Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934.
|
For
the quarterly period ended June 30, 2006
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934.
|
For
the Transition Period from
to .
Commission
file number: 1-15831
MCF
CORPORATION
(Exact
Name of Registrant as Specified in its Charter)
Delaware
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
11-2936371
(I.R.S.
Employer
Identification
No.)
|
600
California Street, 9th Floor
San
Francisco, CA
(Address
of Principal Executive Offices)
|
|
|
(415)
248-5600
(Registrant's
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
o No x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o
|
|
Accelerated
filer x
|
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o No x
The
number of shares of Registrant's common stock outstanding as of August 7, 2006
was 73,825,316.
Form
10-Q
For
the Six Months Ended June 30, 2006
|
|
Page
No.
|
|
PART
I FINANCIAL INFORMATION
|
|
|
|
|
ITEM
1. Financial Statements (unaudited)
|
|
|
|
|
Condensed
Consolidated Statements of Operations For the Three Months and Six
Months
Ended June 30, 2006 and 2005
|
|
|
2
|
|
Condensed
Consolidated Statements of Financial Condition as of June 30, 2006
and
December 31, 2005
|
|
|
3
|
|
Condensed
Consolidated Statements of Cash Flows For the Six months Ended June
30,
2006 and 2005
|
|
|
4
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
|
5
|
|
ITEM
2. Management's Discussion and Analysis of Financial Condition and
Results
of Operations
|
|
|
16
|
|
ITEM
3. Quantitative and Qualitative Disclosures About Market
Risk
|
|
|
27
|
|
ITEM
4. Controls and Procedures
|
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27
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PART
II OTHER INFORMATION
|
|
|
|
|
ITEM
1. Legal Proceedings
|
|
|
28
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|
ITEM
1A. Risk Factors
|
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28
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|
ITEM
4. Submission of Matters to a Vote of Security Holders
|
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35
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ITEM
6. Exhibits
|
|
|
36
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Signatures
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|
|
|
|
Certifications
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|
|
|
|
Item
1. Financial Statements (unaudited)
MCF
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
2006
|
|
June
30,
2005
|
|
June
30,
2006
|
|
June
30,
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
7,945,580
|
|
$
|
7,299,732
|
|
$
|
16,643,708
|
|
$
|
13,321,695
|
|
Principal
transactions
|
|
|
(735,951
|
)
|
|
(149,592
|
)
|
|
(332,650
|
)
|
|
(522,734
|
)
|
Investment
banking
|
|
|
7,485,108
|
|
|
1,950,289
|
|
|
9,910,888
|
|
|
8,709,099
|
|
Other
|
|
|
387,422
|
|
|
190,728
|
|
|
631,414
|
|
|
256,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
15,082,159
|
|
|
9,291,157
|
|
|
26,853,360
|
|
|
21,764,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
11,896,209
|
|
|
7,166,581
|
|
|
21,826,154
|
|
|
16,368,546
|
|
Brokerage
and clearing fees
|
|
|
706,256
|
|
|
565,559
|
|
|
1,388,860
|
|
|
1,087,277
|
|
Professional
services
|
|
|
862,798
|
|
|
475,404
|
|
|
1,308,285
|
|
|
746,830
|
|
Occupancy
and equipment
|
|
|
430,135
|
|
|
383,239
|
|
|
832,148
|
|
|
733,198
|
|
Communications
and technology
|
|
|
725,027
|
|
|
442,929
|
|
|
1,335,115
|
|
|
866,353
|
|
Depreciation
and amortization
|
|
|
173,084
|
|
|
129,363
|
|
|
336,935
|
|
|
235,112
|
|
Travel
and entertainment
|
|
|
851,285
|
|
|
476,528
|
|
|
1,381,655
|
|
|
784,412
|
|
Other
|
|
|
163,672
|
|
|
721,008
|
|
|
562,664
|
|
|
1,136,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
15,808,466
|
|
|
10,360,611
|
|
|
28,971,816
|
|
|
21,957,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(726,307
|
)
|
|
(1,069,454
|
)
|
|
(2,118,456
|
)
|
|
(193,695
|
)
|
Interest
income
|
|
|
140,183
|
|
|
115,264
|
|
|
251,844
|
|
|
190,091
|
|
Interest
expense
|
|
|
(473,811
|
)
|
|
(16,526
|
)
|
|
(542,931
|
)
|
|
(33,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(1,059,935
|
)
|
|
(970,716
|
)
|
|
(2,409,543
|
)
|
|
(37,317
|
)
|
Income
tax (expense) benefit
|
|
|
—
|
|
|
244,380
|
|
|
—
|
|
|
(40,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,059,935
|
)
|
$
|
(726,336
|
)
|
$
|
(2,409,543
|
)
|
$
|
(77,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
$
|
0.00
|
|
Diluted
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
69,726,297
|
|
|
66,210,026
|
|
|
68,662,235
|
|
|
65,880,961
|
|
Diluted
|
|
|
69,726,297
|
|
|
66,210,026
|
|
|
68,662,235
|
|
|
65,880,961
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
MCF
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
|
|
June
30,
2006
|
|
December
31,
2005
|
|
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
9,817,951
|
|
$
|
11,138,923
|
|
Cash
restricted for fund investment (Note 1)
|
|
|
6,639,366
|
|
|
—
|
|
Securities
owned:
|
|
|
|
|
|
|
|
Marketable,
at fair value
|
|
|
11,028,245
|
|
|
8,627,543
|
|
Not
readily marketable, at estimated fair value
|
|
|
866,751
|
|
|
1,065,743
|
|
Restricted
cash
|
|
|
884,014
|
|
|
627,606
|
|
Due
from clearing broker
|
|
|
1,488,037
|
|
|
973,138
|
|
Accounts
receivable, net
|
|
|
2,551,277
|
|
|
2,073,195
|
|
Equipment
and fixtures, net
|
|
|
1,319,527
|
|
|
1,378,235
|
|
Intangible
assets
|
|
|
430,518
|
|
|
394,456
|
|
Prepaid
expenses and other assets
|
|
|
2,174,158
|
|
|
1,415,574
|
|
Total
assets
|
|
$
|
37,199,844
|
|
$
|
27,694,413
|
|
LIABILITIES,
MINORITY INTEREST AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,132,311
|
|
$
|
901,138
|
|
Commissions
and bonus payable
|
|
|
4,103,972
|
|
|
4,735,892
|
|
Accrued
liabilities
|
|
|
2,016,295
|
|
|
2,201,499
|
|
Due
to clearing and other brokers
|
|
|
114,690
|
|
|
118,798
|
|
Securities
sold, not yet purchased
|
|
|
320,308
|
|
|
41,579
|
|
Capital
lease obligation
|
|
|
702,081
|
|
|
883,993
|
|
Convertible
notes payable and participation interest obligation, net
|
|
|
6,439,753
|
|
|
176,741
|
|
Notes
payable
|
|
|
185,636
|
|
|
231,772
|
|
Total
liabilities
|
|
|
15,015,046
|
|
|
9,291,412
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
2,192,943
|
|
|
—
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, Series A--$0.0001 par value; 2,000,000 shares authorized;
0 shares
issued and outstanding as of June 30, 2006 and December 31, 2005,
respectively; aggregate liquidation preference of $0
|
|
|
—
|
|
|
—
|
|
Preferred
stock, Series B--$0.0001 par value; 12,500,000 shares authorized;
8,750,000 shares issued and 0 shares outstanding as of June 30, 2006
and
December 31, 2005; aggregate liquidation preference of $0
|
|
|
—
|
|
|
—
|
|
Preferred
stock, Series C--$0.0001 par value; 14,200,000 shares authorized;
11,800,000 shares issued and 0 shares outstanding as of June 30,
2006 and
December 31, 2005; aggregate liquidation preference of $0
|
|
|
—
|
|
|
—
|
|
Common
stock, $0.0001 par value; 300,000,000 shares authorized; 73,755,316
and
71,467,118 shares issued and outstanding as of June 30, 2006 and
December
31, 2005, respectively
|
|
|
7,375
|
|
|
7,147
|
|
Additional
paid-in capital
|
|
|
112,576,497
|
|
|
111,725,167
|
|
Deferred
compensation
|
|
|
—
|
|
|
(3,146,839
|
)
|
Accumulated
deficit
|
|
|
(92,592,017
|
)
|
|
(90,182,474
|
)
|
Total
stockholders' equity
|
|
|
19,991,855
|
|
|
18,403,001
|
|
Total
liabilities, minority interest and stockholders' equity
|
|
$
|
37,199,844
|
|
$
|
27,694,413
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
MCF
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Six
months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,409,543
|
)
|
$
|
(77,911
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
336,935
|
|
|
235,112
|
|
Share-based
compensation
|
|
|
1,982,049
|
|
|
1,151,529
|
|
Tax
benefits from employee stock options
|
|
|
—
|
|
|
5,717
|
|
Amortization
of discounts on convertible notes payable
|
|
|
150,840
|
|
|
5,169
|
|
Amortization
of debt issuance costs
|
|
|
15,305
|
|
|
—
|
|
Unrealized
(gain) loss on securities owned
|
|
|
1,255,288
|
|
|
(133,680
|
)
|
Other
|
|
|
13,055
|
|
|
(6,438
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Securities
owned
|
|
|
(3,178,269
|
)
|
|
(1,332,441
|
)
|
Restricted
cash
|
|
|
(256,408
|
)
|
|
—
|
|
Due
from clearing broker
|
|
|
(514,899
|
)
|
|
(1,234,913
|
)
|
Accounts
receivable
|
|
|
(478,082
|
)
|
|
602,579
|
|
Prepaid
expenses and other assets
|
|
|
(773,889
|
)
|
|
134,037
|
|
Accounts
payable
|
|
|
231,173
|
|
|
(85,357
|
)
|
Commissions
and bonus payable
|
|
|
(631,920
|
)
|
|
(307,716
|
)
|
Accrued
liabilities
|
|
|
(185,204
|
)
|
|
141,197
|
|
Due
to clearing and other brokers
|
|
|
(4,108
|
)
|
|
5,222
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(4,447,677
|
)
|
|
(897,894
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Cash
restricted for fund investment
|
|
|
(6,639,366
|
)
|
|
—
|
|
Purchase
of equipment and fixtures
|
|
|
(268,786
|
)
|
|
(261,945
|
)
|
Investment
in Catalyst
|
|
|
(58,558
|
)
|
|
(353,882
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(6,966,710
|
)
|
|
(615,827
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from the exercise of stock options and warrants
|
|
|
289,089
|
|
|
58,169
|
|
Proceeds
from the issuance of common stock
|
|
|
339,430
|
|
|
325,109
|
|
Proceeds
from the issuance of note payable ($6,112,171) and stock warrant
($1,387,829)
|
|
|
7,500,000
|
|
|
—
|
|
Minority
interest in fund
|
|
|
2,192,943
|
|
|
—
|
|
Debt
service principal payments
|
|
|
(228,047
|
)
|
|
(131,061
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
10,093,415
|
|
|
252,217
|
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(1,320,972
|
)
|
|
(1,261,504
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
11,138,923
|
|
|
17,459,113
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
9,817,951
|
|
$
|
16,197,609
|
|
|
|
|
|
|
|
|
|
Supplementary
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
39,265
|
|
$
|
31,443
|
|
Income
taxes
|
|
$
|
10,300
|
|
$
|
10,700
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Reclassification
of deferred compensation
|
|
$
|
3,146,839
|
|
$
|
—
|
|
Issuance
of non-vested stock
|
|
$
|
—
|
|
$
|
2,384,162
|
|
Purchase
of equipment and fixtures on capital lease
|
|
$
|
—
|
|
$
|
80,168
|
|
Acquisition
of Catalyst
|
|
$
|
—
|
|
$
|
74,940
|
|
Issuance
of common stock to Ascend
|
|
$
|
—
|
|
$
|
500,000
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
Significant Accounting Policies
Basis
of Presentation
The
interim financial statements included herein for MCF Corporation, or the
Company, have been prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the financial statements included in this report reflect all normal
recurring adjustments that the Company considers necessary for the fair
presentation of the results of operations for the interim periods covered and
the financial position of the Company at the date of the interim statement
of
financial condition. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to understand the information presented.
The
operating results for interim periods are not necessarily indicative of the
operating results for the entire year. These financial statements should be
read
in conjunction with the Company's 2005 audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for
the
year ended December 31, 2005.
In
May
2006, the stockholders of the Company voted to approve the amendment to the
Amended Certificate of Incorporation to effect a reverse stock split at a ratio
of 1-for-7, which could be implemented over the next two years.
