Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934.
|
For
the quarterly period ended September 30, 2007
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)
|
|
94108
(Zip
Code)
|
(415)
248-5600
(Registrant's
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x No
¨
Indicate
by check mark whether the registrant 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 ¨
|
Accelerated
filer x
|
Non-accelerated
filer ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes ¨
No x
The
number of shares of Registrant's common stock outstanding as of November 5,
2007
was 12,234,448.
Form
10-Q
For
the Three Months Ended September 30, 2007
|
|
Page
No.
|
|
PART
I FINANCIAL INFORMATION
|
|
|
|
ITEM
1. Financial Statements (unaudited)
|
|
|
|
Condensed
Consolidated Statements of Operations For the Three Months and Nine
Months
Ended September 30, 2007 and 2006
|
|
2
|
|
Condensed
Consolidated Statements of Financial Condition as of September 30,
2007
and December 31, 2006
|
|
3
|
|
Condensed
Consolidated Statements of Cash Flows For the Nine Months Ended September
30, 2007 and 2006
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
5
|
|
ITEM
2. Management's Discussion and Analysis of Financial Condition and
Results
of Operations
|
|
15
|
|
ITEM
3. Quantitative and Qualitative Disclosures About Market
Risk
|
|
24
|
|
ITEM
4. Controls and Procedures
|
|
24
|
|
PART
II OTHER INFORMATION
|
|
|
|
ITEM
1. Legal Proceedings
|
|
25
|
|
ITEM
1A. Risk Factors
|
|
25
|
|
ITEM
2. Unregistered Sales of Equity Securities
|
|
31
|
|
ITEM
6. Exhibits
|
|
32
|
|
Signatures
|
|
33
|
|
Certifications
|
|
|
|
Item
1. Financial Statements (unaudited)
MCF
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2007
|
|
September
30, 2006
|
|
September
30, 2007
|
|
September
30, 2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
7,923,963
|
|
$
|
6,700,416
|
|
$
|
22,807,243
|
|
$
|
23,344,124
|
|
Principal
transactions
|
|
|
2,478,297
|
|
|
(1,148,313
|
)
|
|
10,804,073
|
|
|
(1,480,963
|
)
|
Investment
banking
|
|
|
5,616,491
|
|
|
1,839,288
|
|
|
15,480,518
|
|
|
11,750,176
|
|
Primary
research
|
|
|
1,165,428
|
|
|
─
|
|
|
2,116,490
|
|
|
─
|
|
Advisory
and other fees
|
|
|
476,015
|
|
|
35,099
|
|
|
1,147,363
|
|
|
238,321
|
|
Total
revenue
|
|
|
17,660,194
|
|
|
7,426,490
|
|
|
52,355,687
|
|
|
33,851,658
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
12,096,131
|
|
|
8,534,218
|
|
|
35,673,505
|
|
|
29,987,310
|
|
Brokerage
and clearing fees
|
|
|
627,223
|
|
|
598,644
|
|
|
1,921,920
|
|
|
1,987,504
|
|
Cost
of primary research services
|
|
|
555,185
|
|
|
─
|
|
|
950,403
|
|
|
─
|
|
Professional
services
|
|
|
518,045
|
|
|
567,535
|
|
|
1,603,163
|
|
|
1,850,916
|
|
Occupancy
and equipment
|
|
|
499,459
|
|
|
406,047
|
|
|
1,395,048
|
|
|
1,195,202
|
|
Communications
and technology
|
|
|
921,853
|
|
|
800,061
|
|
|
2,618,799
|
|
|
2,123,963
|
|
Depreciation
and amortization
|
|
|
193,284
|
|
|
156,760
|
|
|
556,332
|
|
|
467,870
|
|
Amortization
of intangible assets
|
|
|
264,771
|
|
|
─
|
|
|
485,414
|
|
|
─
|
|
Travel
and entertainment
|
|
|
635,353
|
|
|
611,712
|
|
|
1,789,971
|
|
|
1,960,304
|
|
Other
|
|
|
1,277,519
|
|
|
1,042,738
|
|
|
2,993,878
|
|
|
1,578,024
|
|
Total
operating expenses
|
|
|
17,588,823
|
|
|
12,717,715
|
|
|
49,988,433
|
|
|
41,151,093
|
|
Operating
income (loss)
|
|
|
71,371
|
|
|
(5,291,225
|
)
|
|
2,367,254
|
|
|
(7,299,435
|
)
|
Interest
income
|
|
|
132,965
|
|
|
117,945
|
|
|
362,919
|
|
|
367,711
|
|
Interest
expense
|
|
|
(15,876
|
)
|
|
134,895
|
|
|
(97,087
|
)
|
|
(408,002
|
)
|
Income
(loss) from continuing operations before taxes
|
|
|
188,460
|
|
|
(5,038,385
|
)
|
|
2,633,089
|
|
|
(7,339,726
|
)
|
Income
tax expense
|
|
|
─
|
|
|
─
|
|
|
(55,000
|
)
|
|
─
|
|
Income
(loss) from continuing operations
|
|
|
188,460
|
|
|
(5,038,385
|
)
|
|
2,578,089
|
|
|
(7,339,726
|
)
|
Loss
from discontinued operations
|
|
|
─
|
|
|
(70,666
|
)
|
|
─
|
|
|
(178,868
|
)
|
Net
income (loss)
|
|
$
|
188,460
|
|
$
|
(5,109,051
|
)
|
$
|
2,578,089
|
|
$
|
(7,518,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.02
|
|
$
|
(0.50
|
)
|
$
|
0.23
|
|
$
|
(0.74
|
)
|
Loss
from discontinued operations
|
|
$
|
─
|
|
$
|
(0.01
|
)
|
$
|
─
|
|
$
|
(0.02
|
)
|
Net
income (loss)
|
|
$
|
0.02
|
|
$
|
(0.51
|
)
|
$
|
0.23
|
|
$
|
(0.76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.01
|
|
$
|
(0.05
|
)
|
$
|
0.21
|
|
$
|
(0.74
|
)
|
Loss
from discontinued operations
|
|
$
|
─
|
|
$
|
(0.01
|
)
|
$
|
─
|
|
$
|
(0.02
|
)
|
Net
income (loss)
|
|
$
|
0.01
|
|
$
|
(0.51
|
)
|
$
|
0.21
|
|
$
|
(0.76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,999,656
|
|
|
10,151,922
|
|
|
11,337,346
|
|
|
9,906,672
|
|
Diluted
|
|
|
13,139,384
|
|
|
10,151,922
|
|
|
12,499,544
|
|
|
9,906,672
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
MCF
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
|
|
September
30, 2007
|
|
December
31, 2006
|
|
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
12,470,717
|
|
$
|
13,746,590
|
|
Securities
owned:
|
|
|
|
|
|
|
|
Marketable,
at fair value
|
|
|
14,661,068
|
|
|
7,492,914
|
|
Not
readily marketable, at estimated fair value
|
|
|
4,040,665
|
|
|
1,489,142
|
|
Restricted
cash
|
|
|
688,011
|
|
|
629,427
|
|
Due
from clearing broker
|
|
|
1,134,440
|
|
|
551,831
|
|
Accounts
receivable, net
|
|
|
2,421,026
|
|
|
2,715,271
|
|
Equipment
and fixtures, net
|
|
|
1,368,286
|
|
|
1,586,630
|
|
Intangible
assets
|
|
|
2,214,586
|
|
|
314,963
|
|
Goodwill
|
|
|
3,153,219
|
|
|
─
|
|
Prepaid
expenses and other assets
|
|
|
2,022,405
|
|
|
1,971,445
|
|
Total
assets
|
|
$
|
44,174,423
|
|
$
|
30,498,213
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,871,033
|
|
$
|
1,121,623
|
|
Commissions
and bonus payable
|
|
|
7,900,581
|
|
|
7,711,805
|
|
Accrued
expenses
|
|
|
3,469,821
|
|
|
2,285,670
|
|
Due
to clearing and other brokers
|
|
|
16,733
|
|
|
11,114
|
|
Securities
sold, not yet purchased
|
|
|
2,476,071
|
|
|
1,534,953
|
|
Capital
lease obligation
|
|
|
850,034
|
|
|
1,292,378
|
|
Convertible
notes payable, net
|
|
|
194,831
|
|
|
187,079
|
|
Notes
payable
|
|
|
66,187
|
|
|
138,571
|
|
Total
liabilities
|
|
|
16,845,291
|
|
|
14,283,193
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, Series A--$0.0001 par value; 2,000,000 shares authorized;
0 shares
issued and outstanding as of September 30, 2007 and December 31,
2006,
respectively; aggregate liquidation preference of $0
|
|
|
─
|
|
|
─
|
|
Preferred
stock, Series B--$0.0001 par value; 12,500,000 shares authorized;
1,250,000 shares issued and 0 shares outstanding as of September
30, 2007
and December 31, 2006; aggregate liquidation preference of
$0
|
|
|
─
|
|
|
─
|
|
Preferred
stock, Series C--$0.0001 par value; 14,200,000 shares authorized;
1,685,714 shares issued and 0 shares outstanding as of September
30, 2007
and December 31, 2006; aggregate liquidation preference of
$0
|
|
|
─
|
|
|
─
|
|
Common
stock, $0.0001 par value; 300,000,000 shares authorized; 12,249,520
and
10,602,720 shares issued and 12,223,082 and 10,602,720 shares outstanding
as of September 30, 2007 and December 31, 2006,
respectively
|
|
|
1,226
|
|
|
1,061
|
|
Additional
paid-in capital
|
|
|
123,278,319
|
|
|
114,616,848
|
|
Treasury
stock
|
|
|
(125,613
|
)
|
|
--
|
|
Accumulated
deficit
|
|
|
(95,824,800
|
)
|
|
(98,402,889
|
)
|
Total
stockholders' equity
|
|
|
27,329,132
|
|
|
16,215,020
|
|
Total
liabilities and stockholders' equity
|
|
$
|
44,174,423
|
|
$
|
30,498,213
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
MCF
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
2,578,089
|
|
$
|
(7,518,594
|
)
|
Adjustments
to reconcile net income (loss) to cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
