MCF
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
|
June
30,
2007
|
|
December
31,
2006
|
|
ASSETS
|
|
|
|
|
Cash
and cash equivalents
|
$
|
16,130,529
|
|
$
|
13,746,590
|
|
Securities
owned:
|
|
|
|
|
|
|
Marketable,
at fair value
|
|
13,690,559
|
|
|
7,492,914
|
|
Not
readily marketable, at estimated fair value
|
|
1,717,282
|
|
|
1,489,142
|
|
Restricted
cash
|
|
631,968
|
|
|
629,427
|
|
Due
from clearing broker
|
|
1,126,441
|
|
|
551,831
|
|
Accounts
receivable, net
|
|
2,870,376
|
|
|
2,715,271
|
|
Equipment
and fixtures, net
|
|
1,387,904
|
|
|
1,586,630
|
|
Intangible
assets
|
|
2,479,357 |
|
|
314,963
|
|
Goodwill
|
|
3,171,969 |
|
|
─
|
|
Prepaid
expenses and other assets
|
|
1,453,589
|
|
|
1,971,445
|
|
Total
assets
|
$
|
44,659,974
|
|
$
|
30,498,213
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
Accounts
payable
|
$
|
2,269,120
|
|
$
|
1,121,623
|
|
Commissions
and bonus payable
|
|
6,531,294
|
|
|
7,711,805
|
|
Accrued
expenses
|
|
4,137,359
|
|
|
2,285,670
|
|
Due
to clearing and other brokers
|
|
21,858
|
|
|
11,114
|
|
Securities
sold, not yet purchased
|
|
4,177,032
|
|
|
1,534,953
|
|
Capital
lease obligation
|
|
987,880
|
|
|
1,292,378
|
|
Convertible
notes payable, net
|
|
192,247
|
|
|
187,079
|
|
Notes
payable
|
|
90,556
|
|
|
138,571
|
|
Total
liabilities
|
|
18,407,346
|
|
|
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 June 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 June 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 June 30,
2007 and
December 31, 2006; aggregate liquidation preference of $0
|
|
─
|
|
|
─
|
|
Common
stock, $0.0001 par value; 300,000,000 shares authorized; 12,160,458
and
10,602,720 shares issued and 12,134,020 and 10,602,720 shares
outstanding
as of June 30, 2007 and December 31, 2006, respectively
|
|
1,217
|
|
|
1,061
|
|
Additional
paid-in capital
|
|
122,390,284
|
|
|
114,616,848
|
|
Treasury
stock
|
|
(125,613
|
)
|
|
--
|
|
Accumulated
deficit
|
|
(96,013,260
|
)
|
|
(98,402,889
|
)
|
Total
stockholders' equity
|
|
26,252,628
|
|
|
16,215,020
|
|
Total
liabilities and stockholders' equity
|
$
|
44,659,974
|
|
$
|
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)
|
Six
Months Ended
June
30,
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
Net
income (loss)
|
$
|
2,389,629
|
|
$
|
(2,409,543
|
)
|
Adjustments
to reconcile net income (loss) to cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
363,048
|
|
|
336,935
|
|
Amortization
of intangible assets
|
|
220,643 |
|
|
─
|
|
Stock-based
compensation
|
|
1,451,862
|
|
|
1,982,049
|
|
Amortization
of discounts on convertible notes payable
|
|
5,166
|
|
|
150,840
|
|
Amortization
of debt issuance costs
|
|
─
|
|
|
15,305
|
|
Unrealized
(gain) loss on securities owned
|
|
(5,680,368
|
)
|
|
1,255,288
|
|
Bad
debt write-off
|
|
228,167
|
|
|
─
|
|
Other
|
|
31,304
|
|
|
13,055
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
Securities
owned
|
|
1,896,662
|
|
|
(3,178,269
|
)
|
Restricted
cash
|
|
(2,541
|
)
|
|
(256,408
|
)
|
Due
from clearing broker
|
|
(574,610
|
)
|
|
(514,899
|
)
|
Accounts
receivable
|
|
628,898
|
|
|
(478,082
|
)
|
Prepaid
expenses and other assets
|
|
667,994
|
|
|
(773,889
|
)
|
Accounts
payable
|
|
570,326
|
|
|
231,173
|
|
Commissions
and bonus payable
|
|
(1,368,234
|
)
|
|
(631,920
|
)
|
Accrued
expenses
|
|
1,671,655
|
|
|
(185,204
|
)
|
Due
to clearing and other brokers
|
|
10,744
|
|
|
(4,108
|
)
|
Net
cash provided by (used in) operating activities
|
|
2,510,345
|
|
|
(4,447,677
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
Cash
restricted for fund investment
|
|
─
|
|
|
(6,639,366
|
)
|
Purchase
of equipment and fixtures
|
|
(118,021
|
)
|
|
(268,786
|
)
|
Investment
in MedPanel
|
|
(24,585
|
)
|
|
─
|
|
Investment
in Catalyst
|
|
163,219
|
|
|
(58,558
|
)
|
Net
cash provided by (used in) investing activities
|
|
20,613
|
|
|
(6,966,710
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Proceeds
from the exercise of stock options and warrants
|
|
102,937
|
|
|
289,089
|
|
Proceeds
from the issuance of common stock
|
|
102,555
|
|
|
339,430
|
|
Proceeds
from the issuance of note payable ($6,112,171) and stock warrant
($1,387,829)
|
|
─
|
|
|
7,500,000
|
|
Minority
interest in fund
|
|
─
|
|
|
2,192,943
|
|
Debt
service principal payments
|
|
(352,511
|
)
|
|
(228,047
|
)
|
Net
cash provided by (used in) financing activities
|
|
(147,019
|
)
|
|
10,093,415
|
|
Increase
(decrease) in cash and cash equivalents
|
|
2,383,939
|
|
|
(1,320,972
|
)
|
Cash
and cash equivalents at beginning of period
|
|
13,746,590
|
|
|
11,138,923
|
|
Cash
and cash equivalents at end of period
|
$
|
16,130,529
|
|
$
|
9,817,951
|
|
|
|
|
|
|
|
|
Supplementary
disclosure of cash flow information:
|
|
|
|
|
|
|
Cash
paid during the period:
|
|
|
|
|
|
|
Interest
|
$
|
51,039
|
|
$
|
39,265
|
|
Income
taxes
|
$
|
─
|
|
$
|
10,300
|
|
Reclassification
of deferred compensation
|
$
|
─
|
|
$
|
3,146,839
|
|
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 six months ended
June
30, 2007. Total assets for Panel Intelligence were $7,806,000 as of June
30,
2007. The results of operations for the Company’s Wealth Management segment
for the three months and six months ended June 30, 2006 have been treated
as
discontinued operations since this business was sold in January 2007 (see
Note
No. 4).
