SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
Fiscal Year ended December 31, 2007
OR
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
transition period from _______ to
________
Commission
File Number 001-15831
MCF
CORPORATION
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware
|
|
11-2936371
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(IRS
Employer
Identification
No.)
|
600
California Street, 9th Floor
San
Francisco, CA 94108
(Address
of principal executive offices)(Zip Code)
(415)
248-5600
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
|
Large
Accelerated Filer o
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Accelerated
Filer x
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Non-accelerated
Filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
The
aggregate market value of the 11,157,574 shares of common stock of the
Registrant issued and outstanding as of June 30, 2007, the last business day
of
the registrant’s most recently completed second fiscal quarter, excluding
976,446 shares
of
common stock held by affiliates of the Registrant
was
$56,011,021. This amount is based on the closing price of the common stock
on
the American Stock Exchange of $5.02 per share on June 30, 2007.
The
number of shares of Registrant’s common stock outstanding as of February 11,
2008 was 12,317,940.
DOCUMENTS
INCORPORATED BY REFERENCE
Part
III
of this Form 10-K incorporates by reference certain portions of the Registrant’s
proxy statement for its 2008 annual meeting of stockholders to be filed with
the
Commission not later than 120 days after the end of the fiscal year covered
by
this report.
TABLE
OF CONTENTS
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PART I
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Item 1.
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Business
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1
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Item 1A.
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Risk
Factors
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10
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Item 1B.
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Unresolved
Staff Comments
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21
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Item 2.
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Properties
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21
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Item 3.
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Legal
Proceedings
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22
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Item 4.
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Submission
of Matters to a Vote of Stockholders
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22
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PART II
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Item 5.
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Market
for Registrant’s Common Stock and Related Stockholder
Matters
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23
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Item 6.
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Selected
Financial Data
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25
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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26
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Item 7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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40
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Item 8.
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Financial
Statements and Supplementary Data
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41
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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72
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Item 9A.
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Controls
and Procedures
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72
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Item 9B.
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Other
Information
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72
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PART III
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Item
10.
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Directors
and Executive Officers of the Registrant
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74
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Item 11.
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Executive Compensation
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77
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Item 12.
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Security Ownership
of Certain Beneficial Owners and Management
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77
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Item 13.
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Certain
Relationships and Related Transactions
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77
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Item 14.
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Principal Accounting Fees And Services
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77
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PART IV
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Item 15.
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Exhibits
and Financial Statement Schedules
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78
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i
This
Annual Report on Form 10-K and the information incorporated by reference in
this
Form 10-K include forward-looking statements within the meaning of Section
27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Some of the forward-looking statements can
be
identified by the use of forward-looking words such as “believes,” “expects,”
“may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,”
“estimates” or “anticipates” or the negative of those words or other comparable
terminology. Forward-looking statements involve risks and uncertainties. You
should be aware that a number of important factors could cause our actual
results to differ materially from those in the forward-looking statements.
We
will not necessarily update the information presented or incorporated by
reference in this Annual Report on Form 10-K if any of these forward-looking
statements turn out to be inaccurate. Risks affecting our business are described
throughout this Form 10-K and especially in the section “Risk Factors.” This
entire Annual Report on Form 10-K, including the consolidated financial
statements and the notes and any other documents incorporated by reference
into
this Form 10-K should be read for a complete understanding of our business
and
the risks associated with that business.
PART
I
Item
1. Business
Overview
We
are a
financial services holding company that provides investment research, capital
markets services, corporate and venture services, investment banking, asset
management and primary research through our operating subsidiaries, Merriman
Curhan Ford & Co., MCF Asset Management, LLC and Panel Intelligence,
LLC.
Merriman
Curhan Ford & Co. is an investment bank and securities broker-dealer focused
on fast growing companies and institutional investors. Our mission is to become
a leader in the researching, advising, financing, trading and investing
in fast growing companies under $2 billion in market capitalization. We
provide equity research, brokerage and trading services primarily to
institutions, as well as investment banking and advisory services to corporate
clients. We are gaining market share by originating differentiated research
for
our institutional investor clients and providing specialized and integrated
services for our fast-growing corporate clients.