556,332
|
|
|
474,637
|
|
Amortization
of intangible assets
|
|
|
485,414
|
|
|
34,214
|
|
Stock-based
compensation
|
|
|
2,146,436
|
|
|
3,179,305
|
|
Amortization
of discounts on convertible notes payable
|
|
|
7,749
|
|
|
326,383
|
|
Amortization
of debt issuance costs
|
|
|
─
|
|
|
26,783
|
|
Unrealized
(gain) loss on securities owned
|
|
|
(4,807,990
|
)
|
|
2,810,298
|
|
Bad
debt write-off
|
|
|
368,272
|
|
|
─
|
|
Other
|
|
|
72,229
|
|
|
13,055
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Securities
owned
|
|
|
(3,970,569
|
)
|
|
(3,421,329
|
)
|
Restricted
cash
|
|
|
(58,584
|
)
|
|
(575
|
)
|
Due
from clearing broker
|
|
|
(582,609
|
)
|
|
386,205
|
|
Accounts
receivable
|
|
|
938,143
|
|
|
1,345,785
|
|
Prepaid
expenses and other assets
|
|
|
99,178
|
|
|
(542,545
|
)
|
Accounts
payable
|
|
|
172,239
|
|
|
279,879
|
|
Commissions
and bonus payable
|
|
|
1,053
|
|
|
(1,714,895
|
)
|
Accrued
expenses
|
|
|
1,022,867
|
|
|
(122,981
|
)
|
Due
to clearing and other brokers
|
|
|
5,619
|
|
|
(99,530
|
)
|
Net
cash used in operating activities
|
|
|
(966,132
|
)
|
|
(4,543,905
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Cash
restricted for fund investment
|
|
|
─
|
|
|
(6,300,944
|
)
|
Purchase
of equipment and fixtures
|
|
|
(291,687
|
)
|
|
(353,623
|
)
|
MedPanel
acquisition costs
|
|
|
(24,585
|
)
|
|
─
|
|
Catalyst
acquisition costs
|
|
|
─
|
|
|
(58,558
|
)
|
Proceeds
from the sale of Catalyst
|
|
|
163,219
|
|
|
─
|
|
Net
cash used in investing activities
|
|
|
(153,053
|
)
|
|
(6,713,125
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from the exercise of stock options and warrants
|
|
|
172,996
|
|
|
301,799
|
|
Proceeds
from the issuance of common stock
|
|
|
185,041
|
|
|
603,070
|
|
Proceeds
from the issuance of note payable ($6,112,171) and stock warrant
($1,387,829)
|
|
|
─
|
|
|
7,500,000
|
|
Minority
interest in fund
|
|
|
─
|
|
|
2,188,050
|
|
Debt
service principal payments
|
|
|
(514,725
|
)
|
|
(345,271
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(156,688
|
)
|
|
10,247,648
|
|
Decrease
in cash and cash equivalents
|
|
|
(1,275,873
|
)
|
|
(1,009,382
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
13,746,590
|
|
|
11,138,923
|
|
Cash
and cash equivalents at end of period
|
|
$
|
12,470,717
|
|
$
|
10,129,541
|
|
|
|
|
|
|
|
|
|
Supplementary
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
73,023
|
|
$
|
55,624
|
|
Income
taxes
|
|
$
|
38,400
|
|
$
|
18,800
|
|
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 2006 audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for
the
year ended December 31, 2006.
Reverse
Stock Split
On
August
4, 2006, the Company's Board of Directors approved a one-for-seven reverse
stock
split of the Company's common stock. The reverse stock split became effective
at
11:59 pm, Eastern Time, on November 15, 2006. Pursuant to the reverse stock
split, each seven shares of authorized and outstanding common stock was
reclassified and combined into one share of new common stock. The reverse stock
split did not change the number of authorized shares or the par value per share
of common stock or preferred stock designated by the Company's Certificate
of
Incorporation. Currently, the Company has authorized 300,000,000 shares of
common stock and 27,450,000 shares of preferred stock. All references to share
and per share data for all periods presented have been retroactively adjusted
to
give effect to the one-for-seven reverse stock split.
Acquisition
of MedPanel, Inc.
On
April
17, 2007, MCF Corporation completed the acquisition of MedPanel, Inc., or
MedPanel, a privately-held company based in Cambridge, Massachusetts, pursuant
to the terms of the Agreement and Plan of Merger dated November 6, 2006, by
and
among MCF Corporation, MedPanel Acquisition I Corp., Panel Intelligence, LLC,
MedPanel, Inc. and William J. Febbo. MedPanel is an online medical market
intelligence firm that serves life sciences companies and health care investors
through its proprietary methodologies and vast network of leading physicians,
medical researchers, allied health professionals and other important healthcare
constituencies.
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
resale 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 illiquidity.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
1.
Significant Accounting Policies - Continued
Investment
Banking Revenue
Investment
banking revenue includes underwriting and private placement agency fees earned
through the Company's participation in public offerings and private placements
of equity and convertible debt securities and fees earned as financial advisor
in mergers and acquisitions and similar transactions. Underwriting revenue
is
earned in securities offerings in which the Company acts as an underwriter
and
includes management fees, selling concessions and underwriting fees. Fee revenue
relating to underwriting commitments is recorded when all significant items
relating to the underwriting cycle have been completed and the amount of the
underwriting revenue has been determined. This generally is the point at which
all of the following have occurred: (i) the issuer's registration statement
has
become effective with the SEC, or other offering documents are finalized, (ii)
the Company has made a firm commitment for the purchase of the shares or debt
from the issuer, and (iii) the Company has been informed of the exact number
of
shares or the principal amount of debt that it has been allotted. Syndicate
expenses related to securities offerings in which the Company acts as
underwriter or agent are deferred until the related revenue is recognized or
we
determine that it is more likely than not that the securities offerings will
not
ultimately be completed. 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.
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.
Primary
Research Revenue
Revenue
from primary research services is recognized on a proportional performance
basis
as services are provided.
Cost
of Primary Research Services
Direct
costs associated with generating primary research revenue principally consist
of
panelist honorarium and recruitment costs. Medical experts receive cash
honoraria for participating in qualitative panels and quantitative surveys.
The
Company pays the honoraria to the panelists when the panel or survey has been
completed and records this expense as incurred.
Share-Based
Compensation Expense
The
Company measures and recognizes 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. The Company estimates 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 includes compensation expense for
share-based awards granted (i) prior to, but not yet vested as of
December 31, 2005, based on the grant date fair value, and
(ii) subsequent to December 31, 2005. Compensation expense for all
share-based awards subsequent to December 31, 2005 is recognized using the
straight-line single-option method. 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. Forfeitures
are
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
1.
Significant Accounting Policies - Continued
To
calculate option-based compensation, the Company uses the Black-Scholes option
pricing model, which is affected by the Company's stock price as well as
assumptions regarding a number of subjective variables. These variables include,
but are not limited to the Company's expected stock price volatility over the
term of the awards, and actual and projected employee stock option exercise
behaviors. No tax benefits were attributed to the share-based compensation
expense because a valuation allowance was maintained for all net deferred tax
assets.
Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the estimated future
tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are 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
The
Company organizes its operations into three operating segments for the purpose
of making operating decisions and assessing performance. These operating
segments are organized along operating subsidiaries, Merriman Curhan Ford &
Co, MCF Asset Management, LLC and Panel Intelligence, LLC. Accordingly, the
Company operates in Investment Banking and Asset Management operating segments
in the United States during 2007 and 2006, and added a Primary Research
operating segment in April 2007 with the acquisition of MedPanel (see Note
No.
3). However, only the Investment Banking segment produced operating results
that
were material to the Company during the three months and nine months ended
September 30, 2007. Total assets for Panel Intelligence were $7,093,000 as
of
September 30, 2007. Total assets for MCF Asset Management were $3,187,000 as
of
September 30, 2007. The
MCF
Asset Management segment had an operating loss for the three months and nine
months ended September 30, 2007 in the amount of $253,000 and $302,000,
respectively. The results of operations for the Company's Wealth
Management segment for the three months and nine months ended September 30,
2006
have been treated as discontinued operations since this business was sold in
January 2007 (see Note No. 4).
Concentrations
As
of
September 30, 2007, the Company owned 4,808,000 shares of Points International
in its proprietary trading account with a fair market value of $8,711,000 or
approximately 20% of total assets.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. Actual results could differ from those
estimates.
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
157,
“Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework
for measuring fair value under generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company is currently
evaluating the impact the adoption of this statement could have on its financial
condition, results of operations and cash flows.
In
February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial
Assets and Financial Liabilities”, which permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value and establishes presentation
and
disclosure requirements designed to facilitate comparisons between entities
that
choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for fiscal years beginning after November
15, 2007. The Company is currently evaluating the impact, if any, that the
adoption of SFAS No. 159 will have on its consolidated statements of financial
condition, operations and cash flows.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
1.
Significant Accounting Policies - Continued
In
June
2007, the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) No. 07-1, “Clarification of the Scope of the Audit
and Accounting Guide `Audits of Investment Companies' and Accounting by Parent
Companies and Equity Method Investors for Investments in Investment Companies.”
SOP No. 07-1 clarifies when an entity may apply the provisions of the Audit
and
Accounting Guide for Investment Companies (the Guide). Investment companies
that
are within the scope of the Guide report investments at fair value;
consolidation or use of the equity method for investments is generally not
appropriate. SOP No. 07-1 also addresses the retention of specialized investment
company accounting by a parent company in consolidation or by an equity method
investor. In May 2007, the FASB issued FSP FIN No. 46-R-7, “Application of FIN
46-R to Investment Companies,” which amends FIN No. 46-R to make permanent the
temporary deferral of the application of FIN No. 46-R to entities within the
scope of the revised Guide under SOP No. 07-1. FSP FIN No. 46-R-7 is effective
upon adoption of SOP No 07-1. In October 2007, the FASB indefinitely deferred
the effective date for SOP No. 07-1. The firm is evaluating the impact of
adopting SOP No. 07-1 and FSP FIN No. 46-R-7 on its financial condition, results
of operations and cash flows.
2.
Share-Based Compensation Expense
Stock
Options
As
of
September 30, 2007, there were 5,591,430 shares authorized for issuance under
the Option Plans, and 612,858 shares authorized for issuance outside of the
Option Plans. As of September 30, 2007, 374,618 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 nine months ended September 30, 2007 was
$368,000 and $1,017,000, respectively. Compensation expense for stock options
during the three months and nine months ended September 30, 2006 was $363,000
and $1,004,000, respectively.
The
following table is a summary of the Company's stock option activity for the
nine
months ended September 30, 2007:
|
|
Options
Outstanding
|
|
Weighted
Average
Exercise Price
|
|
Balance
as of December 31, 2006
|
|
|
3,570,370
|
|
$
|
6.19
|
|
Granted
|
|
|
644,620
|
|
|
4.72
|
|
Exercised
|
|
|
(83,939
|
)
|
|
(2.06
|
)
|
Canceled
|
|
|
(107,994
|
)
|
|
(6.89
|
)
|
Balance
as of September 30, 2007
|
|
|
4,023,057
|
|
$
|
6.02
|
|
Exercisable
as of September 30, 2007
|
|
|
3,029,242
|
|
$
|
6.13
|
|
The
following table summarizes information with respect to stock options outstanding
at September 30, 2007:
|
|
|
Options
Outstanding
|
|
|
Vested
Options
|
|
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
|
|
$
0.00 -- $ 3.50
|
|
|
1,993,849
|
|
|
5.28
|
|
$
|
2.99
|
|
$
|
2,142,790
|
|
|
1,993,849
|
|
$
|
2.99
|
|
$
|
2,142,790
|
|
$
3.51 -- $ 7.00
|
|
|
1,107,181
|
|
|
8.29
|
|
$
|
4.62
|
|
|
─
|
|
|
351,061
|
|
|
4.17
|
|
|
─
|
|
$
7.01 -- $14.00
|
|
|
626,359
|
|
|
6.95
|
|
$
|
8.88
|
|
|
─
|
|
|
388,664
|
|
|
9.21
|
|
|
─
|
|
$14.01
-- $28.00
|
|
|
256,381
|
|
|
3.10
|
|
$
|
22.04
|
|
|
─
|
|
|
256,381
|
|
|
22.04
|
|
|
─
|
|
$28.01
-- $49.00
|
|
|
39,287
|
|
|
2.41
|
|
$
|
49.00
|
|
|
─
|
|
|
39,287
|
|
|
49.00
|
|
|
─
|
|
|
|
|
4,023,057
|
|
|
6.20
|
|
$
|
6.02
|
|
$
|
2,142,790
|
|
|
3,029,242
|
|
$
|
6.13
|
|
$
|
2,142,790
|
|
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
2.
Share-Based Compensation Expense - continued
As
of
September 30, 2007, total unrecognized compensation expense related to unvested
stock options was $3,221,000. This amount is expected to be recognized as
expense over a weighted-average period of 1.45 years.
Non-Vested
Stock
At
the
date of grant, the recipients of non-vested stock have 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 and nine months ended September 30,
2007 was $298,000 and $986,000, respectively. Compensation expense for
non-vested stock during the three months and nine months ended September 30,
2006 was $463,000 and $1,481,000, respectively.
The
following table is a summary of the Company's non-vested stock activity for
the
nine months ended September 30, 2007:
|
|
Non-Vested
Stock
Outstanding
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
Intrinsic
Value
at
September
30, 2007
|
|
Balance
as of December 31, 2006
|
|
|
306,009
|
|
$
|
10.04
|
|
|
|
|
Granted
|
|
|
92,462
|
|
|
4.66
|
|
|
|
|
Vested
|
|
|
(231,933
|
)
|
|
(8.72
|
)
|
|
|
|
Canceled
|
|
|
(21,702
|
)
|
|
(9.49
|
)
|
|
|
|
Balance
as of September 30, 2007
|
|
|
144,836
|
|
$
|
8.78
|
|
$
|
588,034
|
|
As
of
September 30, 2007, total unrecognized compensation expense related to
non-vested stock was $933,000. This expense is expected to be recognized over
a
weighted-average period of 0.92 year.
2002
Employee Stock Purchase Plan
The
Company issued all shares previously available under the Employee Stock Purchase
Plan, or ESPP, to its employees through August 15, 2007. As of September 30,
2007, there are no shares available under the ESPP plan and the Company has
no
plan to request additional shares from the stockholders for this program.
Compensation expense for ESPP during the three months and nine months ended
September 30, 2007 was $28,000 and $143,000, respectively. Compensation expense
for ESPP during the three months and nine months ended September 30, 2006 was
$301,000 and $483,000, respectively.
Fair
Value and Assumptions Used to Calculate Fair Value
The
weighted average fair value of each stock option granted for the three months
and nine months ended September 30, 2007 was $2.84 and $2.67,
respectively. The weighted average fair value of each stock option granted
for the three months and nine months ended September 30, 2006 was $3.33 and
$3.72, 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 nine months ended September 30, 2007 and
2006:
|
|
Nine
months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
Expected
volatility
|
|
|
63.81
|
%
|
|
82.71
|
%
|
Expected
life (years)
|
|
|
4.20
|
|
|
4.50
|
|
Risk-free
interest rate
|
|
|
4.66
|
%
|
|
4.79
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
2.
Share-Based Compensation Expense - continued
The
weighted average fair value of the non-vested stock granted under the Company's
stock option plans for the three months and nine months ended September 30,
2007
was $4.32 and $4.66 per share, respectively. The weighted average fair value
of
the non-vested stock granted under the Company's stock option plans for the
three months and nine months ended September 30, 2006 was $5.25 and $7.56 per
share, respectively. The fair value of the non-vested stock award is estimated
on the date of grant using the intrinsic value method.
3.