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. SOP No. 07-1 is effective for fiscal years beginning on or after
December 15, 2007 with early adoption encouraged. 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. 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 June 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 June 30, 2007, 579,974 shares were available for future option
grants under the Option Plans. There were no shares available for future
option
grants outside of the Options Plans. Compensation expense for stock options
during the three months and six months ended June 30, 2007 was $329,000
and
$649,000, respectively. Compensation expense for stock options during the
three
months and six months ended June 30, 2006 was $319,000 and $641,000,
respectively.
The
following table is a summary of the Company's stock option activity for
the six
months ended June 30, 2007:
|
|
Options
Outstanding
|
|
Weighted
Average
Exercise Price
|
|
Balance
as of December 31, 2006
|
|
|
3,570,370
|
|
$
|
6.19
|
|
Granted
|
|
|
408,132
|
|
|
4.72
|
|
Exercised
|
|
|
(39,583
|
)
|
|
(2.60
|
)
|
Canceled
|
|
|
(65,721
|
)
|
|
(7.33
|
)
|
Balance
as of June 30, 2007
|
|
|
3,873,198
|
|
$
|
6.05
|
|
Exercisable
as of June 30, 2007
|
|
|
3,000,711
|
|
$
|
6.06
|
|
The
following table summarizes information with respect to stock options outstanding
at June 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
|
|
|
2,038,205
|
|
|
5.54
|
|
$
|
2.95
|
|
$
|
4,209,505
|
|
|
2,036,864
|
|
$
|
2.95
|
|
$
|
4,207,346
|
|
$
3.51 -- $ 7.00
|
|
|
893,048
|
|
|
8.19
|
|
$
|
4.60
|
|
|
377,938
|
|
|
313,010
|
|
|
4.09
|
|
|
291,569
|
|
$
7.01 -- $14.00
|
|
|
646,277
|
|
|
7.68
|
|
$
|
8.86
|
|
|
─
|
|
|
355,169
|
|
|
9.29
|
|
|
─
|
|
$14.01
-- $28.00
|
|
|
256,381
|
|
|
3.36
|
|
$
|
22.04
|
|
|
─
|
|
|
256,381
|
|
|
22.04
|
|
|
─
|
|
$28.01
-- $49.00
|
|
|
39,287
|
|
|
2.66
|
|
$
|
49.00
|
|
|
─
|
|
|
39,287
|
|
|
49.00
|
|
|
─
|
|
|
|
|
3,873,198
|
|
|
6.34
|
|
$
|
6.05
|
|
$
|
4,587,443
|
|
|
3,000,711
|
|
$
|
6.06
|
|
$
|
4,498,915
|
|
MCF
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
2.
Share-Based Compensation Expense - continued
As
of June 30, 2007, total unrecognized compensation expense related to unvested
stock options was $3,038,000. This amount is expected to be recognized
as
expense over a weighted-average period of 1.43 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 six months ended June 30,
2007 was
$327,000 and $688,000, respectively. Compensation expense for non-vested
stock
during the three months and six months ended June 30, 2006 was $564,000
and
$1,018,000, respectively.
The
following table is a summary of the Company's non-vested stock activity
for the
six months ended June 30, 2007:
|
|
Non-Vested
Stock
Outstanding
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
Intrinsic
Value
at
June
30, 2007
|
|
Balance
as of December 31, 2006
|
|
|
306,009
|
|
$
|
10.04
|
|
|
|
|
Granted
|
|
|
65,308
|
|
|
4.80
|
|
|
|
|
Vested
|
|
|
(167,787
|
)
|
|
(9.42
|
)
|
|
|
|
Canceled
|
|
|
(17,689
|
)
|
|
(8.72
|
)
|
|
|
|
Balance
as of June 30, 2007
|
|
|
185,841
|
|
$
|
8.87
|
|
$
|
932,922
|
|
As
of June 30, 2007, total unrecognized compensation expense related to non-vested
stock was $1,163,000. This expense is expected to be recognized over a
weighted-average period of 0.97 year.
2002
Employee Stock Purchase Plan
The
Company offers an Employee Stock Purchase Plan, or ESPP, to its employees.
As of
June 30, 2007, 21,565 shares were available for issuance under the ESPP.
Compensation
expense for ESPP during the three months and six months ended June 30,
2007 was
$58,000 and $115,000, respectively.