In
April
2007, we acquired MedPanel, Inc. (now Panel Intelligence, LLC) and began
offering custom and published primary research to industry clients and
investment professionals through online panel discussions, quantitative surveys
and an extensive research library. Panel Intelligence is positioned to provide
greater access, compliance, insights and productivity to clients in the
healthcare, clean technology (“CleanTech”), technology, media and
telecommunications (“TMT”) and financial industries.
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 December 31, 2007, assets under management across our three fund
products exceeded $56 million.
We
are
headquartered in San Francisco, with additional offices in New York, NY,
Cambridge, MA, Newport Beach, CA and Portland, OR. As of December 31, 2007,
we
had 198 employees. Merriman Curhan Ford & Co. is registered with the
Securities and Exchange Commission as a broker-dealer and is a member of
Financial Industry Regulatory Authority (“FINRA”) and the Securities Investors
Protection Corporation. MCF Asset Management, LLC is registered with the
Securities and Exchange Commission.
Principal
Services
We
have
three business segments: the investment bank / broker-dealer, primary research
and asset management. Our investment bank / broker-dealer segment provides
three
service offerings: investment banking, brokerage and equity research. Our
primary research segment offers custom, independent primary research services
to
health care and Clean Technology companies, as well as financial services firms
that invest in these companies. Our asset management segment manages investment
products for investors. We sold our wealth management subsidiary, Catalyst
Financial Planning & Investment Management Corporation, or Catalyst, in
January 2007. The results from this segment have been treated as discontinued
operations.
1
Investment
Banking
Our
investment bankers provide a full range of corporate finance and strategic
advisory services. Our corporate finance practice is comprised of industry
coverage investment bankers that are focused on raising capital for fast growing
companies in selected industry sectors. Our strategic advisory practice tailors
solutions to meet the specific needs of our clients at various points in their
growth cycle. Over the last three years, we have focused on growing our
investment banking business through the hiring of increasingly senior investment
bankers and support professionals. As of December 31, 2007, we had 33
professionals in our investment banking group.
Corporate
Finance.
Our
corporate finance practice advises on and structures capital raising solutions
for our corporate clients through public and private offerings of primarily
equity and convertible debt securities. Our focus is to provide fast growing
companies with the capital necessary to drive them to the next level of growth.
We offer a wide range of financial services designed to meet the needs of fast
growing companies, including initial public offerings, secondary offerings,
private investments in public equity, or PIPEs, and private placements. Our
equity capital markets team executes underwritten securities offerings, assists
clients with investor relations advice and introduces companies seeking to
raise
capital to investors that we believe will be supportive, long-term investors.
Additionally, we draw upon our contacts throughout the financial and corporate
world, expanding the options available for our corporate clients.
Strategic
Advisory.
Our
strategic advisory services include transaction specific advice regarding
mergers and acquisitions, divestitures, spin-offs and privatizations, as well
as
general strategic advice. Our commitment to long-term relationships and our
ability to meet the needs of a diverse range of clients has made us a reliable
source of advisory services for fast growing public and private companies.
Our
strategic advisory services are also supported by our capital markets
professionals, who provide assistance in acquisition financing in connection
with mergers and acquisitions transactions.
Institutional
Brokerage Services
We
provide institutional sales, sales trading and trading services to more than
590
institutional accounts in the United States. We execute securities transactions
for money managers, mutual funds, hedge funds, insurance companies, pension
and
profit-sharing plans. Institutional investors normally purchase and sell
securities in large quantities, which require the distribution and trading
expertise that we provide.
We
provide integrated research and trading solutions centered on helping our
institutional clients to invest profitably, to grow their portfolios and
ultimately their businesses. We understand the importance of building long-term
relationships with our clients who we believe look to us for the professional
resources and relevant expertise to provide answers for their specific
situations. We believe it is important for us to be involved with public
companies early in their corporate life cycles. We strive to provide unique
investment opportunities in fast growing, relatively undiscovered companies
and
to help our clients execute trades rapidly, efficiently and
accurately.
Institutional
Sales.
Our
sales professionals focus on communicating investment ideas to our clients
and
executing trades in securities of companies in our target growth sectors. By
actively trading in these securities, we endeavor to couple the capital market
information flow with the fundamental information flow provided by our analysts.