Cash
Restricted for Fund Investment
In
March
2006, the Company launched its first proprietary hedge fund managed by MCF
Asset
Management, LLC. The Company invested $7.5 million into the fund as a limited
partner. Accordingly, the Company has consolidated all of the assets and
liabilities of the fund, including $6,639,000 of cash and cash equivalents,
because the Company has effective control of the fund that results from the
large initial percentage interest in the limited partnership. The Company will
deconsolidate the assets and liabilities of the fund, including the cash and
cash equivalents of the fund, if and when effective control of the fund
transfers to other investors in the future. If the Company did not have
effective control of the fund as of June 30, 2006, these assets, liabilities
and
minority interest, including the $6,639,000 of cash and cash equivalents would
not have been included in the Company's consolidated statements of financial
condition. Instead, the Company would have recorded an asset representing an
investment in the fund managed by MCF Asset Management, LLC which is subject
to
a one year lock-up provision which makes this investment illiquid for one
year.
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 or amounts that approximate fair value, with related unrealized
gains
or losses recognized in the results of operations. The fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation
sale.
Fair
values of the financial instruments are generally obtained from quoted market
prices in active markets, broker or dealer price quotations, or alternative
pricing sources with reasonable levels of price transparency. To the extent
certain financial instruments trade infrequently or are non-marketable
securities and, therefore, have little or no price transparency, the Company
values these instruments based on management's estimates. The fair value of
these securities is subject to a high degree of volatility and may be
susceptible to significant fluctuation in the near term. Securities that contain
restrictions are stated at a discount to the value of readily marketable
securities. Stock warrants are carried at a discount to fair value as determined
by using the Black-Scholes Option Pricing model due to liquidity.
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.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
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. Management
fees are recorded on the offering date, selling concessions on settlement date,
and underwriting fees at the time the underwriting is completed and the related
income is reasonably determinable. 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. Merger
and
acquisition fees and other advisory service revenue are generally earned and
recognized only upon successful completion of the engagement. Underwriting
revenue is presented net of related expenses. Unreimbursed expenses associated
with private placement and advisory transactions are recorded as expenses as
incurred.
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.
Share-Based
Compensation Expense
On
January 1, 2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) 123(R), “Share-Based Payment,” which requires the measurement
and recognition of compensation expense, based on estimated fair values, for
all
share-based awards, made to employees and directors, including stock options,
non-vested stock, and participation in the Company's employee stock purchase
plan. In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 107 relating to SFAS 123(R). The Company
has applied the provisions of SAB 107 in its adoption of SFAS
123(R).
The
Company adopted SFAS 123(R) using the modified prospective application
transition method, as of January 1, 2006, the first day of the Company's
fiscal year 2006. The Company's consolidated financial statements as of and
for
the six months ended June 30, 2006 reflect the impact of SFAS 123(R). In
accordance with the modified prospective application transition method, the
Company's consolidated financial statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS 123(R). Share-based
compensation expense recognized under SFAS 123(R) for the six months ended
June
30, 2006 was $1,982,000, which includes $141,000 of share-based compensation
issued in connection with the acquisition of Catalyst (see Note 4).
Prior
to
the adoption of SFAS 123(R), the Company accounted for share-based awards to
employees and directors using the intrinsic value method in accordance with
Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock
Issued to Employees,” as allowed under SFAS 123, “Accounting for Stock-Based
Compensation.” Share-based compensation expense of $1,152,000 for the six months
ended June 30, 2005 was solely related to non-vested stock awards and stock
options granted with intrinsic value that the Company had been recognizing
in
its consolidated statements of operations in accordance with the provisions
set
forth above. In accordance with the intrinsic value method, no share-based
compensation expense was otherwise recognized in the Company's consolidated
statements of operations because the exercise price of nearly all of the
Company's stock options granted to employees and directors equaled the fair
market value of the underlying stock at the grant date.
SFAS
123(R) requires companies to estimate the fair value of share-based awards
on
the date of grant using an option-pricing model. The value of the portion of
the
award that is ultimately expected to vest is recognized as expense in the
Company's consolidated statements of operations over the requisite service
periods. Share-based compensation expense recognized in the Company's
consolidated statement of operations for the six months ended June 30, 2006
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 estimated in accordance with the provisions of SFAS 123, and
(ii) subsequent to December 31, 2005, based on the grant date fair
value estimated in accordance with the provisions of SFAS 123(R). Compensation
expense for all share-based awards subsequent to December 31, 2005 is
recognized using the straight-line single-option method. Because share-based
compensation expense is based on awards that are ultimately expected to vest,
share-based compensation expense has been reduced to account for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. In the Company's pro forma information required
under SFAS 123 for periods prior to fiscal 2006, the Company accounted for
forfeitures as they occurred.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
To
calculate option-based compensation under SFAS 123(R), the Company used the
Black-Scholes option pricing model, which it had previously used for valuation
of option-based awards for its pro forma information required under SFAS 123
for
periods prior to fiscal 2006. The Company's determination of fair value of
option-based awards on the date of grant using the Black-Scholes model is
affected by the Company's stock price as well as assumptions regarding a number
of subjective variables. These variables include, but are not limited to the
Company's expected stock price volatility over the term of the awards, and
actual and projected employee stock option exercise behaviors.
No
tax
benefits were attributed to the share-based compensation expense because a
valuation allowance was maintained for all net deferred tax assets.
Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the estimated future
tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance
is
recorded to reduce deferred tax assets to an amount whose realization is more
likely than not. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in the consolidated statements of operations in
the
period that includes the enactment date.
Segment
Reporting
SFAS
No. 131,
Disclosures about Segments of an Enterprise and Related
Information,
establishes annual and interim reporting standards for operating segments of
a
company. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets
and
reports revenue, and its major customers. The Company organizes its operations
into four operating segments for the purpose of making operating decisions
or
assessing performance. These operating segments are organized along operating
subsidiaries, Merriman Curhan Ford & Co., MCF Asset Management, LLC and
MCF Wealth Management, LLC, as well as corporate support. Accordingly, the
Company operates in four reportable operating segments in the United
States.
Reclassification
Certain
prior year amounts have been reclassified to conform to current year
consolidated financial statement presentation.
2.
Issuance of Debt
On
March
7, 2006, the Company completed a $7.5 million private placement of a variable
rate secured convertible debenture with a detachable stock warrant. The issue
was placed with Midsummer Investment, Ltd. The Company invested the proceeds
in
one of the proprietary funds managed by MCF Asset Management, LLC, a wholly
owned subsidiary. The debenture bears interest at a variable rate based on
the
annual investment performance of the investment in the proprietary funds managed
by MCF Asset Management, LLC. The interest rate can be zero or a positive number
and is based on the investment performance for each separate calendar
year.
The
debenture is convertible into the Company's common stock at a conversion price
of $1.41 per share, subject to certain anti-dilutive adjustments. Specifically,
if the Company issues common stock at an effective price below $1.41, then
the
conversion price of the debenture will be reduced to equal this new effective
price. This anti-dilution provision excludes certain exempt issuances, such
as
employee stock options. Midsummer may elect to convert the debenture into common
stock of the Company at the conversion price at any time following the closing
date. The Company may redeem all or part of the debenture after three years
at
110% of the principal amount being redeemed. The Company may elect to force
conversion of the debenture into common stock if the Company's common stock
trades above $4.94 for 20 consecutive trading days. The debenture contains
covenants that may preclude the Company from issuing additional debt over a
specified limit, entering into certain new liens on company assets, repurchasing
stock or paying dividends when the debenture remains outstanding with balance
of
at least $2 million. The maturity date of the notes is December 31, 2010. Stock
warrants to purchase 1,875,000 shares of common stock at $1.41 per share were
also issued to the investor. The stock warrants have a six year term. The stock
warrant includes a similar anti-dilution provision for subsequent common stock
issuance at prices below $1.41 per share.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
The
$7,500,000 raised in the transaction described above is accounted for under
generally accepted accounting principles, primarily APB 14, “Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants”, SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities”, EITF Issue 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios”, and EITF Issue 00-19, “Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company's Own Stock”. The Company has accounted for this transaction as the
issuance of convertible debt, an embedded derivative referred to as a
participation interest obligation, and a detachable stock warrant. The
$7,500,000 has been allocated to these individual instruments based on their
relative fair value as determined by management.
The
fair
value of the stock warrant of $1,492,000 has been recorded as a discount to
the
convertible debenture and an increase to additional paid-in capital. The
fair value of the participation interest obligation of $2,316,000 is also
treated as a discount to the convertible debenture and is based on a forecast
of
future cash flows to be paid to the lender discounted at a risk adjusted
yield. The discount to the convertible debenture of $3,808,000 is
amortized to interest expense using the level yield method over the term of
the
debenture. As of June 30, 2006, the Company estimates that the implicit rate
on
this obligation will be 24%. The participation interest obligation is
carried in the statements of financial condition at fair value and the Company
will reassess fair value of the participation interest obligation at the end
of
each reporting period with adjustments recorded to interest expense. The
allocation to the three separate instruments is subject to further analysis
to
be completed in the third quarter of 2006; however, management does not expect
that an adjustment, if any, would be material to the financial
statements.
3.
Share-Based Compensation Expense
Stock
Options
The
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 non-vested stock options, and
therefore as of June 30, 2006 and December 31, 2005 there were no shares
subject to repurchase.
As
of
June 30, 2006, there were 34,940,000 shares authorized for issuance under the
Option Plans, and 4,290,000 shares authorized for issuance outside of the Option
Plans. As of June 30, 2006, 3,798,000 shares were available for future option
grants under the Option Plans. There were no shares available for future option
grants outside of the Options Plans. Compensation expense for stock options
during the three months and six months ended June 30, 2006 was $319,000 and
$641,000, respectively.
The
following table is a summary of the Company's stock option activity for the
six
months ended June 30, 2006:
|
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Balance
as of December 31, 2005
|
|
|
23,270,046
|
|
$
|
0.89
|
|
Granted
|
|
|
1,230,000
|
|
|
1.10
|
|
Exercised
|
|
|
(327,690
|
)
|
|
(0.30
|
)
|
Canceled
|
|
|
(352,757
|
)
|
|
(1.75
|
)
|
Balance
as of June 30, 2006
|
|
|
23,819,599
|
|
$
|
0.90
|
|
Exercisable
as of June 30, 2006
|
|
|
19,416,952
|
|
$
|
0.86
|
|
The
total
intrinsic value of options exercised during the six months ended June 30, 2006
was $280,000.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
The
following table summarizes information with respect to stock options outstanding
at June 30, 2006:
|
|
Options
Outstanding at June 30, 2006
|
|
Vested
Options at June 30, 2006
|
|
Range
of Exercise Price
|
|
Number
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Number
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
$0.05
—
$0.50
|
|
|
14,605,208
|
|
|
6.61
|
|
$
|
0.42
|
|
|
8,898,953
|
|
|
14,094,792
|
|
$
|
0.42
|
|
|
8,511,845
|
|
$0.51
—
$1.00
|
|
|
2,190,020
|
|
|
6.44
|
|
$
|
0.60
|
|
|
938,424
|
|
|
1,756,707
|
|
|
0.55
|
|
|
836,544
|
|
$1.01
—
$2.00
|
|
|
4,954,718
|
|
|
8.68
|
|
$
|
1.28
|
|
|
—
|
|
|
1,495,800
|
|
|
1.43
|
|
|
|
|
$2.01
—
$4.00
|
|
|
1,794,653
|
|
|
4.36
|
|
$
|
3.15
|
|
|
|
|
|
1,794,653
|
|
|
3.15
|
|
|
|
|
$4.01
— $7.00
|
|
|
275,000
|
|
|
3.66
|
|
$
|
7.00
|
|
|
|
|
|
275,000
|
|
|
7.00
|
|
|
|
|
|
|
|
23,819,599
|
|
|
6.82
|
|
$
|
0.90
|
|
|
9,837,377
|
|
|
19,416,952
|
|
$
|
0.86
|
|
|
9,348,389
|
|
As
of
June 30, 2006, total unrecognized compensation expense related to unvested
stock
options was $2,883,000. This amount is expected to be recognized as expense
over
a weighted-average period of 1.4 years.
Non-Vested
Stock
At
the
date of grant, the recipient of non-vested stock has most of the rights of
a
stockholder other than voting rights, subject to certain restrictions on
transferability and a risk of forfeiture. Non-vested shares typically vest
over
a two to four year period beginning on the date of grant. The fair value of
non-vested stock is equal to the market value of the shares on the date of
grant. The Company recognizes the compensation expense for non-vested stock
on a
straight-line basis over the requisite service period. Compensation expense
for
non-vested stock during the three months ended June 30, 2006 and 2005 was
$564,000 and $607,000, respectively. Compensation expense for non-vested stock
during the six months ended June 30, 2006 and 2005 was $1,018,000 and
$1,113,000, respectively.