Compensation expense for ESPP during the three months and six months ended
June
30, 2006 was $95,000 and $182,000, respectively.
As
of June 30, 2007, unrecognized compensation expense related to the ESPP
was
$74,000. This amount is expected to be recognized as expense over a
weighted-average period of 0.32 year.
Fair
Value and Assumptions Used to Calculate Fair Value
The
weighted average fair value of each stock option granted for the three
months
and six months ended June 30, 2007 was $2.53 and $2.56, respectively. The
weighted average fair value of each stock option granted for the three
months
and six months ended June 30, 2006 was $3.02 and $4.11, respectively. The
fair value of each option award is estimated on the date of grant using
the
Black-Scholes Option Pricing Model, with the following assumptions for
the six
months ended June 30, 2007 and 2006:
|
|
Six
months Ended
June
30,
|
|
|
|
2007
|
|
2006
|
|
Expected
volatility
|
|
|
65.83
|
%
|
|
84.76
|
%
|
Expected
life (years)
|
|
|
4.17
|
|
|
4.69
|
|
Risk-free
interest rate
|
|
|
4.75
|
%
|
|
4.70
|
%
|
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 six months ended June 30, 2007
was
$4.44 and 4.80 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 six months ended June 30, 2006 was $8.96 and 7.84 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
|
|
|
3,171,969 |
|
Total
assets acquired
|
|
|
7,825,572 |
|
|
|
|
|
|
Accounts
payable
|
|
|
(577,171
|
)
|
Accrued
expenses
|
|
|
(463,300 |
) |
Total
liabilities assumed
|
|
|
(1,040,471 |
) |
Net
assets acquired
|
|
$
|
6,785,101
|
|
The
$3,172,000 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
six months ended June 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
|
|
Six
Months Ended
|
|
|
|
June
30,
2007
|
|
June
30,
2006
|
|
June
30,
2007
|
|
June
30,
2006
|
|
Total
revenue
|
|
$
|
20,767,434
|
|
$
|
16,258,906
|
|
$
|
36,823,895
|
|
$
|
29,193,187
|
|
Total
operating expenses
|
|
|
18,609,716
|
|
|
17,046,534
|
|
|
34,936,942
|
|
|
31,427,500
|
|
Operating
income (loss)
|
|
|
2,157,718
|
|
|
(787,628
|
)
|
|
1,886,953
|
|
|
(2,234,313
|
)
|
Net
income (loss)
|
|
$
|
2,183,308
|
|
$
|
(1,179,344
|
)
|
$
|
1,982,848
|
|
$
|
(2,641,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share:
|
|
$
|
0.18
|
|
$
|
(0.10
|
)
|
$
|
0.17
|
|
$
|
(0.23
|
)
|
Diluted
net income (loss) per share:
|
|
$
|
0.17
|
|
$
|
(0.10
|
)
|
$
|
0.15
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,921,532
|
|
|
11,461,020
|
|
|
11,879,225
|
|
|
11,309,011
|
|
Diluted
|
|
|
13,135,495
|
|
|
11,461,020
|
|
|
13,136,321
|
|
|
11,309,011
|
|
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 is being 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 six months ended June 30, 2006:
|
|
Period
Ended June 30, 2006
|
|
|
|
Three
Months
|
|
Six
Months
|
|
Revenue
|
|
$
|
217,293
|
|
$
|
428,192
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
176,890
|
|
|
373,062
|
|
Professional
services
|
|
|
20,740
|
|
|
24,904
|
|
Occupancy
and equipment
|
|
|
22,801
|
|
|
42,993
|
|
Communications
and technology
|
|
|
7,058
|
|
|
11,213
|
|
Depreciation
and amortization
|
|
|
13,923
|
|
|
25,825
|
|
Travel
and entertainment
|
|
|
21,209
|
|
|
33,063
|
|
Other
expenses
|
|
|
10,011
|
|
|
27,378
|
|
|
|
|
272,632
|
|
|
538,438
|
|
Operating
loss
|
|
|
(55,339
|
)
|
|
(110,246
|
)
|
Interest
income, net
|
|
|
1,077
|
|
|
2,044
|
|
Net
loss
|
|
$
|
(54,262
|
)
|
$ |
(108,202
|
)
|
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 six months ended
June
30, 2007 and 2006, the Company recorded $55,000 and $0 as income tax
expense.
