Directors.





From time
to time, officers, directors, employees and/or certain large stockholders of the
Company may invest in private placements which the Company arranges and for
which the Company charges investment banking fees.




20.
Quarterly Financial Data (Unaudited)




The table
below sets forth the operating results represented by certain items in the
Company’s Consolidated Statements of Operations for each of the eight quarters
in the two years ended December 31, 2009. This information is unaudited, but in
the Company’s opinion, reflects all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of such information in accordance with generally accepted
accounting principles. The results for any quarter are not necessarily
indicative of results for any future period.





97




MERRIMAN
CURHAN FORD GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




20. Quarterly
Financial Data (Unaudited) - (continued)





20091st
                
                
                2nd
                
                
                3rd
                
                
                4thRevenue
                
                $
                10,050,622
                
                
                $
                12,432,278
                
                
                $
                13,308,394
                
                
                $
                13,471,748Operating
      expenses
                
                
                13,067,520
                
                
                
                13,767,255
                
                
                
                19,199,330
                
                
                
                16,808,290Operating
      loss from continuing operations
                
                
                (3,016,899
                )
                
                
                (1,334,977
                )
                
                
                (5,890,936
                )
                
                
                (3,336,541
                )(Loss)
      income from continuing operations
                
                
                (1,828,992
                )
                
                
                (562,740
                )
                
                
                (16,568,645
                )
                
                
                13,593,508Loss
      from discontinued operations
                
                
                (94,894
                )
                
                
                -
                
                
                
                -
                
                
                
                -Net
      (loss) income
                
                $
                (1,923,886
                )
                
                $
                (562,740
                )
                
                $
                (16,568,645
                )
                
                $
                13,593,508Net
      (loss) income attributable to common shareholders
                
                $
                (1,923,886
                )
                
                $
                (562,740
                )
                
                $
                (21,674,447
                )
                
                $
                13,440,508Basic
      net (loss) income per share:(Loss)
      income from continuing operations
                
                $
                (0.14
                )
                
                $
                (0.04
                )
                
                $
                (1.31
                )
                
                $
                1.07Loss
      from discontinued operations
                
                
                (0.01
                )
                
                
                -
                
                
                
                -
                
                
                
                -Net
      (loss) income per share
                
                $
                (0.15
                )
                
                $
                (0.04
                )
                
                $
                (1.31
                )
                
                $
                1.07Diluted
      net (loss) income per share:(Loss)
      income from continuing operations
                
                $
                (0.14
                )
                
                $
                (0.04
                )
                
                $
                (1.31
                )
                
                $
                0.27Loss
      from discontinued operations
                
                
                (0.01
                )
                
                
                -
                
                
                
                -
                
                
                
                -Net
      (loss) income per share
                
                $
                (0.15
                )
                
                $
                (0.04
                )
                
                $
                (1.31
                )
                
                $
                0.27Net
      income (loss) attributable to common shareholders
                
                $
                (0.15
                )
                
                $
                (0.04
                )
                
                $
                (1.71
                )
                
                $
                1.06




98




MERRIMAN
CURHAN FORD GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





20. Quarterly
Financial Data (Unaudited) - (continued)




20081st
                      
                      
                      2nd
                      
                      
                      3rd
                      
                      
                      4thRevenue
                      
                      $
                      10,211,455
                      
                      
                      $
                      14,197,041
                      
                      
                      $
                      4,494,943
                      
                      
                      $
                      7,664,397Operating
      expenses
                      
                      
                      16,983,595
                      
                      
                      
                      18,180,284
                      
                      
                      
                      15,785,800
                      
                      
                      
                      12,029,745Operating
      loss from continuing operations
                      
                      
                      (6,772,140
                      )
                      
                      
                      (3,983,243
                      )
                      
                      
                      (11,290,857
                      )
                      
                      
                      (4,365,348
                      )Loss
      from continuing operations
                      
                      
                      (6,693,504
                      )
                      
                      
                      (2,126,098
                      )
                      
                      
                      (11,313,824
                      )
                      
                      
                      (4,339,302
                      )Loss
      from discontinued operations
                      
                      
                      (356,469
                      )
                      
                      
                      (2,987,748
                      )
                      
                      
                      (409,513
                      )
                      
                      
                      (2,047,347
                      )Net
      loss
                      
                      $
                      (7,049,973
                      )
                      
                      $
                      (5,113,846
                      )
                      