The
following table is a summary of the Company's non-vested stock activity for
the
six months ended June 30, 2006:
|
|
|
Non-Vested
Stock
Outstanding
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
|
Intrinsic
Value
at
June
30, 2006
|
|
Balance
as of December 31, 2005
|
|
|
4,069,878
|
|
$
|
1.12
|
|
|
|
|
Granted
|
|
|
490,000
|
|
|
1.12
|
|
|
|
|
Vested
|
|
|
(533,558
|
)
|
|
(1.24
|
)
|
|
|
|
Canceled
|
|
|
(115,001
|
)
|
|
(1.39
|
)
|
|
|
|
Balance
as of June 30, 2006
|
|
|
3,911,319
|
|
$
|
1.09
|
|
$
|
4,263,338
|
|
The
total
intrinsic value of non-vested stock which vested during the six months ended
June 30, 2006 was $662,000.
As
of
June 30, 2006, total unrecognized compensation expense related to non-vested
stock was $2,380,000. This expense is expected to be recognized over a
weighted-average period of 1.1 years.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
2002
Employee Stock Purchase Plan
The
Company offers an Employee Stock Purchase Plan, or ESPP, to its employees.
As of
June 30, 2006, 2,550,124 shares have been authorized by the stockholders of
the
Company for issuance under the ESPP, of which 1,816,974 have been issued.
Compensation expense for ESPP during the three months and six months ended
June
30, 2006 was $95,000 and $182,000, respectively.
Under
the
ESPP, eligible employees may enroll in a 24-month offer period during certain
open enrollment periods. New offer periods begin February 15 and
August 15 of each year. Each offer period consists of four, six-month
purchase periods during which employee payroll deductions are accumulated.
These
deduction amounts, which are subject to certain limitations, are accumulated,
and, at the end of each purchase period, are used to purchase shares of common
stock. The purchase price of the shares is 15% less than the fair market value
on either the first day of an offer period or the last day of a purchase period,
whichever is lower. If the fair market value on the purchase date is less than
the fair market value on the first day of an offer period, then participants
automatically commence a new 24-month offer period. The ESPP has a ten-year
term.
As
of
June 30, 2006, unrecognized compensation expense related to the ESPP was
$481,000. This amount is expected to be recognized as expense over a
weighted-average period of 1.3 years.
Share-Based
Compensation under SFAS 123(R) for Fiscal 2006 and APB 25 for Fiscal
2005
On
January 1, 2006, the Company adopted SFAS 123(R), which requires the
measurement and recognition of compensation expense, based on estimated fair
values, for all share-based payments awards made to the Company's employees
and
directors including stock options, non-vested stock, and stock purchased under
the Company's ESPP.
Prior
to
the adoption of SFAS 123(R), the Company accounted for share-based awards to
employees and directors using the intrinsic value method in accordance with
APB
25, as allowed under SFAS 123, “Accounting for Stock-Based Compensation.”
Share-based compensation expense of $1,152,000 for the six months ended June
30,
2005 was solely related to share-based awards resulting from stock options
granted with intrinsic value and non-vested stock awards that the Company had
been recognizing in its consolidated statements of operations in accordance
with
the provisions set forth above. In accordance with the intrinsic value method,
no share-based compensation expense was otherwise recognized in the Company's
consolidated statements of operations because the exercise price of nearly
all
of the Company's stock options granted to employees and directors equaled the
fair market value of the underlying stock at the grant date.
Pro
Forma Share-Based Compensation under SFAS 123 for Fiscal 2005
If
the
Company had recognize compensation expense over the relevant service period
under the fair value method consistent with the provisions of SFAS 123,
“Accounting for Stock Based Compensation” as amended by SFAS 148, “Accounting
for Stock Based Compensation-Transition and Disclosure,” with respect to stock
options granted for the three months and six months ended June 30, 2005, net
income would have changed, resulting in pro forma net income and pro forma
net
income per share as presented below:
|
|
Three
Months
Ended
June 30,
2005
|
|
Six
Months
Ended
June 30,
2005
|
|
Net
loss, as reported
|
|
$
|
(726,336
|
)
|
$
|
(77,911
|
)
|
Add:
Stock-based employee compensation expense included in the reported
net
loss
|
|
|
19,203
|
|
|
38,406
|
|
Less:
Stock-based employee compensation expense determined under fair value
method for all awards
|
|
|
(444,394
|
)
|
|
(813,382
|
)
|
|
|
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(1,151,527
|
)
|
$
|
(852,887
|
)
|
|
|
|
|
|
|
|
|
Net
loss per share, as reported:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.01
|
)
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
Net
loss per share, pro forma:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
The
pro
forma share based compensation expense for the six months ended June 30, 2005
has increased by $123,000 since it was initially disclosed in the Quarterly
Report on Form 10-Q for the second quarter of 2005. The increase primarily
relates to the accounting for the contingent shares issuable to the Catalyst
Shareholder that is subject to performance conditions (see Note 4). The Company
determined in 2005 that the issuance of the common stock over the service period
is probable and should have disclosed $23,000 per month as pro forma expense
from March to December 2005.
Fair
Value and Assumptions Used to Calculate Fair Value under SFAS 123(R) and SFAS
123
The
weighted average fair value of the non-vested stock granted under the Company's
stock option plans for the first six months of 2006 and 2005 was $1.12 and
$1.55
per share, respectively. The fair value of the non-vested stock award is
estimated on the date of grant using the intrinsic value method.
The
weighted average fair value of each stock option granted for the six months
ended June 30, 2006 and 2005 was $0.59 and $0.77, respectively. The fair
value of each option award is estimated on the date of grant using the
Black-Scholes Option Pricing Model, with the following assumptions for the
six
months ended June 30, 2006 and 2005:
|
|
Six
months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
Expected
volatility
|
|
|
84
|
%
|
|
100
|
%
|
Expected
life (years)
|
|
|
4.69
|
|
|
2.00
|
|
Risk-free
interest rate
|
|
|
4.77
|
%
|
|
3.44
|
%
|
Expected
dividend yield
|
|
|
0.0
|
%
|
|
0.0
|
%
|
Assumptions
for Option-Based Awards under SFAS 123(R)
Consistent
with SFAS 123(R) and SAB 107, 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 lattice 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.
As
share-based compensation expense recognized in the consolidated statement of
operations for the six months ended June 30, 2006 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 option-based awards under SFAS 123
Prior
to
the first quarter of fiscal 2006, the Company considered the historical
volatility of its stock price in determining its expected volatility. The
risk-free interest rate was based upon assumption of interest rates appropriate
for the term of the Company's employee stock options. The dividend yield
assumption was based on the Company's history and expectation of dividend
payouts. Forfeitures prior to the first quarter of fiscal 2006 were accounted
for as they occurred in accordance with APB No. 25.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
4.
Contingent Consideration
In
February 2005, the Company acquired Catalyst Financial Planning &
Investment Management, Inc., or Catalyst, a registered investment advisor with
over $100 million in assets under management at the time of acquisition. The
purchase consideration for Catalyst consisted of both cash and common stock
that
will be paid over a three year period. The Company paid to the sole shareholder
of Catalyst, or Catalyst Shareholder, $330,000 as initial consideration at
the
closing and placed into escrow 555,195 shares of common stock to be issued
over
the three year period following the closing date. The issuance of these shares
is conditioned upon the Catalyst Shareholder being a full-time employee at
the
anniversary dates. The Catalyst Shareholder is entitled to additional
consideration that can be payable in either cash or common stock at the Catalyst
Shareholder's option. The additional consideration will be based on a multiple
of revenue growth at the end of the first three anniversary dates from the
closing. However, if the Catalyst revenue declines during the three years
following the closing, the Catalyst Shareholder will forego some of the initial
consideration based on a multiple of revenue decline at the end of the first
three anniversary dates.
With
the
adoption of SFAS 123(R) in January 2006, the Company is treating the 555,195
common shares as a non-vested stock grant that vests over three years, subject
to performance conditions. The Company has determined that the issuance of
the
common stock over the service period is probable and will record an expense
of
$23,000 per month over the three year service period. During the six months
ended June 30, 2006, the Company recorded a charge to compensation and benefits
expense in the amount of $141,000. At the first anniversary date in February
2006, the Company issued 185,065 shares of common stock from escrow and paid
$59,000 to the Catalyst Shareholder for additional consideration that resulted
from growth in the Catalyst revenue. The additional consideration was recorded
as an increase in the intangible assets acquired.
5.
Income Taxes
At
the
end of each interim reporting period the Company calculates an effective
tax
rate based on the Company's best estimate of the tax provision (benefit)
that
will be provided for the full year, stated as a percentage of estimated annual
pre-tax income (loss). The tax provision (benefit) for the interim period
is
determined using this estimated annual effective tax rate.
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 the
companies expected current expense for the year. The
Company historically has had and expects to have for the current year,
current tax expense primarily related to alternative minimum, state
and minimum tax liabilities.
Historically
and currently, the Company has recorded a valuation allowance on the
deferred tax assets, the significant component of which relates to net operating
loss tax carryforwards. Management continually evaluates the realizability
of
its deferred tax assets based upon negative and positive evidence
available. Based on the evidence available at this time, the Company continues
to conclude that it is not "more likely than not" that we will be able to
realize the benefit of our deferred tax assets in the
future.
6.
Earnings (loss) per Share
The
following is a reconciliation of the basic and diluted net income available
to
common stockholders and the number of shares used in the basic and diluted
net
income per common share computations for the periods presented:
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
loss available to common stockholders - basic
|
|
$
|
(1,059,935
|
)
|
$
|
(726,336
|
)
|
$
|
(2,409,543
|
)
|
$
|
(77,911
|
)
|
Net
loss available to common stockholders - diluted
|
|
$
|
(1,059,935
|
)
|
$
|
(726,336
|
)
|
$
|
(2,409,543
|
)
|
$
|
(77,911
|
)
|
Weighted-average
number of common shares - basic
|
|
|
69,726,297
|
|
|
66,210,026
|
|
|
68,662,235
|
|
|
65,880,961
|
|
Weighted-average
number of common shares - diluted
|
|
|
69,726,297
|
|
|
66,210,026
|
|
|
68,662,235
|
|
|
65,880,961
|
|
Basic
net loss per common share
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
$
|
0.00
|
|
Diluted
net loss per common share
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
$
|
0.00
|
|
Basic
earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding, excluding shares of
non-vested stock. Diluted earnings per share is calculated by dividing net
income, plus interest and dividends on dilutive securities, by the weighted
average number of common shares used in the basic earnings per share calculation
plus the number of common shares that would be issued assuming exercise or
conversion of all potentially dilutive common shares outstanding, including
non-vested stock. Diluted loss per share is unchanged from basic loss per share
for the three months and six months ended June 30, 2006 and 2005 because the
addition of common shares that would be issued assuming exercise or conversion
would be anti-dilutive.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
Shares
used in the diluted net income per share computation include the dilutive impact
of the Company's stock options and warrants. The impact of the Company's stock
options and warrants on shares used for the diluted earnings per share
computation is calculated based on the average share price of the Company's
common stock for each period using the treasury stock method. Under the treasury
stock method, the tax-effected proceeds that would be hypothetically received
from the exercise of all stock options and warrants with exercise prices below
the average share price of the Company's common stock are assumed to be used
to
repurchase shares of the Company's common stock. Because the Company reported
a
net loss during the three months and six months ended June 30, 2006 and 2005,
the Company excluded the impact of all stock options and warrants in the
computation of dilutive earnings per share, as their effect would be
anti-dilutive.
The
Company excludes all potentially dilutive securities from its diluted net income
(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:
|
|
Three Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Stock
options and warrants excluded due to the exercise price exceeding
the
average fair value of the Company’s common stock during the
period
|
|
|
9,073,700
|
|
|
8,677,049
|
|
|
8,223,773
|
|
|
7,862,314
|
|
Weighted
average non-vested stock, stock options and stock warrants, calculated
using the treasury stock method, that were excluded due to the Company
reporting a net loss during the period
|
|
|
15,193,118
|
|
|
17,856,840
|
|
|
15,350,921
|
|
|
18,392,641
|
|
Weighted
average shares issuable upon conversion of the convertible notes
payable
|
|
|
6,319,149
|
|
|
1,000,000
|
|
|
4,408,957
|
|
|
1,000,000
|
|
Weighted
average shares contingently issuable
|
|
|
370,130
|
|
|
1,057,031
|
|
|
659,884
|
|
|
629,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
common stock equivalents excluded from diluted net loss per
share
|
|
|
30,956,097
|
|
|
28,590,920
|
|
|
28,643,535
|
|
|
27,884,546
|
|
7.
Regulatory Requirements
Merriman
Curhan Ford & Co. is a broker-dealer subject to Rule 15c3-1 of the
Securities and Exchange Commission, which specifies uniform minimum net capital
requirements, as defined, for their registrants. As of June 30, 2006, Merriman
Curhan Ford & Co. had regulatory net capital, as defined, of $7,945,000,
which exceeded the amount required by $6,728,000. Merriman Curhan Ford & Co.
is exempt from Rules 15c3-3 and 17a-13 under the Securities Exchange Act of
1934
because it does not carry customer accounts, nor does it hold customer
securities or cash.
8.