Acquisition of MedPanel, Inc.
On
April
17, 2007, MCF Corporation acquired 100 percent of the outstanding common shares
of MedPanel, Inc. The results of MedPanel's operations have been included in
the
consolidated financial statements since that date. MedPanel is an online medical
market intelligence firm that serves life sciences companies and health care
investors through its proprietary methodologies and vast network of leading
physicians, medical researchers, allied health professionals and other important
healthcare constituencies. As a result of the acquisition, the Company will
provide independent market data and information to clients in the biotechnology,
pharmaceutical, medical device, and financial industries by leveraging
MedPanel's proprietary methodology and vast network of medical
experts.
The
Company paid $6.5 million in common stock for MedPanel. The value of the
1,547,743 shares of common shares issued was determined based on the average
market price of MCF Corporation's common stock over the period including three
days before and after the terms of the acquisition were agreed to and announced.
The selling stockholders may also be entitled to additional consideration on
the
third anniversary from the closing which is based upon MedPanel achieving
specific revenue and profitability milestones. The payment of the incentive
consideration will be 50% in cash and 50% in the Company's common stock and
may
not exceed $11,455,000. The Company registered 1,548,119 shares of common stock
with the Securities and Exchange Commission on Form S-4, file number 333-138870,
originally filed November 21, 2006, as amended.
The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed at the date of acquisition. The Company is in the process
of
obtaining third-party valuations of certain intangible assets; thus, the
allocation of the purchase price is subject to refinement.
|
|
As
of
April
17, 2007
|
|
Cash
and cash equivalents
|
|
$
|
670,028
|
|
Accounts
receivable
|
|
|
1,023,325
|
|
Equipment
and fixtures
|
|
|
86,088
|
|
Prepaid
expenses and other assets
|
|
|
174,162
|
|
Intangible
assets not subject to amortization:
|
|
|
|
|
Registered
trademarks
|
|
|
710,000
|
|
Intangible
assets subject to amortization:
|
|
|
|
|
Customer
relationships (56 month weighted-average useful life)
|
|
|
990,000
|
|
Customer
backlog (8 month weighted-average useful life)
|
|
|
420,000
|
|
Technology
platform (30 month weighted-average useful life)
|
|
|
360,000
|
|
Database
of registered panelists (24 weighted-average useful life)
|
|
|
220,000
|
|
Goodwill
|
|
|
3,153,219
|
|
Total
assets acquired
|
|
|
7,806,822
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(577,171
|
)
|
Accrued
expenses
|
|
|
(463,300
|
)
|
Total
liabilities assumed
|
|
|
(1,040,471
|
)
|
Net
assets acquired
|
|
$
|
6,766,351
|
|
The
$3,153,000 of goodwill was assigned to our Primary Research
segment.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
3.
Acquisition of MedPanel, Inc. - continued
The
following unaudited pro forma results of our operations for the three months
and
nine months ended September 30, 2007 and 2006 assume the MedPanel acquisition
occurred as of January 1, 2006. The pro forma results give effect to certain
adjustments, including depreciation, amortization of intangible assets and
related income tax effects. The pro forma results have been prepared for
comparative purposes only and do not purport to indicate the results of
operations which would actually have occurred had the combinations been in
effect on the dates indicated or which may occur in the future.
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
2007
|
|
September
30,
2006
|
|
September
30,
2007
|
|
September
30,
2006
|
|
Total
revenue
|
|
$
|
17,660,194
|
|
$
|
8,671,790
|
|
$
|
54,484,089
|
|
$
|
37,864,977
|
|
Total
operating expenses
|
|
|
17,588,823
|
|
|
14,283,459
|
|
|
52,525,765
|
|
|
45,710,959
|
|
Operating
income (loss)
|
|
|
71,371
|
|
|
(5,611,669
|
)
|
|
1,958,324
|
|
|
(7,845,982
|
)
|
Net
income (loss)
|
|
$
|
188,460
|
|
$
|
(5,434,415
|
)
|
$
|
2,171,308
|
|
$
|
(8,076,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
$
|
0.02
|
|
$
|
(0.47
|
)
|
$
|
0.18
|
|
$
|
(0.71
|
)
|
Diluted
net income (loss) per share
|
|
$
|
0.01
|
|
$
|
(0.47
|
)
|
$
|
0.17
|
|
$
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,999,656
|
|
|
11,652,042
|
|
|
11,919,810
|
|
|
11,406,792
|
|
Diluted
|
|
|
12,996,526
|
|
|
11,652,042
|
|
|
13,114,384
|
|
|
11,406,792
|
|
4.
Discontinued Operations
In
December 2006, the Company decided to sell its Catalyst Financial Planning
&
Investment Management, Inc., or Catalyst, subsidiary and discontinue its wealth
management activities. The sale of Catalyst closed in January 2007. As of
December 31, 2006, Catalyst was accounted for as held for sale in
accordance with SFAS 144. As a result, the revenue and expenses of Catalyst
and
MCF Wealth Management, LLC for 2006 have been reclassified and included in
discontinued operations in the consolidated statements of
operations.
The
following revenue and expenses have been reclassified as discontinued operations
for the three months and nine months ended September 30,
2006:
|
|
Three
Months
|
|
Nine
Months
|
|
Revenue
|
|
$
|
206,911
|
|
$
|
635,103
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
182,615
|
|
|
555,677
|
|
Professional
services
|
|
|
8,525
|
|
|
33,429
|
|
Occupancy
and equipment
|
|
|
30,722
|
|
|
73,715
|
|
Communications
and technology
|
|
|
2,716
|
|
|
13,929
|
|
Depreciation
and amortization
|
|
|
15,156
|
|
|
40,981
|
|
Travel
and entertainment
|
|
|
11,875
|
|
|
44,938
|
|
Other
expenses
|
|
|
26,863
|
|
|
54,241
|
|
|
|
|
278,472
|
|
|
816,910
|
|
Operating
loss
|
|
|
(71,561
|
)
|
|
(181,807
|
)
|
Interest
income, net
|
|
|
895
|
|
|
2,939
|
|
Net
loss
|
|
$
|
(70,666
|
)
|
$
|
(178,868
|
)
|
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
4.
Discontinued Operations - Continued
The
following assets and liabilities of operations held for sale have been included
in the condensed consolidated statements of financial condition as of December
31, 2006:
Assets:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
68,503
|
|
Accounts
receivable
|
|
|
11,155
|
|
Furniture
and equipment
|
|
|
34,234
|
|
Intangible
assets, net of accumulated amortization of $172,417
|
|
|
314,963
|
|
Prepaid
expenses and other assets
|
|
|
24,024
|
|
|
|
$
|
452,879
|
|
Liabilities:
|
|
|
|
|
Accounts
payable
|
|
|
--
|
|
Commissions
and bonus payable
|
|
|
8,368
|
|
Accrued
liabilities
|
|
|
87,176
|
|
Capital
leases
|
|
|
--
|
|
|
|
$
|
95,544
|
|
5.
Income Taxes
At
the
end of each interim reporting period the Company calculates an effective tax
rate based on the Company's estimate of the tax provision (benefit) that will
be
provided for the full year, stated as a percentage of estimated annual pre-tax
income (loss). The tax provision (benefit) for the interim period is determined
using this estimated annual effective tax rate. For the nine months ended
September 30, 2007 and 2006, the Company recorded $55,000 and $0 as income
tax
expense, respectively.
The
effective tax rate differs from the statutory rate primarily due to the
existence and utilization of net operating loss carryforwards which have been
offset by a valuation allowance resulting in a tax provision equal to the
companies expected current expense for the year. The
Company historically has had 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 it will be able to
realize the benefit of our deferred tax assets in the future.
In
July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement 109 (“FIN 48”). FIN 48 is
effective for fiscal years beginning after December 15, 2006. FIN 48 prescribes
a comprehensive model for how a company should recognize, measure, present,
and
disclose in its financial statements uncertain tax positions that a company
has
taken or expects to take on a tax return (including a decision whether to file
or not to file a return in a particular jurisdiction). Under FIN 48, the
financial statements reflect expected future tax consequences of such positions
presuming the taxing authorities' full knowledge of the position and all
relevant facts, but without considering time values. MCF Corporation adopted
Interpretation No. 48 on January 1, 2007.
As
a
result of the implementation of FIN 48, the Company recognized no adjustment
in
the liability for unrecognized income tax benefits and no corresponding change
in retained earnings. The Company does not have any material accrued interest
or
penalties associated with any unrecognized tax benefits. The Company
does not believe it is reasonably possible that the Company's unrecognized
tax benefits will significantly change within the next twelve months. The
Company's policy is to account for interest, if any, as interest expense and
penalties as income tax expense.