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 we 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. Other
than
as discussed below, 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 June 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 June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income (loss) available to stockholders - basic
|
|
$
|
2,320,373
|
|
$
|
(1,059,935
|
)
|
$
|
2,389,629
|
|
$
|
(2,409,543
|
)
|
Interest
on dilutive securities
|
|
|
4,084 |
|
|
─
|
|
|
8,168
|
|
|
─
|
|
Net
income (loss) available to stockholders - diluted
|
|
$
|
2,324,457
|
|
$
|
(1,059,935
|
)
|
$
|
2,397,797
|
|
$
|
(2,409,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of common shares - basic
|
|
|
11,657,775
|
|
|
9,960,900
|
|
|
11,000,702
|
|
|
9,808,891
|
|
Exercise
or conversion of all potentially dilutive common shares
outstanding
|
|
|
1,198,531 |
|
|
─
|
|
|
1,208,263
|
|
|
─
|
|
Weighted-average
number of common shares - diluted
|
|
|
12,856,306
|
|
|
9,960,900
|
|
|
12,208,965
|
|
|
9,808,891
|
|
Basic
net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.20
|
|
$
|
(0.10
|
)
|
$
|
0.22
|
|
$
|
(0.23
|
)
|
Loss
from discontinued operations
|
|
$
|
─
|
|
$
|
(0.01
|
)
|
$
|
─
|
|
$
|
(0.01
|
)
|
Net
income (loss)
|
|
$
|
0.20
|
|
$
|
(0.11
|
)
|
$
|
0.22
|
|
$
|
(0.24
|
)
|
Diluted
net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.18
|
|
$
|
(0.10
|
)
|
$
|
0.20
|
|
$
|
(0.23
|
)
|
Loss
from discontinued operations
|
|
$
|
─
|
|
$
|
(0.01
|
)
|
$
|
─
|
|
$
|
(0.01
|
)
|
Net
income (loss)
|
|
$
|
0.18
|
|
$
|
(0.11
|
)
|
$
|
0.20
|
|
$
|
(0.24
|
)
|
Basic
earnings (loss) per share is computed by dividing net income (loss) by
the
weighted average number of common shares outstanding, excluding shares
of
non-vested stock. Diluted earnings per share is calculated by dividing
net
income, plus interest and dividends on dilutive securities, by the weighted
average number of common shares used in the basic earnings per share calculation
plus the number of common shares that would be issued assuming exercise
or
conversion of all potentially dilutive common shares outstanding, including
non-vested stock. Diluted loss per share is unchanged from basic loss per
share
for the three months and six months ended June 30, 2006 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 six months ended June 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 June 30,
|
|
Six
Months Ended June 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
|
|
|
1,682,257
|
|
|
1,296,243
|
|
|
1,637,949
|
|
|
1,174,825
|
|
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
|
|
|
─
|
|
|
2,170,446
|
|
|
─
|
|
|
2,192,989
|
|
Weighted
average shares issuable upon conversion of the convertible notes
payable
|
|
|
─
|
|
|
902,736
|
|
|
─
|
|
|
629,851
|
|
Weighted
average shares contingently issuable
|
|
|
─
|
|
|
52,876
|
|
|
─
|
|
|
94,270
|
|
Total
common stock equivalents excluded from diluted net income (loss)
per
share
|
|
|
1,682,257
|
|
|
4,422,301
|
|
|
1,637,949
|
|
|
4,091,935
|
|
7.
Other Operating Expenses
The
following expenses are included in other operating expenses for the three
months
and six months ended June 30, 2007:
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Investor
conferences
|
|
$
|
259,982
|
|
$
|
226,517
|
|
$
|
388,371
|
|
$
|
280,908
|
|
Recruiting
|
|
|
227,053 |
|
|
34,658
|
|
|
370,061
|
|
|
129,896
|
|
Bad
debt expenses
|
|
|
217,922 |
|
|
(467,878
|
)
|
|
228,166
|
|
|
(445,016
|
)
|
Public
and investor relations
|
|
|
112,780 |
|
|
79,325
|
|
|
160,711
|
|
|
174,001
|
|
Supplies
|
|
|
79,355 |
|
|
85,293
|
|
|
167,707
|
|
|
154,563
|
|
Insurance
|
|
|
74,547 |
|
|
65,759
|
|
|
147,004
|
|
|
130,869
|
|
Other
|
|
|
152,776 |
|
|
129,987
|
|
|
254,339
|
|
|
110,065
|
|
|
|
$
|
1,124,415
|
|
$
|
153,661
|
|
$
|
1,716,359
|
|
$
|
535,286
|
|
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 June 30, 2007, Merriman
Curhan Ford & Co. had regulatory net capital, as defined, of $8,875,000,
which exceeded the amount required by $7,875,000. 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 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 June 30, 2007, assets under management across
our
three fund products exceeded $37 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 second quarter 2007 exceeded $20.3 million, which represents 42%
sequential growth over first quarter 2007 and a 37% increase over the second
quarter 2006. Revenue growth was led by principal transactions, which includes
proprietary trading and market making, as well as primary research. We
closed
the acquisition of MedPanel on April 17, 2007 and began recognizing primary
research revenue and related expenses since that date. We also experienced
continued growth for each of our recurring revenue activities, including
asset
management and brokering institutional money funds by our Institutional
Cash
Distributors division. Net income for the second quarter 2007 was $2.3
million,
or $0.18 per diluted share, which represents the second 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 June 30, 2007 was 63%,
which
represents a significant improvement from second quarter 2006.
Business
Environment
Most
U.S. stock indexes advanced in the second quarter, some setting records
along
the way. Stocks moved higher based on corporate earnings early in the quarter
and later overcame short periods of increased volatility associated with
investor concerns about soft retail sales, rising interest rates, inflation,
the
housing market and sub-prime mortgage woes. An active mergers-and-acquisitions
market, fueled to a significant degree by buying from private equity funds,
was
one factor supporting the market. Conversely, the housing market remained
depressed, and long-term interest rates moved decisively higher. Crude
oil
surged to close the period near $70 per barrel. Lastly, long-term interest
rates
continued to rise, indicating a deteriorating credit climate for U.S. businesses
and consumers. Despite the increased volatility the market demonstrated
in the
second half of the quarter, most broad measures of stock performance managed
to
finish solidly in positive territory.
For
the quarter overall, the S&P 500 returned 6.27%. The technology-heavy Nasdaq
Composite® Index reached a new six-year high and ended the quarter ahead by
7.50%. In the small-cap arena, the Russell 2000® Growth Index posted a gain of
6.69%. Among S&P 500 sectors, energy was the clear winner, reflecting high
crude oil prices. Growth maintained a healthy lead over value in each primary
capitalization groups.