We believe that this combined information flow is the underpinning of getting
our clients favorable execution of investment strategies. Sales professionals
work closely with our research analysts to provide up-to-date information to
our
institutional clients. We interface actively with our clients and plan to be
involved with our clients over the long term.
Sales
Trading.
Our
sales traders are experienced in the industry and possess in-depth knowledge
of
both the markets for fast growing company securities and the institutional
traders who buy and sell them.
Trading.
Our
trading professionals facilitate liquidity discovery in equity securities.
We
make markets in NASDAQ and other securities, trade listed securities and service
the trading desks of institutions in the United States. Our trading
professionals have direct access to the major stock exchanges, including the
New
York Stock Exchange and the American Stock Exchange. As of December 31, 2007,
we
were a market maker in over 1,200 securities.
2
The
customer base of our brokerage business is primarily institutional, including
mutual funds and hedge funds, as well as smaller, private investment firms
and
certain high net worth individuals. We believe this group of clients and
potential clients to number over 4,000. We grew our business during 2007 by
adding new customers, and increasing the penetration of existing institutional
customers that use our equity research and trading services in their investment
process.
Proprietary
Trading.
We will
from time to time take significant positions in fast growing companies that
we
feel are undervalued in the marketplace. We believe that our window into these
opportunities, due to the types of companies we research, offers us a
significant competitive advantage. We have generated attractive returns on
our capital by deploying this strategy since the inception of our
firm.
Corporate
and Venture Services.
We
offer brokerage services to corporations including corporate cash management
and
stock repurchase programs through our Corporate and Venture Services group.
We
also serve the needs of venture capital investors and company executives with
restricted stock transactions, cashless exercise of options, hedging and
diversification strategies, and liquidity strategies. Additionally, the Venture
Services team provides sales distribution for capital raises for private
companies via the introduction to venture capital and private equity
investors.
Institutional
Cash Distributors (ICD).
ICD is
a broker of money market funds serving the short-term investing needs of
corporate finance departments at companies throughout the United States and
Europe. Companies using ICD’s services receive access to over 40 fund families
through ICD’s one-stop process that includes one application, one wire and one
statement that consolidates reporting regardless of the number of funds
utilized. As
of
December 31, 2007, ICD clients have invested over $18 billion in money market
funds from which ICD earns brokerage fees. ICD
is a
division of Merriman Curhan Ford & Co.
OTCQX
Advisory.
During
2007, Merriman Curhan Ford & Co. began offering services to sponsor
companies on the Domestic and International OTCQX markets. This new service
offering has been designed to enable domestic and non-U.S. companies to obtain
greater exposure to U.S. institutional investors without the expense and
regulatory burdens of listing on a traditional U.S. exchanges. The Domestic
and
International OTCQX market tiers do not require full SEC registration or
Sarbanes Oxley compliance. Listing on the market requires the sponsorship of
a
qualified investment bank called a Designated Advisor for Disclosure (DAD)
for
domestic companies or a Principal American Liaison (PAL) for non-U.S. companies.
Merriman Curhan Ford & Co. was the first U.S. investment bank to achieve DAD
and PAL designations.
Capital
Access Group.
We
raise capital for institutional hedge funds, venture capital and private equity
clients for a fee through our Capital Access Group. We believe fee-based capital
raising is an underserved area of the institutional brokerage
industry.
Equity
Research
A
key
part of our strategy is to originate specialized and in-depth research. Our
analysts cover a universe of approximately 186 companies in our focus industry
sectors. We leverage the ideas generated by our research teams, using them
to
attract and retain institutional brokerage clients.
Supported
by the firm’s institutional sales and trading capabilities, our analysts deliver
timely recommendations to clients on innovative investment opportunities. In
an
effort to make money for our investor clients, our analysts are driven to find
undiscovered opportunities in fast growing companies that are not widely held
and that we believe are undervalued. Given the contrarian and undiscovered
nature of many of our research ideas, we, as a firm, specialize in serving
sophisticated, aggressive institutional investors. As
of
December 31, 2007, approximately 78% of the companies covered by our research
professionals had market capitalizations of $1 billion or less.
3
Our
research focuses on bottom-up, fundamental analysis of fast growing companies
in
selected growth sectors. Our analysts’ expertise in these categories of
companies, along with their intensive industry knowledge and contacts, provides
us with the ability to deliver timely, accurate, and value-added information
to
our clients.