There
were no unrecognized tax benefits as of September 30, 2007. The Company is
subject to taxation in the US and various state and foreign jurisdictions.
The
tax years 2002-2006 remain open to examination by the federal and most state
tax
authorities.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
6.
Earnings (loss) per Share
The
following is a reconciliation of the basic and diluted net income (loss)
available to common stockholders and the number of shares used in the basic
and
diluted net income (loss) per common share computations for the periods
presented:
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
income (loss) available to stockholders - basic
|
|
$
|
188,460
|
|
$
|
(5,109,051
|
)
|
$
|
2,578,089
|
|
$
|
(7,518,594
|
)
|
Interest
on dilutive securities
|
|
|
4,084
|
|
|
─
|
|
|
12,252
|
|
|
─
|
|
Net
income (loss) available to stockholders - diluted
|
|
$
|
192,544
|
|
$
|
(5,109,051
|
)
|
$
|
2,590,341
|
|
$
|
(7,518,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of common shares - basic
|
|
|
11,999,656
|
|
|
10,151,922
|
|
|
11,337,346
|
|
|
9,906,672
|
|
Exercise
or conversion of all potentially dilutive common shares
outstanding
|
|
|
1,139,728
|
|
|
─
|
|
|
1,162,198
|
|
|
─
|
|
Weighted-average
number of common shares - diluted
|
|
|
13,139,384
|
|
|
10,151,922
|
|
|
12,499,544
|
|
|
9,906,672
|
|
Basic
net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.02
|
|
$
|
(0.50
|
)
|
$
|
0.23
|
|
$
|
(0.74
|
)
|
Loss
from discontinued operations
|
|
$
|
─
|
|
$
|
(0.01
|
)
|
$
|
─
|
|
$
|
(0.02
|
)
|
Net
income (loss)
|
|
$
|
0.02
|
|
$
|
(0.51
|
)
|
$
|
0.23
|
|
$
|
(0.76
|
)
|
Diluted
net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.01
|
|
$
|
(0.50
|
)
|
|
(0.21
|
)
|
|
(0.74
|
)
|
Loss
from discontinued operations
|
|
$
|
─
|
|
$
|
(0.01
|
)
|
$
|
─
|
|
$
|
(0.02
|
)
|
Net
income (loss)
|
|
$
|
0.01
|
|
$
|
(0.51
|
)
|
$
|
0.21
|
|
$
|
(0.76
|
)
|
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 nine months ended September 30, 2006 because the
addition of common shares that would be issued assuming exercise or conversion
would be anti-dilutive.
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 nine months ended September 30, 2006,
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.
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
6.
Earnings (loss) per Share - continued
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
September 30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Stock
options and warrants excluded due to the exercise price exceeding
the
average fair value of the Company's common stock during the
period
|
|
|
2,093,089
|
|
|
1,519,107
|
|
|
1,756,224
|
|
|
1,335,327
|
|
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
|
|
|
─
|
|
|
1,568,682
|
|
|
─
|
|
|
2,018,006
|
|
Weighted
average shares issuable upon conversion of the convertible notes
payable
|
|
|
─
|
|
|
902,736
|
|
|
─
|
|
|
721,812
|
|
Weighted
average shares contingently issuable
|
|
|
─
|
|
|
52,876
|
|
|
─
|
|
|
80,320
|
|
Total
common stock equivalents excluded from diluted net income (loss)
per
share
|
|
|
2,093,089
|
|
|
4,043,401
|
|
|
1,756,224
|
|
|
4,155,465
|
|
7.
Other Operating Expenses
The
following expenses are included in other operating expenses for the three months
and nine months ended September 30, 2007:
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Investor
conferences
|
|
$
|
521,759
|
|
$
|
593,580
|
|
$
|
910,130
|
|
$
|
874,487
|
|
Recruiting
|
|
|
116,778
|
|
|
134,452
|
|
|
486,839
|
|
|
264,349
|
|
Bad
debt expenses
|
|
|
140,105
|
|
|
─
|
|
|
368,271
|
|
|
(445,016
|
)
|
Public
and investor relations
|
|
|
208,058
|
|
|
73,165
|
|
|
368,769
|
|
|
247,166
|
|
Supplies
|
|
|
65,954
|
|
|
58,887
|
|
|
233,661
|
|
|
213,450
|
|
Insurance
|
|
|
73,659
|
|
|
66,997
|
|
|
220,663
|
|
|
197,867
|
|
Other
|
|
|
151,206
|
|
|
115,657
|
|
|
405,545
|
|
|
225,721
|
|
|
|
$
|
1,277,519
|
|
$
|
1,042,738
|
|
$
|
2,993,878
|
|
$
|
1,578,024
|
|
8.
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 September 30, 2007,
Merriman Curhan Ford & Co. had regulatory net capital, as defined, of
$5,789,000, which exceeded the amount required by $4,789,000. 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.
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.
Overview
MCF
Corporation (AMEX:MEM) is a financial services holding company that provides
investment research, capital markets services, corporate and venture services,
investment banking, asset management and primary research through its operating
subsidiaries, Merriman Curhan Ford & Co., MCF Asset Management, LLC and
Panel Intelligence, LLC.
Merriman
Curhan Ford & Co. is an investment bank and securities broker-dealer focused
on fast growing companies and institutional investors. Our mission is to become
a leader in the researching, advising, financing, trading and investing
in fast growing companies under $2 billion in market capitalization. We
provide equity research, brokerage and trading services primarily to
institutions, as well as investment banking and advisory services to corporate
clients. We are gaining market share by originating differentiated research
for
our institutional investor clients and providing specialized and integrated
services for our fast-growing corporate clients.
In
April
2007, we acquired MedPanel, Inc. and began offering primary research services
to
top biotechnology, pharmaceutical, medical device, and financial services
companies through our newly formed subsidiary, Panel Intelligence, LLC. Clients
pay subscription fees for access to our online research platform, providing
them
with greater strategic direction for investment decisions, product development,
and marketing.
MCF
Asset
Management, LLC manages absolute return investment products for institutional
and high-net worth clients. During 2006, we introduced the MCF Navigator fund
and MCF Voyager fund. Additionally, we are the sub-advisor for the MCF Focus
fund. As of September 30, 2007, assets under management across our three fund
products exceeded $50 million.
In
February 2005, we acquired Catalyst Financial Planning & Investment
Management, Inc. Catalyst, a Registered Investment Advisor, provides investment
advice to clients that have invested approximately $130 million of assets.
In
January 2007, we sold Catalyst in order to focus on other recurring-revenue
businesses, such as primary research and asset management, which we believe
are
faster growing and more profitable opportunities. While we currently do not
have
any specific plans, we do intend to pursue a wealth management strategy at
some
future date. The results from this segment have been treated as discontinued
operations in the condensed consolidated financial statements.
Executive
Summary
Revenue
for the third quarter 2007 exceeded $17.6 million, which represented an increase
of more than $10 million, or 138%, over the third quarter 2006. Revenue growth
during the latest quarter was led by investment banking and principal
transactions, which were $3.7 million and $3.6 million higher in 2007 as
compared to 2006, respectively. Commissions revenue was up $1.2 million, or
18%,
from third quarter 2006 and we experienced continued growth for each of our
recurring revenue activities, including asset management and primary research.
Net income for the third quarter 2007 was $188,000, or $0.01 per diluted share,
which represents the third consecutive quarter of profitability for our firm.
Profitability during the latest quarter was partially attributable to
net gains in our firm trading and market making accounts, including our
proprietary trading activity which represents the company's highest margin
business. Compensation and benefits expense as a percentage of revenue during
the three months ended September 30, 2007 was 68%, which represents a
significant improvement from third quarter 2006.
For
the
first three quarters of 2007, revenue was $18.5 million, or 55%, higher than
the
similar period in 2006. Net income for the nine months ended September 30,
2007
exceeded $2.5 million, or $0.21 per diluted share, as compared to a net loss
of
$7.5 million, or $0.76 per diluted share, for the nine months ended September
30, 2006.
Business
Environment
Most
categories of U.S. stocks finished the third quarter higher. The final results
masked a significant spike in market volatility from mid-July through
mid-August, however, as concerns about the subprime mortgage market intensified
and evidence mounted that the damage could spread beyond subprime borrowers
and
lenders. The Federal Reserve took action in both July and August, cutting both
the federal funds rate and discount rate. Investors welcomed these rate
reductions, and most broad-based stock indexes were trading near their all-time
highs at the end of the quarter.
Small-cap
stocks struggled in this environment, with the Russell 2000® Index down 3.09%
for the quarter. Growth topped value across all capitalization groups, with
large caps leading the way. Among S&P 500 sectors, energy and information
technology delivered strong gains, while consumer discretionary and financials
ended the quarter with losses.