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
six months ended June 30, 2007 and 2006:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30,
2007
|
|
June
30,
2006
|
|
June
30,
2007
|
|
June
30,
2006
|
Revenue:
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
7,717,573
|
|
$
|
7,945,580
|
|
$
|
14,883,280
|
|
$
|
16,643,708
|
|
Principal
transactions
|
|
|
5,712,652
|
|
|
(735,951
|
)
|
|
8,325,776
|
|
|
(332,650
|
)
|
Investment
banking
|
|
|
5,631,556
|
|
|
7,485,108
|
|
|
9,864,027
|
|
|
9,910,888
|
|
Primary
research
|
|
|
951,062 |
|
|
─
|
|
|
951,062
|
|
|
─
|
|
Advisory
and other fees
|
|
|
359,506
|
|
|
170,129
|
|
|
671,348
|
|
|
203,222
|
|
Total
revenue
|
|
|
20,372,349
|
|
|
14,864,866
|
|
|
34,695,493
|
|
|
26,425,168
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
12,767,087
|
|
|
11,719,319
|
|
|
23,577,374
|
|
|
21,453,092
|
|
Brokerage
and clearing fees
|
|
|
662,056
|
|
|
706,256
|
|
|
1,294,697
|
|
|
1,388,860
|
|
Cost
of primary research services
|
|
|
395,218
|
|
|
─
|
|
|
395,218
|
|
|
─
|
|
Professional
services
|
|
|
703,640 |
|
|
842,058
|
|
|
1,085,118
|
|
|
1,283,381
|
|
Occupancy
and equipment
|
|
|
453,061
|
|
|
407,334
|
|
|
895,589
|
|
|
789,155
|
|
Communications
and technology
|
|
|
884,010
|
|
|
717,969
|
|
|
1,696,946
|
|
|
1,323,902
|
|
Depreciation
and amortization
|
|
|
182,027
|
|
|
159,161
|
|
|
363,048
|
|
|
311,110
|
|
Amortization
of intangible assets
|
|
|
220,643
|
|
|
─
|
|
|
220,643
|
|
|
─
|
|
Travel
and entertainment
|
|
|
685,416
|
|
|
830,076
|
|
|
1,154,618
|
|
|
1,348,592
|
|
Other
|
|
|
1,124,415
|
|
|
153,661
|
|
|
1,716,359
|
|
|
535,286
|
|
Total
operating expenses
|
|
|
18,077,573
|
|
|
15,535,834
|
|
|
32,399,610
|
|
|
28,433,378
|
|
Operating
income (loss)
|
|
|
2,294,776
|
|
|
(670,968
|
)
|
|
2,295,883
|
|
|
(2,008,210
|
)
|
Interest
income
|
|
|
107,461
|
|
|
139,101
|
|
|
229,954
|
|
|
249,766
|
|
Interest
expense
|
|
|
(26,864
|
)
|
|
(473,806
|
)
|
|
(81,208
|
)
|
|
(542,897
|
)
|
Income
(loss) from continuing operations before taxes
|
|
|
2,375,373
|
|
|
(1,005,673
|
)
|
|
2,444,629
|
|
|
(2,301,341
|
)
|
Income
tax expense
|
|
|
(55,000
|
)
|
|
─
|
|
|
(55,000
|
)
|
|
─
|
|
Income
(loss) from continuing operations
|
|
|
2,320,373 |
|
|
(1,005,673
|
)
|
|
2,389,629
|
|
|
(2,301,341
|
)
|
Loss
from discontinued operations
|
|
|
─ |
|
|
(54,262
|
)
|
|
─
|
|
|
(108,202
|
)
|
Net
income (loss)
|
|
$
|
2,320,373
|
|
$
|
(1,059,935
|
)
|
$
|
2,389,629
|
|
$
|
(2,409,543
|
)
|
Our
net income (loss) for the three months and six months ended June 30, 2007
and
2006 included the following non-cash expenses:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30,
2007
|
|
June
30,
2006
|
|
June
30,
2007
|
|
June
30,
2006
|
Stock-based
compensation
|
|
$
|
714,159
|
|
$
|
1,047,908
|
|
$
|
1,451,862
|
|
$
|
1,982,049
|
|
Depreciation
and amortization
|
|
|
182,027
|
|
|
173,084
|
|
|
363,048
|
|
|
336,935
|
|
Amortization
of intangible assets
|
|
|
220,643 |
|
|
─
|
|
|
220,643
|
|
|
─
|
|
Write-off
of uncollectible accounts receivable
|
|
|
217,922
|
|
|
─
|
|
|
228,167
|
|
|
─
|
|
Amortization
of discounts on debt
|
|
|
2,583
|
|
|
126,797
|
|
|
5,166
|
|
|
150,840
|
|
Total
|
|
$
|
1,337,334
|
|
$
|
1,347,789
|
|
$
|
2,268,886
|
|
$
|
2,469,824
|
|
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 six months ended
June 30,
2007 and 2006:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30,
2007
|
|
June
30,
2006
|
|
June
30,
2007
|
|
June
30,
2006
|
Revenue:
|
|
|
|
|
|
|
|
|
Capital
raising
|
|
$
|
5,126,556
|
|
$
|
7,330,108
|
|
$
|
9,146,527
|
|
$
|
9,235,003
|
|
Financial
advisory
|
|
|
505,000
|
|
|
155,000
|
|
|
717,500
|
|
|
675,885
|
|
Total
investment banking revenue
|
|
$
|
5,631,556
|
|
$
|
7,485,108
|
|
$
|
9,864,027
|
|
$
|
9,910,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
Volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
offerings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
underwritten participations
|
|
$
|
72,750,000
|
|
$
|
72,528,000
|
|
$
|
105,250,000
|
|
$
|
104,150,000
|
|
Number
of transactions
|
|
|
4
|
|
|
8
|
|
|
7
|
|
|
10
|
|
Private
placements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
raised
|
|
$
|
22,985,000
|
|
$
|
84,000,000
|
|
$
|
86,585,000
|
|
$
|
88,000,000
|
|
Number
of transactions
|
|
|
3
|
|
|
2
|
|
|
6
|
|
|
4
|
|
Our
investment banking revenue was $5,632,000, or 28% of our revenue during
second
quarter 2007, representing a 25% decrease from the similar quarter in 2006.