Minority Interest
In
March
2006, the Company launched its first proprietary hedge fund managed by MCF
Asset
Management, LLC, a wholly owned subsidiary of the Company. The Company invested
the proceeds from the $7.5 million private placement of secured convertible
debenture and stock warrant into the fund as a limited partner. As of June
30,
2006, the Company's limited partnership interest represented 78% of the fund.
Accordingly, the Company has consolidated all of the assets and liabilities
of
the fund because the Company has effective control of the fund that resulted
from the large initial percentage interest in the limited partnership. The
Company will deconsolidate the assets and liabilities of the fund and carry
the
limited partnership interest at fair value if and when effective control of
the
fund transfers to other investors in the future. This should occur when the
Company's limited partnership interest represents less than 50% of the fund.
The
Company has recorded the minority interest on the consolidated statements of
financial position as of June 30, 2006 which reflects the minority investors'
interest in the fund's assets and liabilities.
By
consolidating the assets and liabilities of the fund as of June 30, 2006, the
Company recorded in the consolidated statements of financial condition
$6,639,000 of cash and cash equivalents, $3,489,000 of marketable securities
owned, $1,000 of due from clearing broker, $85,000 in prepaid and other assets,
$35,000 in accrued liabilities, $303,000 in securities sold, not yet purchased
and $2,193,000 in minority interest. If the Company did not have effective
control of the fund as of June 30, 2006, these assets, liabilities and minority
interest, including the $6,639,000 of cash and cash equivalents would not have
been included in the Company's consolidated statements of financial condition.
Instead, the Company would have recorded an asset representing an investment
in
the fund managed by MCF Asset Management, LLC in the amount of $7,681,000.
The
investment in the fund includes a one year lock-up provision which makes this
investment illiquid for one year.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
9.
Segment Reporting
The
Company considers the capital markets, asset management, wealth management
and
corporate support operations to be four separately reportable segments. The
capital markets segment includes the Company's investment banking and
institutional brokerage operations. Asset management includes the Company's
fee
based asset management operations. The Company's asset management segment was
initiated in March 2006 with the launching of the first proprietary fund managed
by MCF Asset Management, LLC. Accordingly, there is no comparable 2005 financial
information for this segment. Wealth management includes the Company's fee
based
financial planning and investment management operations. The Company's wealth
management segment was initiated subsequent to completing the acquisition of
Catalyst in February 2005. The corporate support segment includes overhead
costs
that are not directly allocated to the other operating segments. The accounting
policies of these segments are the same as those described in Note 1. There
are
no significant revenue transactions between the segments. The Company's revenue
from foreign operations was deminimus during the six months ended June 30,
2006
and 2005.
The
following table presents the financial information for the Company's segments
for the three months ended June 30, 2006 and 2005.
|
|
Capital
Markets
|
|
Asset
Management
|
|
Wealth
Management
|
|
Corporate
Support
|
|
Consolidated
Totals
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
14,716,338
|
|
$
|
148,528
|
|
$
|
217,293
|
|
$
|
|
|
$
|
15,082,159
|
|
Compensation
and benefits
|
|
|
(9,540,882
|
)
|
|
(117,047
|
)
|
|
(176,890
|
)
|
|
(2,061,390
|
)
|
|
(11,896,209
|
)
|
Non-compensation
related expenses
|
|
|
(2,681,010
|
)
|
|
(71,052
|
)
|
|
(95,742
|
)
|
|
(1,064,453
|
)
|
|
(3,912,257
|
)
|
Operating
income (loss)
|
|
$
|
2,494,446
|
|
$
|
(39,571
|
)
|
$
|
(55,339
|
)
|
$
|
(3,125,843
|
)
|
$
|
(726,307
|
)
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
9,102,641
|
|
$
|
—
|
|
$
|
188,516
|
|
$
|
|
|
$
|
9,291,157
|
|
Compensation
and benefits
|
|
|
(5,693,401
|
)
|
|
(1,696
|
)
|
|
(129,082
|
)
|
|
(1,342,402
|
)
|
|
(7,166,581
|
)
|
Total
expense
|
|
|
(1,864,946
|
)
|
|
(733
|
)
|
|
(58,554
|
)
|
|
(1,269,797
|
)
|
|
(3,194,030
|
)
|
Pre-tax
income (loss)
|
|
$
|
1,544,294
|
|
$
|
(2,429
|
)
|
$
|
880
|
|
$
|
(2,612,199
|
)
|
$
|
(1,069,454
|
)
|
The
following table presents the financial information for the Company's segments
for the six months ended June 30, 2006 and 2005.
|
|
Capital
Markets
|
|
Asset
Management
|
|
Wealth
Management
|
|
Corporate
Support
|
|
Consolidated
Totals
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
26,244,915
|
|
$
|
180,253
|
|
$
|
428,192
|
|
$
|
|
|
$
|
26,853,360
|
|
Compensation
and benefits
|
|
|
(17,317,426
|
)
|
|
(218,399
|
)
|
|
(373,062
|
)
|
|
(3,917,267
|
)
|
|
(21,826,154
|
)
|
Non-compensation
related expenses
|
|
|
(4,573,904
|
)
|
|
(115,786
|
)
|
|
(165,376
|
)
|
|
(2,290,596
|
)
|
|
(7,145,662
|
)
|
Operating
income (loss)
|
|
$
|
4,353,585
|
|
$
|
(153,932
|
)
|
$
|
(110,246
|
)
|
$
|
(6,207,863
|
)
|
$
|
(2,118,456
|
)
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
21,511,351
|
|
$
|
|
|
$
|
252,922
|
|
$
|
|
|
$
|
21,764,273
|
|
Compensation
and benefits
|
|
|
(13,235,342
|
)
|
|
(1,696
|
)
|
|
(174,488
|
)
|
|
(2,957,020
|
)
|
|
(16,368,546
|
)
|
Total
expense
|
|
|
(3,165,789
|
)
|
|
(839
|
)
|
|
(76,217
|
)
|
|
(2,346,577
|
)
|
|
(5,589,422
|
)
|
Pre-tax
income (loss)
|
|
$
|
5,110,220
|
|
$
|
(2,535
|
)
|
$
|
2,217
|
|
$
|
(5,303,597
|
)
|
$
|
(193,695
|
)
|
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
10.
Ascend Services Ltd.
In
May
2005, the Company entered into a stock purchase agreement with Ascend Services
Ltd., or Ascend. The Company issued 1,078,749 shares of common stock and Ascend
issued an unsecured promissory note payable to the Company in the amount of
$1.5
million. The shares were initially held in escrow. Upon Ascend achieving
specified milestones related to its credit standing, the 1,078,749 shares of
common stock were be released from escrow in three installments of 359,583
shares each and provided to Ascend. Upon satisfaction of the conditions
specified in the escrow agreement and simultaneous with the release of the
related stock certificates, the related amount of the promissory note became
effective and started accruing interest. The promissory note accrued interest
at
10% per annum and matured on February 28, 2006.
Ascend
attempted to raise capital financing in order to enter the reinsurance business.
In May 2005, the Company released the first installment of 359,583 shares
of common stock to Ascend while the related promissory note with a face value
of
$500,000 became effective. In December 2005, the Company learned that
Ascend had not been able to execute on their business plan and would not likely
have the financial resources to repay the $500,000 note receivable at maturity.
As a result, the Company recorded a charge to other operating expense in 2005
to
write-off the $500,000 note receivable balance. In February 2006, Ascend
defaulted on the repayment of the note receivable. The remaining 719,166 shares
of common stock were returned to the Company from escrow on February 28,
2006.
In
April
2006, the Company entered into a settlement agreement with Ascend Holdings
Ltd.,
Ascend Services Ltd., and other parties with debt obligations from the Ascend
group of companies. A private equity firm acquired all of the assets of the
Ascend group of companies and as a term of that acquisition satisfied the legacy
debt obligations of the Ascend group of companies, including the Company's
$500,000 note receivable. As a result, the Company reversed the $500,000 charge
to write-off the note receivable balance upon the receipt of $500,000 in April
2006.
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This
Quarterly Report on Form 10-Q, including this Management's Discussion and
Analysis of Financial Condition and Results of Operations contains
forward-looking statements regarding future events and our future results that
are based on current expectations, estimates, forecasts, and projections about
the industries in which we operate and the beliefs and assumptions of our
management. Words such as “may,” “will,” “should,” “expects,” “anticipates,”
“targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,”
“estimates,” “predicts,” “potential” or “continue,” variations of such words,
and similar expressions are intended to identify such forward-looking
statements. In addition, any statements that refer to projections of our future
financial performance, our anticipated growth and trends in our businesses,
and
other characterizations of future events or circumstances, are forward-looking
statements. Readers are cautioned that these forward-looking statements are
only
predictions and are subject to risks, uncertainties, and assumptions that are
difficult to predict. Therefore, actual results may differ materially and
adversely from those expressed in any forward-looking statements. Readers are
referred to risks and uncertainties identified under“Risk
Factors” beginning on Page 24 and elsewhere herein. We undertake no obligation
to revise or update publicly any forward-looking statements for any
reason.
Company
Overview
MCF
Corporation is a financial services holding company that provides investment
research, capital markets services, corporate and venture services, investment
banking, asset management and wealth management through its operating
subsidiaries, Merriman Curhan Ford & Co., MCF Asset Management, LLC and
MCF Wealth Management, LLC. We are focused on providing a full range of
specialized and integrated services to institutional investors and corporate
clients.
Merriman
Curhan Ford & Co.
Merriman
Curhan Ford & Co. is a securities broker-dealer and investment bank
focused on fast growing companies and institutional investors. Our mission
is to
become a leader in the researching, advising, financing and trading of fast
growing companies under $2 billion in market capitalization. We provide
investment research, brokerage and trading services primarily to institutions,
as well as advisory and investment banking services to corporate clients. We
are
focused on providing a full range of specialized and integrated services,
including:
·
Equity
Research
·
Sales
and Trading
·
Specialized Trade Execution
·
Market
Making
·
Equity
Capital Markets
·
Corporate and Venture Services
·
Public
Offerings
·
Private
Placements
·
Mergers
and Acquisitions
·
Strategic Advisory Services
By
the
end of the 1990's, many of the investment banks that previously served this
niche were acquired by large commercial banks and subsequently refocused to
serve larger clients and larger transactions. We are gaining market share by
originating differentiated research for our institutional investor clients
and
providing specialized services for our fast-growing corporate clients.
MCF
Asset Management, LLC
MCF
Asset
Management, LLC, or MCFAM, creates investment products for both institutional
and high-net worth clients. Through the corporate and professional resources
of
MCF Corporation, MCFAM has developed an institutional-standard investment
management platform. We launched our first fund in March 2006.
We
believe both institutions and wealthy individuals will continue to shift more
of
their investment dollars into alternative asset class strategies. It is our
intent to help our clients in their investment process by offering access to
alternative investment strategies, as well as certain niche based long-only
strategies. We plan to establish our own alternative investment products
and evaluate opportunities to acquire and partner with managers of
alternative asset investments.
MCF
Wealth Management, LLC
Through
MCF Wealth Management LLC, we provide a tailored, integrated offering of
personal financial services to help corporate executives and high-net-worth
clients achieve their financial goals through our fee-based investment advisory
firms, such as Catalyst Financial Planning and Investment Management. Catalyst
was the first registered investment advisor to be acquired by MCF Wealth
Management in 2005. Today, Catalyst counsels more than 70 clients and manages
over $127 million in assets. MCF Wealth Management, LLC continues to evaluate
acquisitions of existing wealth management businesses, as well as
organically grow assets under management through client referrals and Merriman
Curhan Ford & Co.'s client base.
Business
Environment
After
pushing higher early in the second quarter, U.S. stocks reversed course, with
many broadly based equity indexes ending the period in negative territory.
Early
optimism about solid economic growth and the possibility that the Federal
Reserve Board (“Fed”) might pause in its credit-tightening campaign gave way to
concerns about both inflation and signs of an economic slowdown. The market
experienced a sharp sell-off in early May that turned out to be the beginning
of
a more extended decline. As expected, the Fed added another 0.25% increase
in
June, bringing its target for the federal funds rate to 5.25% at the end of
the
quarter.
Against
a
backdrop of rising inflation, a slowing economy and indications of a slowdown
in
the real estate market, the S&P 500® Index, a well-known large-cap
benchmark, was negative at 1.44%. The Nasdaq Composite® Index, reflecting
weakness in the technology sector, ended the quarter with a 7.17% loss. Smaller
stocks had more substantial declines, with the Russell 2000® Growth Index down
7.25% for the quarter. Average
daily trading volume on the Nasdaq increased 4% in the second quarter of 2006,
compared to the second quarter of 2005. Total small-cap equity issuance volumes
decreased by 8% while initial public offering volumes decreased 27% compared
to
the 2005 quarter.
Our
securities broker-dealer and investment banking activities are linked to the
capital markets. In addition, our business activities are focused in the
consumer growth, healthcare, specialty growth and technology sectors. By their
nature, our business activities are highly competitive and are not only subject
to general market conditions, volatile trading markets and fluctuations in
the
volume of market activity, but also to the conditions affecting the companies
and markets in our areas of focus.