                      $
                      (11,723,337
                      )
                      
                      $
                      (6,386,649
                      )Basic
      net loss per share:Loss
      from continuing operations
                      
                      $
                      (0.54
                      )
                      
                      $
                      (0.17
                      )
                      
                      $
                      (0.90
                      )
                      
                      $
                      (0.34
                      )Loss
      from discontinued operations
                      
                      
                      (0.03
                      )
                      
                      
                      (0.24
                      )
                      
                      
                      (0.03
                      )
                      
                      
                      (0.16
                      )Net
      loss
                      
                      $
                      (0.57
                      )
                      
                      $
                      (0.41
                      )
                      
                      $
                      (0.93
                      )
                      
                      $
                      (0.50
                      )Diluted
      net loss per share:Loss
      from continuing operations
                      
                      $
                      (0.54
                      )
                      
                      $
                      (0.17
                      )
                      
                      $
                      (0.90
                      )
                      
                      $
                      (0.34
                      )Loss
      from discontinued operations
                      
                      
                      (0.03
                      )
                      
                      
                      (0.24
                      )
                      
                      
                      (0.03
                      )
                      
                      
                      (0.16
                      )Net
      loss
                      
                      $
                      (0.57
                      )
                      
                      $
                      (0.41
                      )
                      
                      $
                      (0.93
                      )
                      
                      $
                      (0.50
                      )




21.
Subsequent Events





Under ASC
Topic 855, Subsequent
Events, the Company has evaluated all subsequent events through the date
these consolidated financial statements were filed with the SEC. The Company
determined the following to be material subsequent events that require
disclosure.





Temporary
Subordinated Loan





On January 20, 2010, the Company
borrowed $11,000,000 from DGB Investment, Inc. and the Bergeron Family Trust,
both controlled by Douglas G. Bergeron, a member of the Company’s Board of
Directors. The loan was in the form of a temporary subordinated loan to
supplement the Company’s net capital and enabled it to underwrite an initial
public offering, in accordance with Rule 15c3-1 of the Securities Exchange Act
of 1934.  The Company compensated Mr. Bergeron $731,000 in fees for
the loan.





99




MERRIMAN
CURHAN FORD GROUP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




21.
Subsequent Events - (continued)





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 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 has accrued for the $325,000 liability that was paid out as warrants
subsequent to year end.





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.





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 December 31, 2009, for this matter.





Gary
Thornhill, et al. v. Merriman Curhan Ford & Co.





On
February 5, 2010, the Thornhill case was consolidated with the Arata case,
disclosed in Note 15.




100




Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure




The
financial statements included in this report have been audited by Burr Pilger
Mayer, Inc. (“BPM”), an independent registered public accounting firm, as stated
in its audit report appearing herein.





On August
25, 2009, the Company’s Audit Committee and Board of Directors appointed BPM and
dismissed Ernst & Young LLP (“E&Y”) as its independent registered public
accounting firm.




During
the year ended December 31, 2009 and through the date of this Annual Report on
Form 10-K, there were no disagreements with BPM or E&Y on any matter of
accounting principle or practice, financial statement disclosure, or auditing
scope or procedure which, if not resolved to BPM or E&Y’s satisfaction,
would have caused them to make reference to the subject matter in connection
with their report on the Company’s consolidated financial statements; and there
were no reportable events as set forth in applicable SEC
regulations.




Item
9a. Controls and Procedures




Evaluation of Disclosure Controls
and Procedures - We have established disclosure controls and procedures
to ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to the officers who certify the
Company’s financial reports and to other members of senior management and the
Board of Directors.




Based on
their evaluation as of December 31, 2009, the principal executive officer and
principal financial officer of the Company have concluded that the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) are effective.




Management’s Report on Internal
Control Over Financial Reporting - Our management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework inInternal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the
framework inInternal
Control—Integrated Framework, our management concluded that our internal
control over financial reporting was effective as of December 31,
2009.




Changes in Internal Controls
- No change in the Company’s internal control over financial reporting (as
defined in Rules 13a-15(d) and 15d-15(d) of the Exchange Act) occurred during
the quarter ended December 31, 2009, that materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.