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.
Results
of Operations
The
following table sets forth the results of operations for the three months and
nine months ended September 30, 2007 and 2006:
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
2007
|
|
|
September
30,
2006
|
|
|
September
30,
2007
|
|
|
September
30,
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
7,923,963
|
|
$
|
6,700,416
|
|
$
|
22,807,243
|
|
$
|
23,344,124
|
|
Principal
transactions
|
|
|
2,478,297
|
|
|
(1,148,313
|
)
|
|
10,804,073
|
|
|
(1,480,963
|
)
|
Investment
banking
|
|
|
5,616,491
|
|
|
1,839,288
|
|
|
15,480,518
|
|
|
11,750,176
|
|
Primary
research
|
|
|
1,165,428
|
|
|
─
|
|
|
2,116,490
|
|
|
─
|
|
Advisory
and other fees
|
|
|
476,015
|
|
|
35,099
|
|
|
1,147,363
|
|
|
238,321
|
|
Total
revenue
|
|
|
17,660,194
|
|
|
7,426,490
|
|
|
52,355,687
|
|
|
33,851,658
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
12,096,131
|
|
|
8,534,218
|
|
|
35,673,505
|
|
|
29,987,310
|
|
Brokerage
and clearing fees
|
|
|
627,223
|
|
|
598,644
|
|
|
1,921,920
|
|
|
1,987,504
|
|
Cost
of primary research services
|
|
|
555,185
|
|
|
─
|
|
|
950,403
|
|
|
─
|
|
Professional
services
|
|
|
518,045
|
|
|
567,535
|
|
|
1,603,163
|
|
|
1,850,916
|
|
Occupancy
and equipment
|
|
|
499,459
|
|
|
406,047
|
|
|
1,395,048
|
|
|
1,195,202
|
|
Communications
and technology
|
|
|
921,853
|
|
|
800,061
|
|
|
2,618,799
|
|
|
2,123,963
|
|
Depreciation
and amortization
|
|
|
193,284
|
|
|
156,760
|
|
|
556,332
|
|
|
467,870
|
|
Amortization
of intangible assets
|
|
|
264,771
|
|
|
─
|
|
|
485,414
|
|
|
─
|
|
Travel
and entertainment
|
|
|
635,353
|
|
|
611,712
|
|
|
1,789,971
|
|
|
1,960,304
|
|
Other
|
|
|
1,277,519
|
|
|
1,042,738
|
|
|
2,993,878
|
|
|
1,578,024
|
|
Total
operating expenses
|
|
|
17,588,823
|
|
|
12,717,715
|
|
|
49,988,433
|
|
|
41,151,093
|
|
Operating
income (loss)
|
|
|
71,371
|
|
|
(5,291,225
|
)
|
|
2,367,254
|
|
|
(7,299,435
|
)
|
Interest
income
|
|
|
132,965
|
|
|
117,945
|
|
|
362,919
|
|
|
367,711
|
|
Interest
expense
|
|
|
(15,876
|
)
|
|
134,895
|
|
|
(97,087
|
)
|
|
(408,002
|
)
|
Income
(loss) from continuing operations before taxes
|
|
|
188,460
|
|
|
(5,038,385
|
)
|
|
2,633,087
|
|
|
(7,339,726
|
)
|
Income
tax expense
|
|
|
─
|
|
|
─
|
|
|
(55,000
|
)
|
|
─
|
|
Income
(loss) from continuing operations
|
|
|
188,460
|
|
|
(5,038,385
|
)
|
|
2,578,089
|
|
|
(7,339,726
|
)
|
Loss
from discontinued operations
|
|
|
─
|
|
|
(70,666
|
)
|
|
─
|
|
|
(178,868
|
)
|
Net
income (loss)
|
|
$
|
188,460
|
|
$
|
(5,109,051
|
)
|
$
|
2,578,089
|
|
$
|
(7,518,594
|
)
|
Our
net
income (loss) for the three months and nine months ended September 30, 2007
and
2006 included the following non-cash expenses:
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
2007
|
|
|
September
30,
2006
|
|
|
September
30,
2007
|
|
|
September
30,
2006
|
|
Stock-based
compensation
|
|
$
|
694,574
|
|
$
|
1,197,256
|
|
$
|
2,146,436
|
|
$
|
3,179,305
|
|
Depreciation
and amortization
|
|
|
193,284
|
|
|
137,702
|
|
|
556,332
|
|
|
474,637
|
|
Amortization
of intangible assets
|
|
|
264,771
|
|
|
34,214
|
|
|
485,414
|
|
|
34,214
|
|
Write-off
of uncollectible accounts receivable
|
|
|
140,105
|
|
|
─
|
|
|
368,272
|
|
|
─
|
|
Amortization
of discounts on debt
|
|
|
2,583
|
|
|
175,543
|
|
|
7,749
|
|
|
326,383
|
|
Total
|
|
$
|
1,295,317
|
|
$
|
1,544,715
|
|
$
|
3,564,203
|
|
$
|
4,014,539
|
|
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 for the three months and nine months ended
September 30, 2007 and 2006:
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
2007
|
|
|
September
30,
2006
|
|
|
September
30,
2007
|
|
|
September
30,
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
raising
|
|
$
|
3,881,491
|
|
$
|
1,194,288
|
|
$
|
13,028,018
|
|
$
|
10,429,291
|
|
Financial
advisory
|
|
|
1,735,000
|
|
|
645,000
|
|
|
2,452,500
|
|
|
1,320,885
|
|
Total
investment banking revenue
|
|
$
|
5,616,491
|
|
$
|
1,839,288
|
|
$
|
15,480,518
|
|
$
|
11,750,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
Volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
offerings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
underwritten participations
|
|
$
|
8,505,000
|
|
$
|
─
|
|
$
|
113,744,000
|
|
$
|
104,151,000
|
|
Number
of transactions
|
|
|
1
|
|
|
─
|
|
|
7
|
|
|
10
|
|
Private
placements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
raised
|
|
$
|
101,210,000
|
|
$
|
19,385,000
|
|
$
|
187,795,000
|
|
$
|
107,385,000
|
|
Number
of transactions
|
|
|
8
|
|
|
4
|
|
|
15
|
|
|
8
|
|
Our
investment banking revenue was $5,616,000, or 32% of our revenue during third
quarter 2007, representing a 205% increase from the similar quarter in 2006.
We
were placement agent for eight private transactions and a co-manager for one
public offering during the three months ended September 30, 2007.
During
the nine months ended September 30, 2007, no single investment banking client
accounted for more than 10% of our revenue, while one investment banking client
accounted for 11% of our revenue during the first nine months of
2006.
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
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
2007
|
|
|
September
30,
2006
|
|
|
September
30,
2007
|
|
|
September
30,
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
7,923,963
|
|
$
|
6,700,416
|
|
$
|
22,807,243
|
|
$
|
23,344,124
|
|
Principal
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
principal transactions, proprietary trading and market
making
|
|
$
|
1,888,770
|
|
$
|
(1,135,723
|
)
|
$
|
9,243,523
|
|
$
|
(1,263,456
|
)
|
Investment
portfolio
|
|
|
589,527
|
|
|
(12,590
|
)
|
|
1,560,550
|
|
|
(217,507
|
)
|
Total
principal transactions revenue
|
|
$
|
2,478,297
|
|
$
|
(1,148,313
|
)
|
$
|
10,804,073
|
|
$
|
(1,480,963
|
)
|
Transaction
Volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares traded
|
|
|
315,936,384
|
|
|
193,666,883
|
|
|
793,084,262
|
|
|
701,398,931
|
|
Number
of active clients
|
|
|
374
|
|
|
362
|
|
|
537
|
|
|
510
|
|
Commissions
amounted to $7,924,000, or 45%, of our revenue during the third quarter 2007,
representing a 18% increase from the similar period in 2006. Higher revenue
for
brokering institutional money funds by our Institutional Cash Distributors
division was partially offset by lower brokerage commissions.
Principal
transactions revenue swung from a $1,148,000 loss during the third quarter
2006
to a $2,478,000 gain during the third quarter of 2007. The 2007 gain included
increases in the mark-to-market value of positions in our proprietary trading
account, increased profitability in our market making activities, as well as
realized and unrealized gains in our investment portfolio. As of September
30,
2007, we made markets in over 1,100 stocks, which has increased by more
than 30% from September 30, 2006. We view “intelligent market making” as a
key element to differentiating ourselves from our competition in small
capitalization equities. Principal transactions revenue consists of four
different activities - customer principal trades, market making, trading for
our
proprietary account, and realized and unrealized gains and losses in our
investment portfolio. As a broker-dealer, we account for all of our marketable
security positions on a trading basis and as a result, all security positions
are marked to fair market value each day. Returns from market making and
proprietary trading activities tend to be more volatile than acting as agent
or
principal for customers.