Fluctuations
in revenue also occur due to the overall level of market activity, which, among
other things, affects the flow of investment dollars and the size, number and
timing of investment banking transactions. In addition, a downturn in the level
of market activity can lead to a decrease in brokerage commissions. Therefore,
revenue in any particular period may vary significantly from year to
year.
Executive
Overview
Revenue
recognized in the second quarter 2006 was $15,082,000, 62% higher than the
second quarter of 2005 and our highest quarterly revenue amount to date. We
experienced growth across each of our lines of business, including asset
management and wealth management. Revenue reflected strong growth in investment
banking and continued growth in commissions. Our investment bankers completed
eight equity underwritten transactions during the latest quarter and closed
the
largest sole managed private placement transaction to date for a corporate
client. Net loss for the three months ended June 30, 2006 was $1,060,000, or
$0.02 per diluted share, which was higher than our net loss of $726,000, or
$0.01 per share, during the second quarter of 2005. The net loss for the quarter
was largely attributed to $1,427,000 of proprietary trading losses and increased
compensation and benefits expense due in part to the non-cash expensing of
stock
options in connection with our adoption of SFAS 123(R).
Results
of Operations
The
following table sets forth a summary of financial highlights for the three
months and six months ended June 30, 2006 and 2005:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
2006
|
|
June
30,
2005
|
|
June
30,
2006
|
|
June
30,
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
7,945,580
|
|
$
|
7,299,732
|
|
$
|
16,643,708
|
|
$
|
13,321,695
|
|
Principal
transactions
|
|
|
(735,951
|
)
|
|
(149,592
|
)
|
|
(332,650
|
)
|
|
(522,734
|
)
|
Investment
banking
|
|
|
7,485,108
|
|
|
1,950,289
|
|
|
9,910,888
|
|
|
8,709,099
|
|
Other
|
|
|
387,422
|
|
|
190,728
|
|
|
631,414
|
|
|
256,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
15,082,159
|
|
|
9,291,157
|
|
|
26,853,360
|
|
|
21,764,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
11,896,209
|
|
|
7,166,581
|
|
|
21,826,154
|
|
|
16,368,546
|
|
Brokerage
and clearing fees
|
|
|
706,256
|
|
|
565,559
|
|
|
1,388,860
|
|
|
1,087,277
|
|
Professional
services
|
|
|
862,798
|
|
|
475,404
|
|
|
1,308,285
|
|
|
746,830
|
|
Occupancy
and equipment
|
|
|
430,135
|
|
|
383,239
|
|
|
832,148
|
|
|
733,198
|
|
Communications
and technology
|
|
|
725,027
|
|
|
442,929
|
|
|
1,335,115
|
|
|
866,353
|
|
Depreciation
and amortization
|
|
|
173,084
|
|
|
129,363
|
|
|
336,935
|
|
|
235,112
|
|
Travel
and entertainment
|
|
|
851,285
|
|
|
476,528
|
|
|
1,381,655
|
|
|
784,412
|
|
Other
|
|
|
163,672
|
|
|
721,008
|
|
|
562,664
|
|
|
1,136,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
15,808,466
|
|
|
10,360,611
|
|
|
28,971,816
|
|
|
21,957,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(726,307
|
)
|
|
(1,069,454
|
)
|
|
(2,118,456
|
)
|
|
(193,695
|
)
|
Interest
income
|
|
|
140,183
|
|
|
115,264
|
|
|
251,844
|
|
|
190,091
|
|
Interest
expense
|
|
|
(473,811
|
)
|
|
(16,526
|
)
|
|
(542,931
|
)
|
|
(33,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(1,059,935
|
)
|
|
(970,716
|
)
|
|
(2,409,543
|
)
|
|
(37,317
|
)
|
Income
tax (expense) benefit
|
|
|
—
|
|
|
244,380
|
|
|
—
|
|
|
(40,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,059,935
|
)
|
$
|
(726,336
|
)
|
$
|
(2,409,543
|
)
|
$
|
(77,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
non-GAAP financial measure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(726,307
|
)
|
|
(1,069,454
|
)
|
|
(2,118,456
|
)
|
|
(193,695
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
173,084
|
|
|
129,363
|
|
|
336,935
|
|
|
235,112
|
|
Share-based
payments
|
|
|
1,047,908
|
|
|
625,859
|
|
|
1,982,049
|
|
|
1,151,529
|
|
Adjusted
operating income (loss)
|
|
|
494,685
|
|
|
(314,232
|
)
|
|
200,528
|
|
|
1,192,946
|
|
Revenue
during the second quarter of 2006 increased $5,791,000 or 62%, from the second
quarter of 2005. Investment banking revenue grew by $5,535,000, or 284%, and
commissions revenue grew by 9% during the second quarter of 2006 as compared
to
the second quarter of 2005. Proprietary trading losses amounting to $1,427,000
during the second quarter of 2006 reduced both revenue and profitability by
such
amount. We incurred a net loss of $1,060,000 during the three months ended
June
30, 2006 as compared to net loss of $726,000 for the similar period in 2005.
Our
adjusted operating income (loss) was $495,000 for the second quarter of 2006
which represents an increase from negative $314,000 for the second quarter
of
2005.
Adjusted
operating income (loss) is a key metric we use in evaluating our financial
performance. Adjusted operating income (loss) is considered a non-GAAP financial
measure as defined by Regulation G promulgated by the SEC pursuant to the
Securities Act of 1933, as amended. We consider adjusted operating income (loss)
an important measure of our ability to generate cash flows to service debt,
fund
capital expenditures and fund other corporate investing and financing
activities. Adjusted operating income (loss) eliminates the non-cash effect
of
tangible asset depreciation and amortization of intangible assets and
stock-based compensation. Adjusted operating income (loss) is similar to
earnings before interest, tax depreciation and amortization, or EBITDA, that
we
have presented in the past as a non-GAAP metric used for evaluating our
financial performance. However, adjusted operating income (loss) uses operating
income (loss) as a starting point instead of net income (loss) which simplifies
the presentation. Adjusted operating income (loss) should be considered in
addition to, rather than as a substitute for, pre-tax income, net income and
cash flows from operating activities.
Commissions
and Principal Transactions Revenue
Our
broker-dealer activity includes the following:
·
|
Commissions
— Commissions include revenue resulting from executing stock trades
for
exchange-listed securities, over-the-counter securities and other
transactions as agent.
|
·
|
Principal
Transactions — Principal transactions consist of a portion of dealer
spreads attributed to our securities trading activities as principal
in
NASDAQ-listed and other securities, and include transactions derived
from
our activities as a market-maker. Additionally, principal transactions
include gains and losses resulting from market price fluctuations
that
occur while holding positions in our trading security
inventory.
|
The
following table sets forth our revenue and several operating metrics which
we
utilize in measuring and evaluating performance and the results of our trading
activity operations:
|
|
|
Three Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
7,945,580
|
|
$
|
7,299,732
|
|
$
|
16,643,708
|
|
$
|
13,321,695
|
|
Principal
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
principal transactions, proprietary trading and market
making
|
|
|
(815,666
|
)
|
|
(235,529
|
)
|
|
(127,733
|
)
|
|
(766,248
|
)
|
Investment
portfolio
|
|
|
79,715
|
|
|
85,937
|
|
|
(204,917
|
)
|
|
243,514
|
|
Total
principal transactions revenue
|
|
$
|
(735,951
|
)
|
$
|
(149,592
|
)
|
$
|
(332,650
|
)
|
$
|
(522,734
|
)
|
|
|
|
|
|
|
|
|
|
|
Transaction
Volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares traded
|
|
|
244,984,000
|
|
|
242,964,000
|
|
|
507,732,047
|
|
|
463,914,000
|
|
Number
of active clients
|
|
|
383
|
|
|
396
|
|
|
469
|
|
|
478
|
|
Commissions
revenue amounted to $7,946,000 or 53%, of our revenue during the second quarter
of 2006, representing a 9% increase over commissions recognized during the
second quarter of 2005. The growth in commissions was due to an increase
in trading volumes across key research sectors including telecom services,
consumer and retail. Also contributing to the commission growth was an
increase in productivity among our sales and trading professionals, as well
as
an increase in the number of companies under research coverage. As of June
30,
2006, companies covered by our research analysts have grown to 176 with plans
to
exceed 200 by the end of the year. Additionally, revenue from our Institutional
Cash Distributors, or ICD, group grew by $352,000 over the second quarter of
2005 as the assets brokered by ICD have nearly doubled over the past year.
During the second quarter of 2006 and 2005, no single brokerage customer
accounted for more than 10% of our revenue.
Principal
transactions reduced revenue by $736,000 during the second quarter 2006 and
$150,000 during the second quarter 2005. 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.
During
the second quarter of 2006, we incurred $1.4 million in losses resulting
primarily from a decline in the mark-to-fair market value of positions in
our
proprietary trading account. These losses were partially offset by revenue
from
principal trades for customers.
On
August
8, 2006, Merriman Curhan Ford & Co. filed a Schedule 13D with the Securities
and Exchange Commission related to the shares of Points International Ltd.
that
it owns in its proprietary account. We believe that Points International
Ltd. is
an undervalued company in the Internet media space and that it would benefit
all
shareholders of Points International Ltd. to implement a formal process to
develop strategic partners in order to accelerate their
growth.
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 three months and six months ended
June
30, 2006 and 2005:
|
|
Three Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Capital
raising
|
|
$
|
7,330,108
|
|
$
|
1,910,289
|
|
$
|
9,235,003
|
|
$
|
8,503,974
|
|
Financial
advisory
|
|
|
155,000
|
|
|
40,000
|
|
|
675,885
|
|
|
205,125
|
|
Total
investment banking revenue
|
|
$
|
7,485,108
|
|
$
|
1,950,289
|
|
$
|
9,910,888
|
|
$
|
8,709,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
Volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
offerings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
underwriting participation
|
|
$
|
72,528,000
|
|
$
|
3,750,000
|
|
$
|
104,151,000
|
|
$
|
16,042,000
|
|
Number
of transactions
|
|
|
8
|
|
|
1
|
|
|
10
|
|
|
3
|
|
Private
placements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
raised
|
|
$
|
84,000,000
|
|
$
|
33,425,000
|
|
$
|
89,000,000
|
|
$
|
217,419,000
|
|
Number
of transactions
|
|
|
2
|
|
|
3
|
|
|
4
|
|
|
9
|
|
Our
investment banking revenue amounted to $7,485,000, or 50% of our revenue during
the second quarter of 2006, representing a 284% increase compared to $1,950,000
recognized during the second quarter of 2005. Our equity underwriting activity
grew significantly during the second quarter of 2006 with eight transactions
closed as compared to one transaction during the second quarter of 2005.
Additionally, we raised $78 million for a corporate client which was the largest
sole managed private placement completed by Merriman Curhan Ford & Co. to
date. During the three months ended June 30, 2006, one investment banking
customer accounted for 26% of our revenue, while one investment banking customer
accounted for 12% of our revenue during the three months ended June 30,
2005.
Compensation
and Benefits Expenses
Compensation
and benefits expense represents the majority of our operating expenses and
includes incentive compensation paid to sales, trading and investment banking
professionals, as well as discretionary bonuses, salaries and wages, and
share-based payments. Incentive compensation varies primarily based on revenue
production. Discretionary bonuses paid to research analysts also vary with
commissions revenue production but includes other qualitative factors as well.
Salaries, payroll taxes and employee benefits are relatively fixed in
nature.
The
following table sets forth the major components of our compensation and benefits
for the three months and six months ended June 30, 2006 and 2005:
|
|
Three Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Incentive
compensation and discretionary bonuses
|
|
$7,613,891
|
|
$3,574,161
|
|
$13,260,207
|
|
$9,394,458
|
|
Salaries
and wages
|
|
|
2,450,060
|
|
|
2,297,774
|
|
|
4,660,335
|
|
|
4,287,750
|
|
Stock-based
compensation
|
|
|
1,047,908
|
|
|
625,859
|
|
|
1,982,049
|
|
|
1,151,529
|
|
Payroll
taxes, benefits and other
|
|
|
784,350
|
|
|
668,787
|
|
|
1,923,563
|
|
|
1,534,809
|
|
Total
compensation and benefits
|
|
$
|
11,896,209
|
|
$
|
7,166,581
|
|
$
|
21,826,154
|
|
$
|
16,368,546
|
|
Total
compensation and benefits as a percentage of revenue
|
|
|
79
|
%
|
|
77
|
%
|
|
81
|
%
|
|
75
|
%
|
Cash
compensation and benefits as a percentage of revenue
|
|
|
72
|
%
|
|
70
|
%
|
|
74
|
%
|
|
70
|
%
|
The
amount of compensation and benefits expense that we incur during a given period
is largely dependent upon the level of revenue recognized during that period,
since most of our employees are paid based on a percentage of the revenue
attributed to their efforts. The increase in compensation and benefits expense
of $4,730,000, or 66%, from the second quarter of 2005 to the second quarter
of
2006 was due primarily to higher incentive compensation ($4,040,000) and
stock-based compensation expense ($422,000). Cash compensation as a percentage
of revenue was 72% during the three months ended June 30, 2006 which was higher
than the 70% recorded during the three months ended June 30, 2005. Cash
compensation as a percentage of revenue would have been 66% during the second
quarter of 2006 if we had not incurred the proprietary trading losses of
$1,427,000. Cash compensation is equal to total compensation and benefits
expense excluding stock-based compensation. Our headcount has increased from
144
at June 30, 2005 to 169 at June 30, 2006. During the second quarter 2006 and
2005, one sales professional accounted for 12% and 15% of our revenue,
respectively.