Our
objective is to build long lasting relationships with our clients by providing
investment recommendations that directly equate to enhanced performance of
their
portfolios. Further, given our approach and focus on quality service, we believe
our research analysts are in a unique position to maintain close, ongoing
communication with our institutional clients.
The
industry sectors covered by our 15 equity research analysts
include:
CleanTech/Next-Generation
EnergySM
| · |
Energy
Storage and Efficiency
|
| · |
Environmental
Technologies
|
| · |
Next-Generation
Energy
|
Health
Care
| · |
Infectious
Disease and Oncology
|
| · |
Medical
Technologies
|
| · |
Pain
& Lifestyle
|
Tech/Media/Telecom
| · |
Communications
Technology
|
| · |
Internet
Applications, Software and Services
|
| · |
Semiconductors/Capital
Equipment Enterprise/Data Center
Connectivity
|
| · |
Telecom
and Data Services
|
| · |
Wireless
Communications
|
Consumer/Retail
| · |
Branded
Athletic Lifestyle and Specialty
Retail
|
| · |
Branded
Consumer - Sin Redefined
|
| · |
Consumer
Health and Wellness
|
| · |
Specialty
Retail - Hardline
|
4
After
initiating coverage on a company, our analysts seek to effectively communicate
new developments to our institutional sales and trading professionals as well
as
our institutional investors. We produce full-length research reports, notes
and
earnings estimates on the companies we cover. We also produce comprehensive
industry sector reports. In addition, our analysts distribute written updates
on
these issuers both internally and to our clients through the use of daily
morning meeting notes, real-time electronic mail and other forms of immediate
communication. Our clients can also receive analyst comments through electronic
media, and our sales force receives intra-day updates at meetings and through
regular announcements of developments. All of the above is also available
through a password protected searchable database of our daily and historical
research archives, found on our Website at
www.merrimanco.com/research.
Our
equity research group annually hosts several conferences targeting fast growing
companies and investors, including our Investor Summit, Next-Generation Energy
Conference and IP Video Conference. Additionally, we host one day Round Robin
events in which 12-15 fast growing companies present to institutional investors
in one-on-one meetings. We use these events to showcase innovative and fast
growing companies to institutional investors focused on investing in these
growth sectors.
Asset
Management
MCF
Asset
Management, LLC creates investment products for both institutional and high-net
worth clients. Through the corporate and professional resources of MCF
Corporation, we have developed an institutional-standard investment management
platform.
The
1990’s were a decade of broad stock market appreciation. Investors were
handsomely rewarded for buying exposure to the stock market by investing in
long
only mutual funds, market indices or individual stocks. So far this decade,
equity returns have not been as strong or as consistent as throughout the
1990’s. As a result, interest in alternative investment strategies, such as
long/short equity, market neutral, convertible arbitrage, currency arbitrage
and
real estate, have grown in popularity. Investing in alternative investment
strategies will ideally produce absolute returns that are not correlated with
broad stock market indices and represent a diversification of risk for
investors.
More
importantly, we believe both institutions and wealthy individuals have reached
that same conclusion and will continue to shift more of their investment dollars
into alternative asset class strategies. It is our intent to help our clients
in
their investment process by offering access to alternative investment
strategies, as well as certain niche based long-only strategies. We have
established our own alternative investment products and evaluate opportunities
to acquire and partner with managers of alternative asset investments. We
currently have three active funds in the marketplace.
5
Primary
Research
In
April
2007, we acquired MedPanel, Inc. and began offering primary research services
through our new subsidiary, Panel Intelligence, LLC. Panel Intelligence offers
an online primary research platform that provides healthcare, CleanTech and
TMT
industry clients and investment professionals with deeper insights and better
efficiency for investment decisions, product development and marketing. By
leveraging its proprietary methodology and vast network of healthcare, CleanTech
and TMT experts, we believe we can quickly provide independent market data
and
information to clients.
Our
primary research product and service offerings arise from the intelligent
application of our core technology and research platform. Our staff guides
clients in the development of highly targeted customized quantitative and/or
qualitative research instruments designed to address business issues important
to the client. In addition, we have developed proprietary research products
which we market to multiple clients. These reports provide timely, consistent
and cross-comparable data on a regular basis to subscribing
clients.