Second quarter of 2006 represented our second largest quarter for investment
banking revenue and included a $78 million private placement that resulted
in a
$3.9 million fee. Investment banking revenue for the three months ended
June 30,
2007 was in line with average revenue for the preceding four quarters.
We led
two secondary public offerings during the latest quarter and participated
with
two underwritten offerings as co-manager. Additionally, we were placement
agent
for four private placements during the three months ended June 30,
2007.
During
the six months ended June 30, 2007, no single investment banking client
accounted for more than 10% of our revenue, while one investment banking
client
accounted for 15% of our revenue during the first half 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
|
|
Six
Months Ended
|
|
|
June
30,
2007
|
|
June
30,
2006
|
|
June
30,
2007
|
|
June
30,
2006
|
Revenue:
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
7,717,573
|
|
$
|
7,945,580
|
|
$
|
14,883,280
|
|
$
|
16,643,708
|
|
Principal
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
principal transactions, proprietary trading and market
making
|
|
$
|
4,669,144
|
|
$
|
(815,666
|
)
|
$
|
7,354,753
|
|
$
|
(127,733
|
)
|
Investment
portfolio
|
|
|
1,043,508
|
|
|
79,715
|
|
|
971,023
|
|
|
(204,917
|
)
|
Total
principal transactions revenue
|
|
$
|
5,712,652
|
|
$
|
(735,951
|
)
|
$
|
8,325,776
|
|
$
|
(332,650
|
)
|
Transaction
Volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares traded
|
|
|
247,476,532
|
|
|
244,983,930
|
|
|
477,147,878
|
|
|
507,732,048
|
|
Number
of active clients
|
|
|
408
|
|
|
383
|
|
|
488
|
|
|
469
|
|
Commissions
amounted to $7,718,000, or 38%, of our revenue during the second quarter
2007,
representing a 3% decrease from the similar period in 2006. Lower brokerage
commissions were partially offset by higher revenue for brokering institutional
money funds by our Institutional Cash Distributors division.
Principal
transactions revenue swung from a $736,000 loss during the second quarter
2006
to a $5,713,000 gain during the second quarter of 2007. The 2007 gain included
increases in the mark-to-fair 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
June
30, 2007, we made markets in over 1,100 stocks, which has increased by
nearly
50% from June 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 results of MedPanel's operations from the
acquisition date, April 17, 2007, through June 30, 2007. We are now
offering 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.
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 ended June 30, 2007 and 2006:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30,
2007
|
|
June
30,
2006
|
|
June
30,
2007
|
|
June
30,
2006
|
Incentive
compensation and discretionary bonuses
|
|
$
|
7,708,451
|
|
$
|
7,608,383
|
|
$
|
13,383,686
|
|
$
|
13,253,141
|
|
Salaries
and wages
|
|
|
3,559,646
|
|
|
2,288,814
|
|
|
6,599,791
|
|
|
4,334,897
|
|
Stock-based
compensation
|
|
|
714,159
|
|
|
1,047,908
|
|
|
1,451,862
|
|
|
1,982,049
|
|
Payroll
taxes, benefits and other
|
|
|
784,831
|
|
|
774,214
|
|
|
2,142,035
|
|
|
1,883,005
|
|
Total
compensation and benefits
|
|
$
|
12,767,087
|
|
$
|
11,719,319
|
|
$
|
23,577,374
|
|
$
|
21,453,092
|
|
Total
compensation and benefits as a percentage of revenue
|
|
|
63
|
%
|
|
79
|
%
|
|
68
|
%
|
|
81
|
%
|
Cash
compensation and benefits as a percentage of revenue
|
|
|
59
|
%
|
|
72
|
%
|
|
64
|
%
|
|
74
|
%
|
The
increase in compensation and benefits expense of $1,048,000 or 9%, from
the
second quarter 2006 to the second 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 59% during the
three
months ended June 30, 2007 as compared to 72% during the similar period
in 2006.
This improvement was largely attributed to our proprietary trading gains
during
2007 since the gains increased revenue but did not impact compensation
and
benefits expense.
No
single sales professional accounted for more than 10% of our revenue during
the
six months ended June 30, 2007 and 2006.