101




Item
9b. Other Information




The
annual meeting of our stockholders was held on November 24, 2009. At the annual
meeting, our stockholders voted on the matters shown in the table below. Only
the Series D Preferred stock was entitled to vote with respect to the elections
of Messrs. Arno, Bergeron and Chez.  Only the common stock was
entitled to vote with respect to the other director elections.  Both
classes voted together as a single class with respect to proposals 2 and
3.  Each director was elected, and each proposal adopted, by the votes
shown.





Votes
                          
                          
                          Votes
                          
                          
                          Votes
                          
                          BrokerFor
                          
                          
                          Against
                          
                          
                          Abstained
                          
                          Non-Votes1.
                          Election
      of Directors:John
      M. Thompson
                          
                          
                          7,099,545
                          
                          
                          
                          -
                          
                          
                          
                          474,094
                          
                          Not applicableD.
      Jonathan Merriman
                          
                          
                          7,028,547
                          
                          
                          
                          -
                          
                          
                          
                          545,092
                          
                          Not
      applicableDennis
      G. Schmal
                          
                          
                          7,091,336
                          
                          
                          
                          -
                          
                          
                          
                          482,303
                          
                          Not
      applicableWilliam
      J. Febbo
                          
                          
                          7,080,421
                          
                          
                          
                          -
                          
                          
                          
                          493,218
                          
                          Not
      applicableJeffrey
      M. Soinski
                          
                          
                          7,109,411
                          
                          
                          
                          -
                          
                          
                          
                          464,228
                          
                          Not
      applicableAndrew
      Arno
                          
                          
                          16,162,993
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          Not
      applicableDouglas
      G. Bergeron
                          
                          
                          16,162,993
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          Not
      applicableRonald
      L. Chez
                          
                          
                          16,162,993
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          Not
      applicable2.
                          Adoption
      of the 2009 Stock Incentive Plan
                          
                          
                          18,915,215
                          
                          
                          
                          370,511
                          
                          
                          
                          3,431
                          
                          4,447,4753.
                          Ratification
      of the selection of independent registered public accounting firm for
      fiscal year 2009
                          
                          
                          23,370,219
                          
                          
                          
                          347,093
                          
                          
                          
                          19,320
                          
                          Not
      applicable




102




Report
of Independent Registered Public Accounting Firm




To the
Board of Directors and


Stockholders
of Merriman Curhan Ford Group, Inc.




We have
audited Merriman Curhan Ford Group, Inc.’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Merriman Curhan Ford Group, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on
the company’s internal control over financial reporting based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




In our
opinion, Merriman Curhan Ford Group, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the
consolidated statement of financial position and the related consolidated
statements of operations, stockholders’ equity, and cash flows of
Merriman Curhan Ford Group, Inc., and our report dated March
18, 2010expressed an unqualified opinion.


/s/ Burr
      Pilger Mayer, Inc.




San
Francisco, California


March 18,
2010




103




PART
III





Item
10. Directors and Executive Officers of the Registrant





The
information is incorporated by reference to the Company’s definitive 2009 Proxy
Statement.





Item
11. Executive Compensation





The
information is incorporated by reference to the Company’s definitive 2009 Proxy
Statement.





Item
12. Security Ownership of Certain Beneficial Owners and Management





The
information is incorporated by reference to the Company’s definitive 2009 Proxy
Statement.





Item
13. Certain Relationships and Related Transactions





The
information is incorporated by reference to the Company’s definitive 2009 Proxy
Statement.





Item
14. Principal Accounting Fees and Services





The
information is incorporated by reference to the Company’s definitive 2009 Proxy
Statement





104





PART
IV




Item
15. Exhibits and Financial Statement Schedules





(a)
            1.
            The
      information required by this item is included in Item 8 of Part II of this
      Annual Report on Form 10-K.





2.
            Financial
      Statement Schedules




The
required schedules are omitted because of the absence of conditions under which
they are required or because the required information is presented in the
financial statements or notes thereto.




3.
            Exhibits





The
exhibits listed in the accompanying Exhibit Index are filed or incorporated by
reference as part of this Annual Report on Form 10-K.