We
believe that primary research revenue growth from financial services clients,
such as mutual fund managers and hedge fund mangers, will accelerate due to
the
ability of the combined company to market primary research through our existing
institutional sales force. Part of MedPanel’s rationale for seeking a merger
partner was to expand its financial services customer base through an
established sales force as well as take advantage of the future growth potential
of a larger, publicly-held company with a greater depth of technologies,
marketing opportunities and financial and operating resources.
Competition
We
are
engaged in the highly competitive financial services and investment industries.
We compete with Wall Street securities firms - from large U.S.-based firms,
securities subsidiaries of major commercial bank holding companies and U.S.
subsidiaries of large foreign institutions, to major regional firms, smaller
niche players, and those offering competitive services via the Internet. Recent
developments in the brokerage industry, including decimalization and the growth
of electronic communications networks, or ECNs, have reduced commission rates
and profitability in the brokerage industry. Many large investment banks have
responded to lower margins within their equity brokerage divisions by reducing
research coverage, particularly for smaller companies, consolidating sales
and
trading services, and reducing headcount of more experienced sales and trading
professionals.
In
addition to competing for customers and investments, we compete with other
companies in the financial services and investment industries to attract and
retain experienced and productive investment professionals.
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.
Recent
rapid advancements in computing and communications technology, particularly
the
Internet, are substantially changing the means by which financial services
and
information are delivered. These changes are providing consumers with more
direct access to a wide variety of financial and investment services, including
market information and on-line trading and account information. Advances in
technology also create demand for more sophisticated levels of client services.
We are committed to using technological advancements to provide a high level
of
client service to our target markets. Provision of these services may entail
considerable cost without an offsetting source of revenue.
For
a
further discussion of the competitive factors affecting our business, see “Item
1A. Risk Factors—The markets for securities brokerage and investment banking
services are highly competitive.”
6
Corporate
Support
Accounting,
Administration and Operations
Our
accounting, administration and operations personnel are responsible for
financial controls, internal and external financial reporting, human resources
and personnel services, office operations, information technology and
telecommunications systems, the processing of securities transactions, and
corporate communications. With the exception of payroll processing, which is
performed by an outside service bureau, and customer account processing, which
is performed by our clearing broker, most data processing functions are
performed internally. We believe that future growth will require implementation
of new and enhanced communications and information systems and training of
our
personnel to operate such systems.
Compliance,
Legal, Risk Management and Internal Audit
Our
compliance, legal and risk management personnel (together with other appropriate
personnel) are responsible for our compliance with the legal and regulatory
requirements of our investment banking and asset management businesses and
our
exposure to market, credit, operations, liquidity, compliance, legal and
reputation risk. In addition, our compliance personnel test and audit for
compliance with our internal policies and procedures. Our general counsel also
provides legal service throughout our company, including advice on managing
legal risk. The supervisory personnel in these areas have direct access to
senior management and to the Audit Committee of our Board of Directors to ensure
their independence in performing these functions. In addition to our internal
compliance, legal, and risk management personnel, we retain outside consultants
and attorneys for their particular functional expertise.
Risk
Management
In
conducting our business, we are exposed to a range of risks
including:
Market
risk
is the
risk to our earnings or capital resulting from adverse changes in the values
of
assets resulting from movement in equity prices or market interest
rates.
Credit
risk
is the
risk of loss due to an individual customer’s or institutional counterparty’s
unwillingness or inability to fulfill its obligations.
Operations
risk
is the
risk of loss resulting from systems failure, inadequate controls, human error,
fraud or unforeseen catastrophes.
Liquidity
risk
is the
potential that we would be unable to meet our obligations as they come due
because of an inability to liquidate assets or obtain funding. Liquidity risk
also includes the risk of having to sell assets at a loss to generate liquid
funds, which is a function of the relative liquidity (market depth) of the
asset(s) and general market conditions.
Compliance
risk
is the
risk of loss, including fines, penalties and suspension or revocation of
licenses by self-regulatory organizations, or from failing to comply with
federal, state or local laws pertaining to financial services
activities.
Legal
risk
is the
risk that arises from potential contract disputes, lawsuits, adverse judgments,
or adverse governmental or regulatory proceedings that can disrupt or otherwise
negatively affect our operations or condition.