Stock-based
compensation expense decreased by $334,000 during the second quarter 2007,
as
compared to the similar quarter in 2006. The decline in stock-based compensation
expense was due in part 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 decreased by $44,000, or
6%,
during the second quarter of 2007 as compared to the second quarter of
2006 and
decreased by $94,000, or 7%, during the six months ended June 30, 2007
as
compared to the similar period in 2006. This decrease reflected lower
commissions revenue during 2007, partially offset by increased market making
activity during first half of 2007 as compared to first half of
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 $138,000, or 16%, during the second quarter
of 2007
as compared to the second quarter of 2006 and decrease of $198,000, or
15%,
during the six months ended June 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 $46,000, or 11%, during the
second
quarter of 2007 as compared to the second quarter of 2006 and increase
of
$106,000, or 14%, during the six months ended June 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 $166,000, or
23%,
during the second quarter of 2007 as compared to the second quarter of
2006 and
increase of $373,000, or 28% during the six months ended June 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 $23,000, or 14%, during the second quarter
of
2007 as compared to the second quarter of 2006 and increase of $52,000,
or 17%
during the six months ended June 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 decrease of $145,000, or 17%, during the second
quarter of 2007 as compared to the second quarter of 2006 and decrease
of
$194,000, or 14% during the six months ended June 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 six months ended June 30, 2007:
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Investor
conferences
|
|
$
|
259,982
|
|
$
|
226,517
|
|
$
|
388,371
|
|
$
|
280,908
|
|
Recruiting
|
|
|
227,053 |
|
|
34,658
|
|
|
370,061
|
|
|
129,896
|
|
Bad
debt expenses
|
|
|
217,922 |
|
|
(467,878
|
)
|
|
228,166
|
|
|
(445,016
|
)
|
Public
and investor relations
|
|
|
112,780 |
|
|
79,325
|
|
|
160,711
|
|
|
174,001
|
|
Supplies
|
|
|
79,355 |
|
|
85,293
|
|
|
167,707
|
|
|
154,563
|
|
Insurance
|
|
|
74,547 |
|
|
65,759
|
|
|
147,004
|
|
|
130,869
|
|
Other
|
|
|
152,776 |
|
|
129,987
|
|
|
254,339
|
|
|
110,065
|
|
|
|
$
|
1,124,415
|
|
$
|
153,661
|
|
$
|
1,716,359
|
|
$
|
535,286
|
|
The
increase in other operating expenses of 971,000 during the second quarer
of 2007
as compared to the second quarter of 2006 and $1,181,000 increase during
the six
months ended June 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 during
the most
recent quarter and (iii) the write-off of uncollectible receivables during
the
three months ended June 30, 2007.
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 six months ended June
30, 2007
and 2006, we recorded $55,000 and $0 as income tax expense.
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. Other than as discussed below, 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 June 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 six months
ended June 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 June
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.
|
|
NotesPayable
|
|
Operating
Leases
|
|
Capital
Leases
|
|
Less
than one year
|
|
$
|
53,388
|
|
|
1,011,684
|
|
|
299,498
|
|
One
year to three years
|
|
|
243,990
|
|
|
3,179,296
|
|
|
769,607
|
|
Three
years to five years
|
|
|
--
|
|
|
985,839
|
|
|
--
|
|
Total
commitments
|
|
$
|
297,378
|
|
$
|
5,176,819
|
|
$
|
1,069,105
|
|
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 six months
ended
June 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 June 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 June 30, 2007, liquid assets
consisted primarily of cash and cash equivalents of $16,131,000 and marketable
securities, net of securities sold not yet purchased, of $9,514,000, for
a total
of $25,645,000.
Cash
and cash equivalents increased by $2,384,000 during the six months ended
June
30, 2007. Cash provided by operating activities for 2007 was $2,510,000
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 provided by investing activities amounted to $21,000 during
2007
which consisted of proceeds from the sale of Catalyst, partially offset
by
purchases of equipment and fixtures. Cash used in financing activities
was
$147,000. 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 June 30, 2007, Merriman
Curhan Ford & Co. had regulatory net capital of $8,875,000 which exceeded
the required amount by $7,875,000.
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.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The
following discussion about market risk disclosures involves forward-looking
statements. Actual results could differ materially from those projected
in the
forward-looking statements. We may be exposed to market risks related to
changes
in equity prices, interest rates and foreign currency exchange rates. We
do not
use derivative financial instruments for speculative, trading or any other
purpose.
Equity
Price Risk
The
potential for changes in the market value of our trading positions is referred
to as “market risk.” Our trading positions result from proprietary trading
activities. These trading positions in individual equities and equity indices
may be either long or short at any given time. Equity price risks result
from
exposures to changes in prices and volatilities of individual equities
and
equity indices. We seek to manage this risk exposure through diversification
and
limiting the size of individual positions within the portfolio. The effect
on
earnings and cash flows of an immediate 10% increase or decrease in equity
prices generally is not ascertainable and could be positive or negative,
depending on the positions we hold at the time. We do not establish hedges
in
related securities or derivatives. From time to time, we also hold equity
securities received as compensation for our services in investment banking
transactions. These equity positions are always long. However, as the prices
of
individual equity securities do not necessarily move in tandem with the
direction of the general equity market, the effect on earnings and cash
flows of
an immediate 10% increase or decrease in equity prices generally is not
ascertainable.
Interest
Rate Risk
Our
exposure to market risk resulting from changes in interest rates relates
primarily to our investment portfolio and long term debt obligations. Our
interest income and cash flows may be impacted by changes in the general
level
of U.S. interest rates. We do not hedge this exposure because we believe
that we
are not subject to any material market risk exposure due to the short-term
nature of our investments. We would not expect an immediate 10% increase
or
decrease in current interest rates to have a material effect on the fair
market
value of our investment portfolio.
Our
long term debt obligations bear interest at a fixed rate. Accordingly,
an
immediate 10% increase or decrease in current interest rates would not
have an
impact on our interest expense or cash flows. The fair market value of
our long
term fixed interest rate debt is subject to interest rate risk. Generally,
the
fair market value of fixed interest rate debt will increase as interest
rates
fall and decrease as interest rates rise. We would not expect an immediate
10%
increase or decrease in current interest rates to have a material impact
on the
fair market value of our long term debt obligations.