The
six
months ended June 30, 2006 represents our first fiscal period following adoption
of SFAS 123(R), “Share-Based Payment,” which requires that we recognize
compensation expense on our consolidated statement of operations for all
share-based awards made to employees and directors based on estimated fair
values. We have adopted SFAS 123(R) using the modified prospective application
transition method, and accordingly have not restated financial statements for
prior periods to include the impact of SFAS 123(R). To determine the valuation
of share-based awards under SFAS 123(R), we continue to use the Black-Scholes
option pricing model that we utilized to determine our pro forma share-based
compensation in prior periods. Share-based compensation was $1,048,000 during
the three months ended June 30, 2006, which included $70,000 from the issuance
of common stock as contingent consideration to the Catalyst Shareholder.
Additional information regarding our adoption of SFAS 123(R) during the six
months ended June 30, 2006 is set forth in the notes to the financial statements
above and in “Critical Accounting Policies and Estimates” below.
Other
Operating Expenses
Brokerage
and clearing fees include trade processing expenses that we pay to our clearing
broker and execution fees that we pay to floor brokers and electronic
communication networks. Merriman Curhan Ford & Co. is a fully-disclosed
broker-dealer, which has engaged a third party clearing broker to perform all
of
the clearance functions. The clearing broker-dealer processes and settles the
customer transactions for Merriman Curhan Ford & Co. and maintains the
detailed customer records. Additionally, security trades are executed by
third-party broker-dealers and electronic trading systems. These expenses are
almost entirely variable with commission revenue and the volume of brokerage
transactions. Our brokerage and clearing fees increased by $141,000, or 25%
during the second quarter of 2006 as compared to the second quarter of 2005
and
increased by $302,000, or 28% during the six months ended June 30, 2006 as
compared to the similar period in 2005. These increases reflect the growth
in
our commissions revenue and market making activity.
Professional
services expense includes legal fees, accounting fees, expenses related to
investment banking transactions, consulting fees and recruiting fees. Many
of
these expenses, such as legal and accounting fees, are to a large extent fixed
in nature. The increase of $387,000 or 81%, from the second quarter of 2005
to
the second quarter of 2006 was primarily attributed to the expensing of legal
fees previously deferred that resulted from investment banking transactions
that
have not closed. We defer expenses, including legal fees, related to securities
offerings in which we act as underwriter 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. The increase of $561,000 or 75%, during the
six months ended June 30, 2006 as compared to the similar period in 2005 was
due
to the expensing of legal fees previously deferred for investment banking
transactions as well as higher auditing and tax consulting
services.
Occupancy
and equipment includes rental costs for our office facilities and equipment,
as
well as equipment, software and leasehold improvement expenses. These expenses
are largely fixed in nature. The increase of $47,000, or 12%, from the second
quarter of 2005 to the second quarter of 2006 and the increase of 99,000, or
13%, during the six months ended June 30, 2006 as compared to the similar period
in 2005 resulted mostly from facility maintenance and related
services.
Communications
and technology expense includes voice, data and Internet service fees, and
data
processing costs. While variable in nature, these tend to be more correlated
to
headcount than revenue. The increase of $282,000, or 64%, from the second
quarter of 2005 to the second quarter of 2006 and the increase of $469,000,
or
54%, during the six months ended June 30, 2006 as compared to the similar period
in 2005 was due to network connections and market data service fees incurred
in
our sales, trading and research operations. The higher costs are the result
of
increased headcount and the expansion of our offices.
Depreciation
and amortization expense primarily relate to the depreciation of our computer
equipment and leasehold improvements. Depreciation and amortization is mostly
fixed in nature. The increase of $44,000, or 34%, from the second quarter of
2005 to the second quarter of 2006 and the increase of $102,000, or 43%, during
the six months ended June 30, 2006 as compared to the similar period in 2005
was
due to increased capital expenditures during 2005, including leasehold
improvements, to facilitate our growth and expansion.
Travel
and entertainment expense results from business development activities across
our various businesses. The increase of $375,000, or 79%, from the second
quarter of 2005 to the second quarter of 2006 and the increase of $597,000,
or
76%, during the six months ended June 30, 2006 as compared to the similar period
in 2005 was due mostly to increased investment banking and capital markets
activity, as well as expensing of travel expenses previously deferred that
resulted from investment banking transactions that have not closed. We defer
expenses, including travel and entertainment costs, related to securities
offerings in which we act as underwriter 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.
Other
operating expense includes professional liability and property insurance,
printing and copying, business licenses and taxes, office supplies and other
miscellaneous office expenses. The decrease of approximately $557,000, or 77%,
from the second quarter of 2005 to the second quarter of 2006 and the decrease
of $574,000, or 50%, during the six months ended June 30, 2006 as compared
to
the similar period in 2005 was attributed to the recovery of the $500,000 note
receivable from Ascend Services, Ltd. that we had previously written off through
bad debt expense in 2005.
Interest
Income
Interest
income represents interest earned on our cash balances maintained at financial
institutions. The increase of $25,000, or 22%, from the second quarter of 2005
to the second quarter of 2006 and the increase of $62,000, or 32%, during the
six months ended June 30, 2006 as compared to the similar period in 2005 was
due
to higher average earning assets and higher average interest rates during these
periods.
Interest
Expense
Interest
expense primarily represents interest related to the convertible debenture
issued in March 2006, as well as interest for our various capital leases used
to
finance purchase of furniture and fixtures. Interest expense for the six months
ended June 30, 2006 was $543,000 which included $483,000 for the convertible
debenture issued in March 2006. Interest expense for the convertible debenture
is based on a forecast of future cash flows to be paid to the lender discounted
at a risk adjusted yield. The actual return on our $7,500,000 investment managed
by MCF Asset Management, LLC from March 2006 to June 2006 was $178,000, or
2.4%.
The amount of interest payable to Midsummer based on the actual return is
$134,000. Interest is paid to Midsummer annually based on the investment
performance for the calendar year.
Issuance
of Debt
In
March
2006, we completed a $7.5 million private placement of a variable rate secured
convertible debenture with a detachable stock warrant. The issue was placed
with
Midsummer Investment, Ltd. We invested the proceeds in one of the proprietary
funds managed by MCF Asset Management, LLC, our wholly-owned subsidiary. The
debenture bears interest at a variable rate based on the annual investment
performance of the fund. Stock warrants to purchase 1,875,000 shares of common
stock at $1.41 per share were also issued to the investor. The stock warrants
have a six year term. See Note 2 to the condensed consolidated financial
statements for additional information.
We
have
accounted for this transaction as the issuance of convertible debt, an embedded
derivative referred to as a participation interest obligation, and a detachable
stock warrant. The $7,500,000 has been allocated to these individual instruments
based on their relative fair value as determined by management.
The
fair
value of the stock warrant of $1,492,000 has been recorded as a discount to
the
convertible debenture and an increase to additional paid-in capital. The
fair value of the participation interest obligation of $2,316,000 is also
treated as a discount to the convertible debenture and is based on a forecast
of
future cash flows to be paid to the lender discounted at a risk adjusted
yield. The discount to the convertible debenture of $3,808,000 is
amortized to interest expense using the level yield method over the term of
the
debenture. As of June 30, 2006, the Company estimates that the implicit rate
on
this obligation will be 24%. The participation interest obligation is
carried in the statements of financial condition at fair value and the Company
will reassess fair value of the participation interest obligation at the end
of
each reporting period with adjustments recorded to interest expense. The
allocation to the three separate instruments is subject to further analysis
to
be completed in the third quarter of 2006; however, management does not expect
that an adjustment, if any, would be material to the financial
statements.
Income
Tax Expense
At
the
end of each interim reporting period we calculate an effective tax rate based
on
our best estimate of the tax provision (benefit) that will be provided for
the
full year, stated as a percentage of estimated annual pre-tax income (loss).
The
tax provision (benefit) for the interim period is determined using this
estimated annual effective tax rate.
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 the
companies expected current expense for the year. We historically have
had and expect to have for the current year, 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 future.
Off-Balance
Sheet Arrangements
We
were
not a party to any off-balance sheet arrangements during the six months ended
June 30, 2006 and 2005. In particular, we do not have any interest in so-called
limited purpose entities, which include special purpose entities and structured
finance entities.
Minority
Interest
In
March
2006, the Company launched its first proprietary hedge fund managed by MCF
Asset
Management, LLC, our wholly owned subsidiary. We invested the proceeds from
the
$7,500,000 private placement of secured convertible debenture and stock warrant
into the fund as a limited partner. As of June 30, 2006, our limited partnership
interest represented 78% of the fund. Accordingly, we have consolidated all
of
the assets and liabilities of the fund because we have effective control of
the
fund that results from the large initial percentage interest in the limited
partnership. We will deconsolidate the assets and liabilities of the fund and
carry the limited partnership interest at fair value if and when effective
control of the fund transfers to other investors in the future. This should
occur when our limited partnership interest represents less than 50% of the
fund. We have recorded the minority interest on the consolidated statements
of
financial position as of June 30, 2006 which reflects the minority investors'
interest in the fund's assets and liabilities.
By
consolidating the assets and liabilities of the fund as of June 30, 2006, we
recorded in the consolidated statements of financial condition $6,639,000 of
cash and cash equivalents, $3,489,000 of marketable securities owned, $1,000
of
due from clearing broker, $85,000 in prepaid and other assets, $35,000 in
accrued liabilities, $303,000 in securities sold, not yet purchased and
$2,193,000 in minority interest. If we did not have effective control of the
fund as of June 30, 2006, these assets, liabilities and minority interest,
including the $6,639,000 of cash and cash equivalents would not have been
included in our consolidated statements of financial condition. Instead, we
would have recorded an asset representing an investment in the fund managed
by
MCF Asset Management, LLC in the amount of $7,681,000. The investment in the
fund includes a one year lock-up provision which makes this investment illiquid
for one year.
Commitments
The
following is a table summarizing our significant commitments as of June 30,
2006, consisting of debt payments related to convertible notes payable,
non-convertible notes payable, capital leases and future minimum lease payments
under all non-cancelable operating leases with initial or remaining terms
in
excess of one year.
|
|
Notes
Payable
|
|
Operating
Leases
|
|
Capital
Leases
|
|
2006
|
|
$
|
53,388
|
|
$
|
959,072
|
|
$
|
213,898
|
|
2007
|
|
|
106,775
|
|
|
1,810,616
|
|
|
349,129
|
|
2008
|
|
|
243,990
|
|
|
1,206,478
|
|
|
197,044
|
|
2009
|
|
|
—
|
|
|
832,568
|
|
|
—
|
|
2010
|
|
|
7,500,000
|
|
|
869,731
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
709,898
|
|
|
—
|
|
Total
commitments
|
|
$
|
7,904,153
|
|
$
|
6,388,363
|
|
$
|
760,071
|
|
Critical
Accounting Policies and Estimates
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to the valuation of securities owned and deferred tax assets. We base
our estimates on historical experience and on various other assumptions that
are
believed to be reasonable under the circumstances, the results of which form
the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ
from those estimates. We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation
of
our consolidated financial statements.
Valuation
of Securities Owned
“Securities
owned” and “Securities sold, but not yet purchased” in our consolidated
statements of financial condition consist of financial instruments carried
at
fair value or amounts that approximate fair value, with related unrealized
gains
or losses recognized in our results of operations. The use of fair value to
measure these financial instruments, with related unrealized gains and losses
recognized immediately in our results of operations, is fundamental to our
financial statements and is one of our most critical accounting policies. The
fair value of a financial instrument is the amount at which the instrument
could
be exchanged in a current transaction between willing parties, other than in
a
forced or liquidation sale.
Fair
values of our financial instruments are generally obtained from quoted market
prices in active markets, broker or dealer price quotations, or alternative
pricing sources with reasonable levels of price transparency. To the extent
certain financial instruments trade infrequently or are non-marketable
securities and, therefore, have little or no price transparency, we value these
instruments based on management's estimates. The fair value of these securities
is subject to a high degree of volatility and may be susceptible to significant
fluctuation in the near term. Securities that contain restrictions are stated
at
a discount to the value of readily marketable securities. Stock warrants are
carried at a discount to fair value as determined by using the Black-Scholes
Option Pricing model.