105





SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





Merriman
      Curhan Ford Group, Inc.March
      18, 2010
              By:
              /s/
      D. Jonathan MerrimanD.
      Jonathan Merriman,Chief
      Executive Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




Signature
              
              Title
              
              Date/s/
      D. Jonathan Merriman
              
              Chief
      Executive Officer and
              
              March
      18, 2010D.
      Jonathan Merriman
              
              Director/s/
      Peter V. Coleman
              
              Chief
      Financial Officer and
              
              March
      18, 2010Peter
      V. Coleman
              
              Principal
      Accounting Officer/s/
      John M. Thompson
              
              Chairman
      of the Board of Directors
              
              March
      18, 2010John
      M. Thompson/s/
      Andrew Arno
              
              Director
              
              March
      18, 2010Andrew
      Arno/s/
      Douglas G. Bergeron
              
              Director
              
              March
      18, 2010Douglas
      G. Bergeron/s/
      Ronald L. Chez
              
              Director
              
              March
      18, 2010Ronald
      L. Chez/s/
      William J. Febbo
              
              Director
              
              March
      18, 2010William
      J. Febbo/s/
      Dennis G. Schmal
              
              Director
              
              March
      18, 2010Dennis
      G. Schmal/s/
      Jeffrey M. Soinski
              
              Director
              
              March
      18, 2010Jeffrey
      M. Soinski




106




EXHIBIT
INDEX




Exhibit No.
              
              Description3.1
              
              Certificate
      of Incorporation, as amended (incorporated herein by reference to Exhibit
      3.1 to the Company’s Registration Statement on Form S-1 (Reg. No.
      333-37004)).3.3
              
              Amended
      and Restated Bylaws, as amended. (incorporated by reference to Exhibit
      10.3 to the Company’s Registration Statement on Form S-1 (Reg. No.
      333-53316)).3.4
              
              Certificate
      of Amendment to the Certificate of Incorporation changing name from MCF
      Corporation to Merriman Curhan Ford Group, Inc. (incorporated herein by
      reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K
      filed on May 14, 2008 (Reg. No. 001-15831).4.1
              
              Form
      of Convertible Subordinated Note related to the Company’s private
      financing, dated November 26, 2001 (incorporated by reference to Exhibit
      4.1 to the Company’s Form 10-K for the year ended December 31, 2001) (Reg.
      No. 001-15831).4.2
              
              Form
      of Class A Redeemable Warrant to Purchase Common Stock of the Company
      related to Merriman Curhan Ford Group, Inc. private financing, dated
      November 26, 2001 (incorporated by reference to Exhibit 4.2 to the
      Company’s Form 10-K for the year ended December 31, 2001) (Reg. No.
      001-15831).10.13+
              
              Employment
      Agreement between the Company and D. Jonathan Merriman dated October 5,
      2000 (incorporated herein by reference to Exhibit 10.15 to the Company’s
      Registration Statement on Form S-1 (Reg. No.
  333-53316)).10.15+
              
              1999
      Stock Option Plan (incorporated herein by reference to Exhibit 4.1 to the
      Company’s Registration Statement on Form S-8 (Reg.
      No.333-43776)).10.16+
              
              Form
      of Non-Qualified, Non-Plan Stock Option Agreement dated February 24, 2000
      between the Company and Phillip Rice, Nick Cioll, Paul Wescott, Ross
      Mayfield, Russ Matulich, Terry Ginn, Donald Sledge, Christopher Vizas,
      Douglas Cole, Ronald Spears and Jonathan Merriman (incorporated by
      reference to Exhibit 4.2 to the Company’s Registration Statement on Forms
      S-8 (Reg. No. 333-43776)).10.17+
              
              Schedule
      of non-plan option grants made under Non-Qualified, Non-Plan Stock Option
      Agreements to directors and executive officers (incorporated herein by
      reference to Exhibit 10.19 to the Company’s Registration Statement on Form
      S-1 (Reg. No. 333-53316)).10.18+
              
              2000
      Stock Option and Incentive Plan, as amended (incorporated herein by
      reference to Exhibit 10.20 to the Company’s Registration Statement on Form
      S-1 (Reg. No. 333-53316)).10.23
              
              Master
      Equipment Lease Agreement dated March 16, 2000 (incorporated by reference
      to Exhibit 10.6 to the Company’s Registration Statement on Form S-1 (Reg.
      No. 333-37004)).10.29
              
              Agreement
      between the Company and BL Partners related to RMG Partners Corporation,
      dated April 8, 2001 (incorporated by reference to Exhibit 10.1 to the
      Company’s Form 10-Q for the quarter ended June 30, 2001) (Reg. No.
      001-15831).




107




Exhibit No.
              