During
2007 and 2006, no single brokerage customer accounted for more than 10% of
our
revenue from continuing operations.
Primary
Research Revenue
Primary
research revenue represents the operating results of Panel Intelligence from
the
date of the MedPanel acquisition, April 17, 2007, through September 30,
2007. We are now offering independent market data and information to
clients in the biotechnology, pharmaceutical, medical device, clean tech and
financial industries.
Compensation
and Benefits Expenses
Compensation
and benefits expense represents the largest component of our operating expenses
and includes incentive compensation paid to sales, trading, research and
investment banking professionals, as well as discretionary bonuses, salaries
and
wages, and stock-based compensation. 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 tend to vary
based on overall headcount.
The
following table sets forth the major components of our compensation and benefits
for the three months and nine months ended September 30, 2007 and
2006:
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
2007
|
|
|
September
30,
2006
|
|
|
September
30,
2007
|
|
|
September
30,
2006
|
|
Incentive
compensation and discretionary bonuses
|
|
$
|
6,566,759
|
|
$
|
4,169,791
|
|
$
|
19,950,445
|
|
$
|
17,422,932
|
|
Salaries
and wages
|
|
|
3,928,087
|
|
|
2,402,530
|
|
|
10,527,878
|
|
|
6,737,427
|
|
Stock-based
compensation
|
|
|
694,574
|
|
|
1,197,256
|
|
|
2,146,436
|
|
|
3,179,305
|
|
Payroll
taxes, benefits and other
|
|
|
906,711
|
|
|
764,641
|
|
|
3,048,746
|
|
|
2,647,646
|
|
Total
compensation and benefits
|
|
$
|
12,096,131
|
|
$
|
8,534,218
|
|
$
|
35,673,505
|
|
$
|
29,987,310
|
|
Total
compensation and benefits expense as a percentage of
revenue
|
|
|
68
|
%
|
|
115
|
%
|
|
68
|
%
|
|
89
|
%
|
Cash
compensation and benefits expense as a percentage of
revenue
|
|
|
65
|
%
|
|
99
|
%
|
|
64
|
%
|
|
79
|
%
|
The
increase in compensation and benefits expense of $3,562,000, or 42%, from the
third quarter 2006 to the third quarter 2007 was due primarily to higher
incentive compensation which is directly correlated to revenue production.
Cash
compensation is equal to total compensation and benefits expense excluding
stock-based compensation, which is a non-cash expense. Cash compensation and
benefits expense as a percentage of revenue decreased to 65% during the three
months ended September 30, 2007 as compared to 99% during the similar period
in
2006. This improvement was largely attributed to higher investment banking
and
principal transactions revenue during 2007 as these activities represent our
highest margin businesses.
During
the three months ended September 30, 2007, one sales professional accounting
for
12% of our revenue. No single sales professional accounted for more than 10%
of
our revenue during the three months ended September 30, 2006, and nine months
ended September 30, 2007 and 2006.
Stock-based
compensation expense decreased by $503,000, or 42%, during the third quarter
2007 as compared to the similar quarter in 2006. The decline in stock-based
compensation expense was due mostly to fewer non-vested restricted shares
outstanding in 2007.
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 $29,000, or 5%,
during the third quarter of 2007 as compared to the third quarter of 2006 and
decreased by $66,000, or 3%, during the nine months ended September 30, 2007
as
compared to the similar period in 2006. The third quarter increase reflected
higher market making activities while the slight decrease for the first three
quarters of 2007 resulted from lower overall commissions revenue during 2007,
partially offset by increased market making activity as compared to
2006.
Costs
of
primary research revenue principally consist of panelist honorarium and
recruitment costs. Medical experts receive cash honoraria for participating
in
qualitative panels and quantitative surveys. We pay the honoraria to the
panelists when the panel or survey has been completed and record this expense
as
incurred. We closed the acquisition of MedPanel on April 17, 2007 and began
recognizing primary research revenue and related expenses since that
date.
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 decrease of $49,000, or 9%, during the third quarter of 2007
as
compared to the third quarter of 2006 and decrease of $248,000, or 13%, during
the nine months ended September 30, 2007 as compared to the similar period
in
2006 was primarily attributed to lower attorney fees associated with business
development activities and lower accounting and auditing expenses.
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 $93,000, or 23%, during the third
quarter of 2007 as compared to the third quarter of 2006 and increase of
$200,000, or 17%, during the nine months ended September 30, 2007 as compared
to
the similar period in 2006 resulted mostly from higher hardware and equipment
expenses that were incurred in connection with various technology
projects.
Communications
and technology expense includes market data and quote services, voice, data
and
Internet service fees, and data processing costs. Historically, these costs
have
increased as we hire additional employees. The increase of $122,000, or 15%,
during the third quarter of 2007 as compared to the third quarter of 2006 and
increase of $495,000, or 23% during the nine months ended September 30, 2007
as
compared to the similar period in 2006 was primarily due to upgrading our
trading order management system, as well as the increase in market data and
quote services as we continue to expand our market maker
activities.
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 $37,000, or 23%, during the third quarter
of
2007 as compared to the third quarter of 2006 and increase of $88,000, or 19%
during the nine months ended September 30, 2007 as compared to the similar
period in 2006 was due to increased capital expenditures during 2006, including
leasehold improvements to our San Francisco office, to facilitate our growth
and
expansion.
Identifiable
intangible assets capitalized in connection with the acquisition of MedPanel
included customer relationships, customer backlog, technology platform and
the
database of registered panelists. The estimated fair market value of these
amortizable intangible assets amounting to $1,990,000 will be amortized over
periods ranging from 8 months to 56 months.
Travel
and entertainment expense results from business development activities across
our various businesses. The increase of $24,000, or 4%, during the third quarter
of 2007 as compared to the third quarter of 2006 was attributed to higher
investment banking business development spending while the decrease of $170,000,
or 9% during the nine months ended September 30, 2007 as compared to the similar
period in 2006 was due mostly to our focus to minimize discretionary spending
in
an effort to improve profitability.
The
following expenses are included in other operating expenses for the three months
and nine months ended September 30, 2007:
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Investor
conferences
|
|
$
|
521,759
|
|
$
|
593,580
|
|
$
|
910,130
|
|
$
|
874,487
|
|
Recruiting
|
|
|
116,778
|
|
|
134,452
|
|
|
486,839
|
|
|
264,349
|
|
Bad
debt expenses
|
|
|
140,105
|
|
|
─
|
|
|
368,271
|
|
|
(445,016
|
)
|
Public
and investor relations
|
|
|
208,058
|
|
|
73,165
|
|
|
368,769
|
|
|
247,166
|
|
Supplies
|
|
|
65,954
|
|
|
58,887
|
|
|
233,661
|
|
|
213,450
|
|
Insurance
|
|
|
73,659
|
|
|
66,997
|
|
|
220,663
|
|
|
197,867
|
|
Other
|
|
|
151,206
|
|
|
115,657
|
|
|
405,545
|
|
|
225,721
|
|
|
|
$
|
1,277,519
|
|
$
|
1,042,738
|
|
$
|
2,993,878
|
|
$
|
1,578,024
|
|
The
increase in other operating expenses of $235,000, or 23%, during the third
quarter of 2007 as compared to the third quarter of 2006 was primarily due
to
the write-off of $140,000 in uncollectible receivables related to investment
banking transactions that will not be completed and $135,000 for services
provided by an investor relations consulting firm. The increase of $1,416,000,
or 90%, during the nine months ended September 30, 2007 as compared to the
similar period in 2006 was due to (i) the recovery in April 2006 of the $500,000
note receivable from Ascend that had been previously written-off in 2005, (ii)
higher recruiting costs for some senior investment bankers and institutional
sales professionals and (iii) the write-off of uncollectible receivables related
to investment banking activities.
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. For the nine months ended September 30,
2007 and 2006, we recorded $55,000 and $0 as income tax expense,
respectively.
The
effective tax rate differs from the statutory rate primarily due to the
existence and utilization of net operating loss carryforwards which have been
offset by a valuation allowance resulting in a tax provision equal to the
companies expected current expense for the year. We historically have
had current tax expense primarily related to alternative minimum,
state and minimum tax liabilities.
Historically
and currently, we have recorded a valuation allowance on our deferred tax
assets, the significant component of which relates to net operating loss tax
carryforwards. Management continually evaluates the realizability of its
deferred tax assets based upon negative and positive evidence available.
Based on the evidence available at this time, we continue to conclude that
it is
not "more likely than not" that we will be able to realize the benefit of
our deferred tax assets in the near future.