Revenue
Recognition
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.
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. Management fees are recorded
on
the offering date, selling concessions on settlement date, and underwriting
fees
at the time the underwriting is completed and the related income is reasonably
determinable. 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. Merger and acquisition fees and other advisory
service revenue are generally earned and recognized only upon successful
completion of the engagement. Underwriting revenue is presented net of related
expenses. Unreimbursed expenses associated with private placement and advisory
transactions are recorded as expenses as incurred.
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 reduces 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.
Stock-Based
Compensation
On
January 1, 2006, we adopted SFAS 123(R), “Shared-Based Payment,” which
requires the measurement and recognition of compensation expense, based on
estimated fair values, for all share-based awards, made to employees and
directors, including stock options, non-vested stock, and participation in
our
employee stock purchase plan. Share-based compensation expense recognized in
our
consolidated statement of operations for the six months ended June 30, 2006
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 estimated in accordance with the provisions of SFAS 123, and
(ii) subsequent to December 31, 2005, based on the grant date fair
value estimated in accordance with the provisions of SFAS 123(R).
We
estimate the fair value of stock options granted using the Black-Scholes option
pricing method. This option pricing 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. The Company calculated the expected term using the lattice 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.
Because
share-based compensation expense is based on awards that are ultimately expected
to vest, it has been reduced to account for estimated forfeitures. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. In our pro forma information required under SFAS 123 for the periods
prior to fiscal 2006, we accounted for forfeitures as they occurred. Changes
in
these inputs and assumptions can materially affect the measure of estimated
fair
value of our share-based compensation.
Valuation
of Derivative Embedded in Convertible Debenture
In
March
2006, we completed a $7.5 million private placement of a variable rate secured
convertible debenture with a detachable stock warrant. The debenture bears
interest at a variable rate based on the annual investment performance of the
investment in the proprietary funds managed by MCF Asset Management, LLC. We
have accounted for this transaction as the issuance of convertible debt, an
embedded derivative referred to as a participation interest obligation, and
a
detachable stock warrant. The convertible debenture is carried on the
statements of financial condition net of a $1,492,000 discount for the stock
warrant. The participation interest obligation of $2,316,000 is also
treated as a discount to the convertible debenture and is based on a forecast
of
future cash flows to be paid to the lender discounted at a risk adjusted
yield. As of June 30, 2006, we estimate that the implicit rate on this
obligation will be 24%. The participation interest obligation is carried
in the statements of financial condition at fair value and we will reassess
fair
value of the participation interest obligation at the end of each reporting
period with adjustments recorded to interest expense. Changes in the
forecast of future cash flows to be paid to the lender can materially affect
the
estimated fair value of the participation interest obligation which can
materially affect the amount of interest expense recorded in a
period.
Deferred
Tax Valuation Allowance
We
account for income taxes in accordance with the provision of SFAS No.
109,
Accounting for Income Taxes,
which
requires the recognition of deferred tax assets and liabilities at tax rates
expected to be in effect when these balances reverse. Future tax benefits
attributable to temporary differences are recognized to the extent that the
realization of such benefits is more likely than not. We have concluded that
it
is more likely than not that our deferred tax assets as of June 30, 2006 and
2005 will not be realized based on the scheduling of deferred tax liabilities
and projected taxable income. The amount of the deferred tax assets actually
realized, however, could vary if there are differences in the timing or amount
of future reversals of existing deferred tax liabilities or changes in the
actual amounts of future taxable income. Should we determine that we will be
able to realize all or part of the deferred tax asset in the future, an
adjustment to the deferred tax asset will be recorded in the period such
determination is made.
Liquidity
and Capital Resources
Historically,
we have satisfied our liquidity and regulatory capital needs through the
issuance of equity and debt securities. As of June 30, 2006 liquid assets
consisted primarily of cash and cash equivalents and marketable securities.
Excluding the assets of the proprietary fund managed by MCF Asset Management,
LLC that is being consolidated for financial statement purposes until we no
longer exercise effective control over the fund, liquid assets of amounted
to
$17,358,000 as of June 30, 2006. This consisted of $9,818,000 in cash and cash
equivalents and $7,540,000 in marketable securities.
Merriman
Curhan Ford & Co., 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 June 30, 2006,
Merriman Curhan Ford & Co. had regulatory net capital, as defined, of
$7,945,000, which exceeded the amount required by $6,728,000.
Cash
and
cash equivalents decreased by $1,321,000 during the six months ended June 30,
2006. Cash used in our operating activities was $4,448,000 which primarily
represents the increase in marketable securities owned, payment of employee
bonuses earned in 2005, and net loss for the period adjusted for non-cash
expenses including share-based payments.
Our
adjusted operating income (loss) was $201,000 for the first six months of
2006. Adjusted
operating income (loss) is considered a non-GAAP financial measure as defined
by
Regulation G promulgated by the SEC pursuant to the Securities Act of 1933,
as
amended. We consider adjusted operating income (loss) an important measure
of
our ability to generate cash flows to service debt, fund capital expenditures
and fund other corporate investing and financing activities. Adjusted operating
income (loss) eliminates the non-cash effect of tangible asset depreciation
and
amortization of intangible assets and stock-based compensation. A reconciliation
of adjusted operating income (loss) is provided on page 18 of this Quarterly
Report.
Cash used
in investing activities amounted to $6,967,000 which consisted of
the investment in proprietary fund managed by MCF Asset Management,
LLC, purchases of equipment and fixtures and the contingent payment to the
Catalyst Shareholder. Cash proceeds from our financing activities was
$10,093,000 which included the proceeds from the $7,500,000 convertible
debenture, the minority interest in the fund and proceeds related to
issuance of common stock in connection with our employee stock purchase plan
and
stock option and warrant exercises.
We
believe that our existing cash balances and investments will be sufficient
to
meet our liquidity and capital spending requirements, both for the next twelve
months as well as for the long-term. However, we may require additional capital
investment to fund our working capital if we incur future operating losses.
We
cannot be certain that additional debt or equity financing will be available
when required or, if available, that we can secure it on terms satisfactory
to
us.
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. 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.
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.
Our
long
term debt obligations bear interest at a fixed rate. Accordingly, an immediate
10% increase or decrease in current interest rates would not have an impact
on
our interest expense or cash flows. The fair market value of our long term
fixed
interest rate debt is subject to interest rate risk. Generally, the fair market
value of fixed interest rate debt will increase as interest rates fall and
decrease as interest rates rise. We would not expect an immediate 10% increase
or decrease in current interest rates to have a material impact on the fair
market value of our long term debt obligations.
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.
Item 4.
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 of 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), the Principal Executive Officer and Principal Financial Officer of the
Company have concluded that the disclosure controls and procedures are effective
as of June 30, 2006.
Changes
in internal controls -
There
was 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)
that
occurred during the quarter ended June 30, 2006, that materially affected,
or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
During
the second quarter of 2006, the Company engaged
Pershing, LLC as clearing broker for Merriman Curhan Ford & Co. and began
using their institutional securities processing applications. Additionally,
Merriman Curhan Ford & Co. implemented a new securities order management
system that is being licensed from Fidessa. The implementation of these new
trading systems did not materially affect the Company’s internal control over
financial reporting (as
defined in Rules 13a-15(d) and 15d-15(d) of the Exchange Act).
PART
II. OTHER INFORMATION
Item 1.
|
Legal Proceedings
|
Westerman
v. Western Capital Financial Group--NASD Arbitration
In
May 2005, our broker-dealer subsidiary Merriman Curhan Ford & Co.
was served with a claim in NASD Arbitration by Ms. Westerman. The claim
names Western Capital Financial Group as one of several defendants. Western
Capital Financial Group is the predecessor name of
Merriman Curhan Ford & Co., the California corporation. The
Western Capital Financial Group name was effective from June 26, 1986 to
July 14, 1998.
This
claim arises from Ms. Westerman's purchase of a variable annuity product in
January 1990 from a predecessor of our broker-dealer subsidiary. MCF
Corporation acquired Merriman Curhan Ford & Co. in December 2001.
The Claimant alleges that a registered representative improperly recommended
that she move her investment to different products on two
occasions.
Claimant
alleges a theory of predecessor liability against Merriman Curhan
Ford & Co. Claimant prays for monetary damages in excess of $300,000
against the eleven named respondents. On May 1, 2006, we reached settlement
with
Claimant who accepted $8,500 to resolve the dispute. Merriman Curhan Ford &
Co. has been dismissed from the arbitration and the matter is
resolved.
In
re Odimo Incorporated Securities Litigation.
Merriman
Curhan Ford & Co. was a defendant in a purported class action suit
brought in connection with a registered offering involving Odimo Incorporated
in
which we served as co-manager for the company. The complaint, filed in the
17 th
Judicial Circuit Court for Broward County in Florida on September 30, 2005,
alleged violations of federal securities laws against Odimo and certain of
its
officers as well as the company's underwriters, including us, based on alleged
misstatements and omissions in the registration statement. Recently, similar
cases were consolidated and lead plaintiff's counsel was assigned. Thereafter,
an amended complaint was filed and the underwriters, including Merriman Curhan
Ford & Co., were not named as defendants. This matter is now
resolved.
Thomas
O’Shea v. Merriman Curhan Ford & Co.
In
June
2006, our broker-dealer subsidiary Merriman Curhan Ford & Co. was
served with a claim in NASD Arbitration by Mr. O’Shea. Mr. O’Shea is a former
at-will employee of Merriman Curhan Ford & Co. and worked in the investment
banking department. Mr. O’Shea resigned from Merriman Curhan Ford & Co. in
July 2005. Mr. O’Shea alleges breach of an implied employment contract, quantum
meruit, and unjust enrichment based on his allegations that he was to be paid
more for his work. The matter is in the early pleading stage. We believe that
we
have meritorious defenses and intend to contest these claims vigorously.
However, in the event that we did 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 cashflows.
Additionally,
from time to time, we are involved in ordinary routine litigation incidental
to
our business.
Item
1A. Risk Factors
Investing
in our securities involves a high degree of risk. In addition to the other
information contained in this quarterly report, including reports we
incorporate by reference, you should consider the following factors before
investing in our securities.
It
is difficult to evaluate our business and prospects because we have a limited
operating history.
We
began
actively engaging in providing securities brokerage and investment banking
services in January 2002. This was an entirely new business for us, and was
a complete break with our previous business, the bandwidth brokerage business.
Accordingly, we have a limited operating history on which to base an evaluation
of our business and prospects. Our prospects must be considered in light of
the
risks, expenses and difficulties frequently encountered by fast growing
companies in their early stage of development. We cannot assure you that we
will
be successful in addressing these risks and our failure to do so could have
a
material adverse effect on our business and results of
operations.
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
securities brokerage and investment banking 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;
· manage
expanding operations; and
·
attract and retain qualified personnel.
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 expectations, which makes our ability to successfully implement
our
business plan uncertain.
Because
we are a developing company, 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 and any additional
financing that may be needed for this purpose 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, or obtain the funds necessary to finance this development.
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.
The
markets for securities brokerage and investment banking services are highly
competitive. If we are not able to compete successfully against current and
future competitors, our business and results of operations will be adversely
affected.
We
are
engaged in the highly competitive financial services and investment industries.
We compete with large Wall Street securities firms, securities subsidiaries
of
major commercial bank holding companies, U.S. subsidiaries of large foreign
institutions, major regional firms, smaller niche players, and those offering
competitive services via the Internet. Many competitors have greater personnel
and financial resources than we do. Larger competitors are able to advertise
their products and services on a national or regional basis and may have a
greater number and variety of distribution outlets for their products, including
retail distribution. Discount and Internet brokerage firms market their services
through aggressive pricing and promotional efforts. In addition, 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.
Increased
pressure created by any current or future competitors, or by our competitors
collectively, could materially and adversely affect our business and results
of
operations. Increased competition may result in reduced revenue and loss of
market share. Further, as a strategic response to changes in the competitive
environment, we may from time to time make certain pricing, service or marketing
decisions or acquisitions that also could materially and adversely affect our
business and results of operations. We cannot assure you that we will be able
to
compete successfully against current and future competitors. In addition, new
technologies and the expansion of existing technologies may increase the
competitive pressures on us.
We
may experience reduced revenue due to declining market volume, securities prices
and liquidity, which can also cause counterparties to fail to
perform.
Our
revenue may decrease in the event of a decline in the market volume of
securities transactions, prices or liquidity. Declines in the volume of
securities transactions and in market liquidity generally result in lower
revenue from trading activities and commissions. Lower price levels of
securities may also result in a reduction in our revenue from corporate finance
fees, as well as losses from declines in the market value of securities held
by
us in trading. Sudden sharp declines in market values of securities can result
in illiquid markets and the failure of counterparties to perform their
obligations, as well as increases in claims and litigation, including
arbitration claims from customers. In such markets, we may incur reduced revenue
or losses in our principal trading, market-making, investment banking, and
advisory services activities.