              Description10.30+
              
              Offer
      of Employment Agreement between the Company and Robert E. Ford, dated
      February 19, 2001, is Exhibit 10.2 to Form 10-Q for the quarter ended June
      30, 2001, and is hereby incorporated by reference (Reg. No.
      001-15831).10.31
              
              Ratexchange
      Placement Agreement with Murphy & Durieu, dated November 28, 2001, for
      private financing transaction (incorporated by reference to Exhibit 10.31
      to the Company’s Form 10-K for the year ended December 31, 2001) (Reg. No.
      001-15831).10.32
              
              Form
      of Placement Agent Warrant to Murphy & Durieu, dated November 28, 2001
      (incorporated by reference to Exhibit 10.32 to the Company’s Form 10-K for
      the year ended December 31, 2001) (Reg. No. 001-15831).10.33
              
              Convertible
      Promissory Note held by Forsythe/McArthur Associates, Inc., dated
      September 1, 2001, related to restructure of Master Equipment Lease
      Agreement that is Exhibit 10.23 to Form 10K for the year ended December
      31, 2000 (incorporated by reference to Exhibit 10.33 to the Company’s Form
      10-K for the year ended December 31, 2001) (Reg. No.
      001-15831).10.34+
              
              Employment
      Agreement between the Company and Gregory S. Curhan, dated January 9, 2002
      (incorporated by reference to Exhibit 10.34 to the Company’s Form 10-K for
      the year ended December 31, 2001) (Reg. No. 001-15831).10.35+
              
              Employment
      Agreement between the Company and Robert E. Ford, dated January 1, 2002
      (incorporated by reference to Exhibit 10.35 to the Company’s Form 10-K for
      the year ended December 31, 2001) (Reg. No. 001-15831).10.37
              
              Stock
      Purchase Agreement by and among the Company and InstreamSecurities, Inc,
      (formerly known as Spider Securities, Inc.) and Independent Advantage
      Financial & Insurance Services, Inc., dated December 7, 2001
      (incorporated by reference to Exhibit 10.37 to the Company’s Form 10-K for
      the year ended December 31, 2001) (Reg. No. 001-15831).10.38
              
              Agreement
      to Restructure Convertible Promissory Note held by Forsythe McArthur
      Associates, dated November 20, 2002 (incorporated by reference to Exhibit
      10.38 to the Company’s Form 10-K for the year ended December 31, 2001)
      (Reg. No. 001-15831).10.39
              
              Securities
      Exchange Agreement in connection with Merriman Curhan Ford Group, Inc.
      dated June 22, 2003 (incorporated by reference to Exhibit 99.1 to the
      Company’s Form 8-K filed on July 3, 2003) (Reg. No.
      001-15831).




108




Exhibit No.
                  
                  Description10.43
                  
                  Stock
      Purchase Agreement by and between the Company and Ascend Services Ltd.,
      dated April 29, 2005; together with the following documents which form
      exhibits thereto: Escrow Agreement and Registration Rights Agreement
      (incorporated by reference to the registrant’s Report on Form 10-Q for the
      quarter ended March 31, 2005) (Reg. No. 001-15831).10.44
                  
                  Promissory
      Note issued by Ascend Services Ltd dated April 29, 2005 (incorporated by
      reference to the registrant’s Report on Form 10-Q for the quarter ended
      March 31, 2005) (Reg. No. 001-15831).10.45
                  
                  Employment
      Agreement between the Company and Gregory S. Curhan, dated January 1, 2005
      (incorporated by reference to the registrant’s Report on Form 10-Q for the
      quarter ended June 30, 2005).10.46
                  
                  Employment
      Agreement between the Company and Robert E. Ford, dated January 1, 2005.
      (incorporated by reference to the registrant’s Report on Form 10-Q for the
      quarter ended June 30, 2005) (Reg. No. 001-15831).21.1
                  
                  List
      of Subsidiaries of the Company.23.1
                  
                  Consent
      of Independent Registered Public Accounting Firm.23.2
                  
                  Consent
      of Independent Registered Public Accounting
Firm.31.1
                  
                  Certification
      of Principal Executive Officer Pursuant To Section 302 of The
      Sarbanes-Oxley Act of 2002.31.2
                  
                  Certification
      of Principal Financial Officer Pursuant To Section 302 of The
      Sarbanes-Oxley Act of 2002.32.1
                  
                  Certification
      of Principal Executive Officer and Principal Financial Officer Pursuant to
      18 U.S.C. Section
1350.








+               Represents
management contract or compensatory plan or arrangement.




109