We
adopted Interpretation No. 48 on January 1, 2007. As a result of the
implementation of FIN 48, we recognized no adjustment in the liability for
unrecognized income tax benefits and no corresponding change in retained
earnings. We do not have any material accrued interest or penalties associated
with any unrecognized tax benefits. We do not believe it is reasonably possible
that our unrecognized tax benefits will significantly change within the next
twelve months. There were no unrecognized tax benefits as of September 30,
2007.
We are subject to taxation in the US and various state and foreign
jurisdictions. The tax years 2002-2006 remain open to examination by the federal
and most state tax authorities.
Loss
from Discontinued Operations
In
December 2006, we decided to sell our Catalyst subsidiary and discontinue our
wealth management activities. The sale of Catalyst closed in January 2007.
As of
December 31, 2006, Catalyst was accounted for as held for sale in accordance
with SFAS 144. As a result, the revenue and expenses of Catalyst and MCF Wealth
Management, LLC for 2006 have been reclassified and included in discontinued
operations in the condensed consolidated statements of operations.
Off-Balance
Sheet Arrangements
We
were
not a party to any off-balance sheet arrangements during the nine months ended
September 30, 2007 and 2006. In particular, we do not have any interest in
so-called limited purpose entities, which include special purpose entities
and
structured finance entities.
Commitments
The
following is a table summarizing our significant commitments as of September
30,
2007, 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
|
|
Less
than one year
|
|
$
|
26,694
|
|
$
|
545,011
|
|
$
|
149,307
|
|
One
year to three years
|
|
|
243,990
|
|
|
3,179,296
|
|
|
769,607
|
|
Three
years to five years
|
|
|
─
|
|
|
985,839
|
|
|
─
|
|
Total
commitments
|
|
$
|
270,684
|
|
$
|
4,710,146
|
|
$
|
918,914
|
|
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.
Revenue
Recognition
Investment
banking revenue includes underwriting and private placement agency fees earned
through our participation in public offerings and private placements of equity
and convertible debt securities and fees earned as financial advisor in mergers
and acquisitions and similar transactions. Underwriting revenue is earned in
securities offerings in which we act as an underwriter and includes management
fees, selling concessions and underwriting fees. Fee revenue relating to
underwriting commitments is recorded when all significant items relating to
the
underwriting cycle have been completed and the amount of the underwriting
revenue has been determined. This generally is the point at which all of the
following have occurred: (i) the issuer's registration statement has become
effective with the SEC, or other offering documents are finalized, (ii) the
Company has made a firm commitment for the purchase of the shares or debt from
the issuer, and (iii) the Company has been informed of the exact number of
shares or the principal amount of debt that it has been allotted. Syndicate
expenses related to securities offerings in which 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.
Commissions
revenue and related clearing expenses are recorded on a trade-date basis as
security transactions occur. Principal transactions in regular-way trades are
recorded on the trade date, as if they had settled. Profit and loss arising
from
all securities and commodities transactions entered into for the account and
risk of our company are recorded on a trade-date basis.
Primary
research revenue is recognized on a proportional performance basis as services
are provided.
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.
Stock-Based
Compensation
On
January 1, 2006, we adopted 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
our
employee stock purchase plan. Share-based compensation expense recognized in
our
consolidated statement of operations for the three months and nine months ended
September 30, 2007 and 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. Changes in these inputs and assumptions can materially affect the
measure of estimated fair value of our share-based compensation.
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 September 30, 2007
and 2006 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 September 30, 2007, liquid assets
consisted primarily of cash and cash equivalents of $12,471,000 and marketable
securities, net of securities sold not yet purchased, of $12,185,000, for a
total of $24,656,000.
Cash
and
cash equivalents decreased by $1,276,000 during the nine months ended September
30, 2007. Cash used in operating activities for 2007 was $966,000 which
consisted of our net income adjusted for non-cash expenses including stock-based
compensation, depreciation and amortization, partially offset by unrealized
gains related to securities owned and changes in operating asset and liability
balances. Cash used in investing activities amounted to $153,000 during 2007
which consisted of purchases of equipment and fixtures, partially offset by
proceeds from the sale of Catalyst. Cash used in financing activities was
$157,000. Our financing activities included debt service payments, partially
offset by proceeds from the issuance of common stock in connection with our
employee stock purchase plan and employee stock option exercises.
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 September 30, 2007,
Merriman Curhan Ford & Co. had regulatory net capital of $5,789,000 which
exceeded the required amount by $4,789,000.
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. These trading positions in individual equities and equity indices
may be either long or short at any given time. Equity price risks result from
exposures to changes in prices and volatilities of individual equities and
equity indices. We seek to manage this risk exposure through diversification
and
limiting the size of individual positions within the portfolio. The effect
on
earnings and cash flows of an immediate 10% increase or decrease in equity
prices generally is not ascertainable and could be positive or negative,
depending on the positions we hold at the time. We do not establish hedges
in
related securities or derivatives. From time to time, we also hold equity
securities received as compensation for our services in investment banking
transactions. These equity positions are always long. However, as the prices
of
individual equity securities do not necessarily move in tandem with the
direction of the general equity market, the effect on earnings and cash flows
of
an immediate 10% increase or decrease in equity prices generally is not
ascertainable.
Interest
Rate Risk
Our
exposure to market risk resulting from changes in interest rates relates
primarily to our investment portfolio and long term debt obligations. Our
interest income and cash flows may be impacted by changes in the general level
of U.S. interest rates. We do not hedge this exposure because we believe that
we
are not subject to any material market risk exposure due to the short-term
nature of our investments. We would not expect an immediate 10% increase or
decrease in current interest rates to have a material effect on the fair market
value of our investment portfolio.
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 September 30, 2007.
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 September 30, 2007, that materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item 1. Legal
Proceedings
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 discovery stage and an arbitration
hearing scheduled for June 2007 is being rescheduled between the parties and
the
Arbitration Panel. 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
cash
flows.
S3
Investment Company, Inc. v. Merriman Curhan Ford & Co. and Qualico Capital,
Inc.
In
September 2007, Merriman Curhan Ford & Co. was served with a complaint filed
by a former client S3 Investment Company, Inc. (“S3i”).The matter is pending
before the Superior Count in the City and County of San Francisco. The plaintiff
alleges theories of breach of contract, fraud, negligent misrepresentation,
intentional and negligent interference with prospective economic relations.
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 cash flows.
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.
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.
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. 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.
We
have a
number of revenue producers employed by our securities brokerage and investment
banking subsidiary. 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 nine months ended September 30, 2007 and 2006, no single customer accounted
for more than 10% of our revenue. However, we have been dependent on one
customer or 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.
From
time
to time, we may buy one or more other businesses. 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:
·
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variations
in quarterly operating results;
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·
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our
announcements of significant contracts, milestones,
acquisitions;
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·
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our
relationships with other
companies;
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·
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our
ability to obtain needed capital
commitments;
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·
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additions
or departures of key
personnel;
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·
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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;
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·
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general
economic conditions, including conditions
in the securities brokerage and
investment banking
markets;
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·
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changes
in financial estimates by securities
analysts;
and
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·
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fluctuation
in stock market price and
volume.
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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,
and
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 29% 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. As of September
30, 2007, shares issuable upon the exercise of these options and warrants,
at
prices ranging currently from approximately $1.26 to $49.00 per share, represent
approximately 7% 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.
Item 2.
Unregistered Sales of Equity Securities
On
July
15, 2007, we issued 12,000 shares of our Common Stock to Barretto Pacific Group
(“BPG”), a contractor who performed services for the Company. Such shares were
placed in escrow pending vesting per the Company’s written agreement with BPG.
Vesting was contingent on the provision of services by BPG, which conditions
were satisfied and the shares released from escrow fully vested in October
2007.
These shares were issued in consideration for services rendered to the Company.
These shares were issued in reliance upon the exemption from the registration
requirements of the Securities Act of 1933, as amended (the “Securities Act”)
contained in Section 4.2 of the Securities Act due to the fact that they were
issued in a transaction not involving a public offering.
Item
6. Exhibits
31.1
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Certification
of Principal Executive Officer Pursuant To Section 302 of the
Sarbanes-Oxley Act of 2002.
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31.2
|
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Certification
of Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley
Act of 2002.
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32.1
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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.
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MCF
CORPORATION
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November
6, 2007
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By: |
/s/ D.
JONATHAN MERRIMAN
|
|
D.
Jonathan Merriman,
|
|
Chairman
of the Board and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
November
6, 2007
|
By: |
/s/ JOHN
D. HIESTAND
|
|
John D. Hiestand
|
|
Chief
Financial Officer
(Principal
Financial Officer)
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