Foreign
Currency Risk
We
do not have any foreign currency denominated assets or liabilities or purchase
commitments and have not entered into any foreign currency contracts.
Accordingly, we are not exposed to fluctuations in foreign currency exchange
rates.
Item 4.
Controls and Procedures
Evaluation
of Disclosure Controls and Procedures -
We have established disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries,
is
made known to the officers who certify the Company's financial reports
and to
other members of senior management and the Board of Directors.
Based
on their evaluation of the Company's disclosure controls and procedures
(as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934), the Principal Executive Officer and Principal Financial Officer
of the
Company have concluded that the disclosure controls and procedures are
effective
as of June 30, 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 June 30, 2007, that materially affected, or is
reasonably likely to materially affect, the Company's internal control
over
financial reporting.
On
April 17, 2007, we completed the acquisition of MedPanel. The operations
and
financial controls of MedPanel were integrated into the existing internal
controls of the Company during the three months ended June 30, 2007.
This
integration did not result in any changes which materially affected or
are
reasonably likely to materially affect the Company’s internal controls over
financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) of the
Exchange
Act) that occurred during the quarter ended June 30, 2007.
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.
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 six months ended June 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:
· |
variations
in quarterly operating
results;
|
· |
our
announcements of significant contracts, milestones,
acquisitions;
|
· |
our
relationships with other companies;
|
· |
our
ability to obtain needed capital
commitments;
|
· |
additions
or departures of key personnel;
|
· |
sales
of common stock, conversion of securities convertible into
common stock,
exercise of options and warrants to purchase common stock or
termination
of stock transfer restrictions;
|
· |
general
economic conditions, including conditions in the securities
brokerage and
investment banking markets;
|
· |
changes
in financial estimates by securities analysts;
and
|
· |
fluctuation
in stock market price and
volume.
|
Many
of these factors are beyond our control. Any one of the factors noted herein
could have an adverse effect on the value of our common stock.
In
addition, the stock market in recent years has experienced significant
price and
volume fluctuations that have particularly affected the market prices of
equity
securities of many companies and that often have been unrelated to the
operating
performance of such companies. These market fluctuations have adversely
impacted
the price of our common stock in the past and may do so in the
future.
Our
risk management policies and procedures may leave us exposed to unidentified
or
unanticipated risk.
Our
risk management strategies and techniques may not be fully effective in
mitigating our risk exposure in all market environments or against all
types of
risk.
We
are exposed to the risk that third parties that owe us money, securities
or
other assets will not perform their obligations. These parties may default
on
their obligations to us due to bankruptcy, lack of liquidity, operational
failure, 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 June
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.
The
annual meeting of our stockholders was held on June 8, 2007. At the annual
meeting, our stockholders voted on the matters shown in the table below.
Each
director was elected, and each proposal adopted, by the votes
shown.
|
Votes
For
|
|
Votes
Against
|
|
Votes
Abstained
|
|
|
Broker
Non-Votes
|
|
|
|
|
|
|
|
|
|
|
1.
|
Election
of Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.
Jonathan Merriman
|
7,779,245
|
|
--
|
|
142,093
|
|
|
Not
applicable
|
|
|
|
|
|
|
|
|
|
|
|
Patrick
H. Arbor
|
7,777,888
|
|
--
|
|
143,450
|
|
|
Not
applicable
|
|
|
|
|
|
|
|
|
|
|
|
Ronald
E. Spears
|
7,777,974
|
|
--
|
|
143,364
|
|
|
Not
applicable
|
|
|
|
|
|
|
|
|
|
|
|
Steven
W. Town
|
7,628,549
|
|
--
|
|
292,789
|
|
|
Not
applicable
|
|
|
|
|
|
|
|
|
|
|
|
Raymond
J. Minehan
|
7,622,878
|
|
--
|
|
298,460
|
|
|
Not
applicable
|
|
|
|
|
|
|
|
|
|
|
|
Dennis
G. Schmal
|
7,618,035
|
|
--
|
|
303,303
|
|
|
Not
applicable
|
|
|
|
|
|
|
|
|
|
|
|
Anthony
B. Helfet
|
7,760,028
|
|
--
|
|
161,310
|
|
|
Not
applicable
|
|
|
|
|
|
|
|
|
|
|
|
Scott
Potter
|
7,770,245
|
|
--
|
|
151,093
|
|
|
Not
applicable
|
|
|
|
|
|
|
|
|
|
|
|
William
J. Febbo
|
7,779,245
|
|
--
|
|
142,093
|
|
|
Not
applicable
|
|
|
|
|
|
|
|
|
|
|
2.
|
Approval
of amendments to the Company's 2003 Stock Option and Incentive
Plan to
increase by 600,000 the number of shares of Common Stock available
for
issuance pursuant to awards granted under the Stock Option and
Incentive
Plan and to extend the term of the Stock Option and Incentive
Plan for an
additional one-year period, until March 7, 2017.
|
2,373,618
|
|
251,648
|
|
29,515
|
|
|
6,101,376
|
Item
6. Exhibits
31.1
|
|
Certification
of Principal Executive Officer Pursuant To Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant
to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
|
|
|
MCF
CORPORATION
|
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August
7, 2007
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By: |
/s/ D.
JONATHAN MERRIMAN |
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D.
Jonathan Merriman, |
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Chairman
of the Board and Chief Executive Officer
(Principal
Executive Officer)
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August
7, 2007
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By: |
/s/ JOHN
D.
HIESTAND |
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John
D. Hiestand |
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Chief
Financial Officer
(Principal
Financial Officer)
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