We
may experience significant losses if the value of our marketable security
positions deteriorates.
We
conduct 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
for us. 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.
We
may experience significant fluctuations in our quarterly operating results
due
to the nature of our business and therefore may fail to meet profitability
expectations.
Our
revenue and operating results may fluctuate from quarter to quarter and from
year to year due to a combination of factors, including:
· |
the
level of institutional brokerage transactions and the level of
commissions
we receive from those
transactions;
|
· |
the
valuations of our principal
investments;
|
· |
the
number of capital markets transactions completed by our clients,
and the
level of fees we receive from those transactions;
and
|
· |
variations
in expenditures for personnel, consulting and legal expenses, and
expenses
of establishing new business units, including marketing and technology
expenses.
|
We
record
revenue from a capital markets advisory transaction only when we have rendered
the services, the client is contractually obligated to pay and collection is
probable; generally, most of the fee is earned only upon the closing of a
transaction. Accordingly, the timing of our recognition of revenue from a
significant transaction can materially affect our quarterly operating
results.
We
have registered one of our subsidiaries as a securities broker-dealer and,
as
such, are subject to substantial regulations. If we fail to comply with these
regulations, our business will be adversely affected.
Because
we have registered Merriman Curhan Ford & Co. with the Securities and
Exchange Commission, or SEC, and the National Association of Securities
Dealers, Inc., or NASD, as a securities broker-dealer, we are subject to
extensive regulation under federal and state laws, as well as self-regulatory
organizations. The principal purpose of regulation and discipline of
broker-dealers is the protection of customers and the securities markets rather
than protection of creditors and stockholders of broker-dealers. The Securities
and Exchange Commission is the federal agency charged with administration of
the
federal securities laws. Much of the regulation of broker-dealers, however,
has
been delegated to self-regulatory organizations, such as the NASD and national
securities exchanges. The NASD is our primary self-regulatory organization.
These self-regulatory organizations adopt rules, which are subject to SEC
approval, that govern the industry and conduct periodic examinations of member
broker-dealers. Broker-dealers are also subject to regulation by state
securities commissions in the states in which they are registered. The
regulations to which broker-dealers are subject cover all aspects of the
securities business, including net capital requirements, sales methods, trading
practices among broker-dealers, capital structure of securities firms, record
keeping and the conduct of directors, officers and employees. The SEC and the
self-regulatory bodies may conduct administrative proceedings, which can result
in censure, fine, suspension or expulsion of a broker-dealer, its officers
or
employees. If we fail to comply with these rules and regulations, our
business may be materially and adversely affected.
The
regulatory environment in which we operate is also subject to change. Our
business 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 the NASD. We also may be adversely affected by changes
in the interpretation or enforcement of existing laws and rules by these
governmental authorities and the NASD.
Our
business may suffer if we lose the services of our executive officers or
operating personnel.
We
depend
on the continued services and performance of D. Jonathan Merriman, our Chairman
and Chief Executive Officer, for our future success. We currently have an
employment agreement with Mr. Merriman, which ends on January 1, 2007,
but can be terminated by either party on 60 days' notice. The agreement contains
provisions that obligate us to make certain payments to Mr. Merriman and
substantially reduce vesting periods of options granted to him if we should
terminate him without cause or certain events resulting in a change of control
of our Board were to occur.
In
addition to Mr. Merriman, we are currently managed by a small number of key
management and operating personnel. Our future success depends, in part, on
the
continued service of our key executive, management and technical personnel,
and
our ability to attract highly skilled employees. Our business could be harmed
if
any key officer or employee were unable or unwilling to continue in his or
her
current position. From time to time we have experienced, and we expect to
continue to experience, difficulty in hiring and retaining highly skilled
employees. Competition for employees in our industry is significant. If we
are
unable to retain our key employees or attract, integrate or retain other highly
qualified employees in the future, such failure may have a material adverse
effect on our business and results of operations.
Our
business is dependent on the services of skilled professionals, and may suffer
if we can not recruit or retain such skilled
professionals.
During
the six months ended June 30, 2006, one sales professional accounted for 11%
of
our revenue. We have a number of revenue producers employed by our various
businesses. We do not have employment contracts with these employees. The loss
of one or more of these employees could adversely affect our business and
results of operations.
Our
compensation structure may negatively impact our financial condition if we
are
not able to effectively manage our expenses and cash
flows.
We
are
able to recruit and retain investment banking, research and sales and trading
professionals, in part because our business model provides that we pay our
revenue producing employees a percentage of their earned revenue. Compensation
and benefits is our largest expenditure and this variable compensation component
represents a significant proportion of this expense. Compensation for our
employees is derived as a percentage of our revenue regardless of our
profitability. Therefore, we may continue to pay individual revenue producers
a
significant amount of cash compensation as the overall business experiences
negative cash flows and/or net losses. We may not be able to recruit or retain
revenue producing employees if we modify or eliminate the variable compensation
component from our business model.
We
may be dependent on a limited number of customers for a significant portion
of
our revenue.
During
the three months ended June 30, 2006, one investment banking customer accounted
for 26% of our revenue. Additionally, we have been dependent on a small number
of customers, for a large percentage of our revenue at some times in the past
and we cannot assure you that we will not become so dependent again in the
future. If we do become dependent on a single customer or small group of
customers, the loss of one or more large customers could materially adversely
affect our business and results of operations.
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
company's 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. 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.
We
may be unable to successfully integrate acquired businesses into our existing
business and operations.
On
February 28, 2005, we acquired Catalyst Financial Planning &
Investment Management, Inc., a registered investment advisor with over $100
million in assets under management at the time of acquisition. We may experience
difficulty integrating the operations of Catalyst into our existing business
and
operations including our accounting, finance, compensation, information
technology and management systems. We may not be able to retain the services
of
Catalyst employees. These factors could result in higher than anticipated costs
associated with the Catalyst acquisition. Additionally, they may cause revenue
from the Catalyst acquisition to be lower than forecast. If costs are higher
or
revenue lower than we expect, our business and results of operations could
be
materially adversely affected. Although we have no specific plans to do so
at
this time, we may buy one or more other businesses in the future. If we are
unable to successfully integrate such businesses into our existing business
and
operations in the future, our business and results of operations could be
materially adversely affected
We
may be unable to effectively manage rapid growth that we may experience, which
could place a continuous strain on our resources and, accordingly, adversely
affect our business.
We
plan
to expand our operations. Our growth, if it occurs, will impose significant
demands on our management, financial, technical and other resources. We must
adapt to changing business conditions and improve existing systems or implement
new systems for our financial and management controls, reporting systems and
procedures and expand, train and manage a growing employee base in order to
manage our future growth. We may not be able to implement improvements to our
internal reporting systems in an efficient and timely manner and may discover
deficiencies in existing systems and controls. 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. Furthermore,
we
may acquire existing companies or enter into strategic alliances with third
parties, in order to achieve rapid growth. For us to succeed, we must make
our
existing business and systems work effectively with those of any strategic
partners without undue expense, management distraction or other disruptions
to
our business. We may be unable to implement our business plan if we fail to
manage any of the above growth challenges successfully. Our financial results
may suffer and we could be materially and adversely affected if that
occurs.
Our
business and operations would suffer in the event of system
failures.
Our
success, in particular our ability to successfully facilitate securities
brokerage transactions and provide high-quality customer service, largely
depends on the efficient and uninterrupted operation of our computer and
communications systems. Our systems and operations are vulnerable to damage
or
interruption from fire, flood, power loss, telecommunication failures,
break-ins, earthquake and similar events. Despite the implementation of network
security measures, redundant network systems and a disaster recovery plan,
our
servers are vulnerable to computer viruses, physical or electronic break-ins
and
similar disruptions, which could lead to interruptions, delays, loss of data
or
the inability to accept and fulfill customer orders. Additionally, computer
viruses may cause our systems to incur delays or other service interruptions,
which may cause us to incur additional operating expenses to correct problems
we
may experience. Any of the foregoing problems could materially adversely affect
our business or future results of operations.
We
are highly dependent on proprietary and third-party systems; therefore, system
failures could significantly disrupt our business.
Our
business is highly dependent on communications and information systems,
including systems provided by our clearing brokers. Any failure or interruption
of our systems, the systems of our clearing broker or third party trading
systems could cause delays or other problems in our securities trading
activities, which could have a material adverse effect on our operating results.
In addition, our clearing brokers provide our principal disaster recovery
system. We cannot assure you that we or our clearing brokers will not suffer
any
systems failure or interruption, including one caused by an earthquake, fire,
other natural disaster, power or telecommunications failure, act of God, act
of
war or otherwise, or that our or our clearing brokers' back-up procedures and
capabilities in the event of any such failure or interruption will be
adequate.
Our
common stock price may be volatile, which could adversely affect the value
of
your shares.
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;
|
· |
our
announcements of significant contracts, milestones,
acquisitions;
|
· |
our
relationships with other companies;
|
· |
our
ability to obtain needed capital
commitments;
|
· |
additions
or departures of key personnel;
|
· |
sales
of common 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
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.
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.
Our
risk management policies and procedures may leave us exposed 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. 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.
We
could be sued in a securities class action lawsuit.
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 can not 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.
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 American Stock Exchange, 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.
Anti-takeover
provisions of the Delaware General Corporation Law could discourage a merger
or
other type of corporate reorganization or a change in control even if it
could be favorable to the interests of
our stockholders.
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.
Because
our Board of Directors can issue common stock without stockholder approval,
you
could experience substantial dilution.
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.
Our
ability to issue additional preferred stock may adversely affect your rights
as
a common stockholder and could be used as an anti take-over
device.
Our
Articles of Incorporation authorize our Board of Directors to issue up to an
additional 27,450,000 shares of preferred stock, without approval from our
stockholders. 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.
Our
officers and directors exercise significant control over our affairs, which
could result in their taking actions of which other stockholders do not
approve.
Our
executive officers and directors, and entities affiliated with them, currently
control approximately 23% of our outstanding common stock including exercise
of
their options and 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.
Any
exercise of outstanding stock options and warrants will dilute then-existing
stockholders' percentage of ownership of our common
stock.
We
have a
significant number of outstanding stock options and warrants. During the six
months ended June 30, 2006, shares issuable upon the exercise of these options
and warrants, at prices ranging currently from approximately $0.05 to $7.00
per
share, represent approximately 13% of our total outstanding stock on a fully
diluted basis using the treasury stock method.
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.
The
annual meeting of our stockholders was held on May 5, 2006. At the annual
meeting, our stockholders voted on the matters shown in the table below. Each
director was elected, and each proposal adopted, by the votes
shown.
|
|
Votes
For
|
|
Votes
Against
|
|
Votes
Abstained
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
Election
of Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.
Jonathan Merriman
|
|
57,965,912
|
|
—
|
|
572,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick
H. Arbor
|
|
57,999,345
|
|
—
|
|
538,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald
H. Sledge
|
|
57,331,789
|
|
—
|
|
1,206,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald
E. Spears
|
|
58,080,595
|
|
—
|
|
457,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
W. Town
|
|
58,031,089
|
|
—
|
|
507,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raymond
J. Minehan
|
|
58,068,422
|
|
—
|
|
469,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis
G. Schmal
|
|
58,023,312
|
|
—
|
|
514,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony
B. Helfer
|
|
58,079,595
|
|
—
|
|
458,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
Potter
|
|
58,087,212
|
|
—
|
|
451,048
|
|
|
|
|
|
|
|
|
|
|
|
|
2.
|
Approval
of amendment of the amended Certificate of Incorporation to effect
a
reverse stock split at a ratio of 1-for-7.
|
|
53,276,180
|
|
3,925,040
|
|
86,840
|
|
|
3.
|
Approval
of amendments to the Company’s 2003 Stock Option and Incentive Plan to
increase by 1,500,000 the number of shares of Common Stock available
for
issuance pursuant to awards granted under the Stock Option and Incentive
Plan and to extend the term of the Stock Option and Incentive Plan
for an
additional one-year period, until March 7, 2016.
|
|
22,619,032
|
|
7,375,112
|
|
336,274
|
|
|
4.
|
Approval
of creation of the 2006 Director’s Stock Option and Incentive Plan with
840,000 shares of Common Stock available for issuance and a term
of ten
years.
|
|
20,918,983
|
|
9,185,456
|
|
226,979
|
|
|
31.1
|
Certification
of Principal Executive Officer Pursuant To Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to
18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
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.
|
|
|
|
MCF
CORPORATION
|
|
|
|
August
8, 2006
|
By: |
/s/ D.
JONATHAN MERRIMAN |
|
D.
Jonathan Merriman,
Chairman
of the Board and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
August
8, 2006
|
By: |
/s/ JOHN
D. HIESTAND |
|
John
D. Hiestand
Chief
Financial Officer
(Principal
Financial Officer)
|