Reputation
risk
is the
potential that negative publicity regarding our practices, whether factually
correct or not, will cause a decline in our customer base, costly litigation,
or
revenue reductions.
7
We
have a
risk management program that sets forth various risk management policies,
provides for a risk management committee and assigns risk management
responsibilities. The program is designed to focus on the
following:
|
·
|
Identifying,
assessing and reporting on corporate risk exposures and
trends;
|
|
·
|
Establishing
and revising as necessary policies, procedures and risk
limits;
|
|
·
|
Monitoring
and reporting on adherence with risk policies and
limits;
|
|
·
|
Developing
and applying new measurement methods to the risk process as appropriate;
and
|
|
·
|
Approving
new product developments or business
initiatives.
|
We
cannot
provide assurance that our risk management program or our internal controls
will
prevent or mitigate losses attributable to the risks to which we are
exposed.
For
a
further discussion of the risks affecting our business, see “Item 1A —Risk
Factors.”
Regulation
As
a
result of federal and state registration and self-regulatory organization,
or
SRO, memberships, we are subject to overlapping layers of regulation that cover
all aspects of our securities business. Such regulations cover matters including
capital requirements, uses and safe-keeping of clients’ funds, conduct of
directors, officers and employees, record-keeping and reporting requirements,
supervisory and organizational procedures intended to assure compliance with
securities laws and to prevent improper trading on material nonpublic
information, employee-related matters, including qualification and licensing
of
supervisory and sales personnel, limitations on extensions of credit in
securities transactions, requirements for the registration, underwriting, sale
and distribution of securities, and rules of the SROs designed to promote high
standards of commercial honor and just and equitable principles of trade. A
particular focus of the applicable regulations concerns the relationship between
broker-dealers and their customers. As a result, many aspects of the
broker-dealer customer relationship are subject to regulation including, in
some
instances, “suitability” determinations as to certain customer transactions,
limitations on the amounts that may be charged to customers, timing of
proprietary trading in relation to customers’ trades and disclosures to
customers.
As
a
broker-dealer registered with the Securities and Exchange Commission, or SEC,
and as a member firm of Financial Industry Regulatory Authority, we are subject
to the net capital requirements of the SEC and FINRA. These capital requirements
specify minimum levels of capital, computed in accordance with regulatory
requirements that each firm is required to maintain and also limit the amount
of
leverage that each firm is able to obtain in its respective
business.
“Net
capital” is essentially defined as net worth (assets minus liabilities, as
determined under accounting principles generally accepted in the United States),
plus qualifying subordinated borrowings, less the value of all of a
broker-dealer’s assets that are not readily convertible into cash (such as
furniture, prepaid expenses and unsecured receivables), and further reduced
by
certain percentages (commonly called “haircuts”) of the market value of a
broker-dealer’s positions in securities and other financial instruments. The
amount of net capital in excess of the regulatory minimum is referred to as
“excess net capital.”
The
SEC’s
capital rules also (i) require that broker-dealers notify it, in writing, two
business days prior to making withdrawals or other distributions of equity
capital or lending money to certain related persons if those withdrawals would
exceed, in any 30-day period, 30% of the broker-dealer’s excess net capital, and
that they provide such notice within two business days after any such withdrawal
or loan that would exceed, in any 30-day period, 20% of the broker-dealer’s
excess net capital, (ii) prohibit a broker-dealer from withdrawing or otherwise
distributing equity capital or making related party loans if, after such
distribution or loan, the broker-dealer would have net capital of less than
$300,000 or if the aggregate indebtedness of the broker-dealer’s consolidated
entities would exceed 1,000% of the broker-dealer’s net capital in certain other
circumstances, and (iii) provide that the SEC may, by order, prohibit
withdrawals of capital from a broker-dealer for a period of up to 20 business
days, if the withdrawals would exceed, in any 30-day period, 30% of the
broker-dealer’s excess net capital and if the SEC believes such withdrawals
would be detrimental to the financial integrity of the firm or would unduly
jeopardize the broker-dealer’s ability to pay its customer claims or other
liabilities.
8
Compliance
with regulatory net capital requirements could limit those operations that
require the intensive use of capital, such as underwriting and trading
activities, and also could restrict our ability to withdraw capital from our
broker-dealer, which in turn could limit our ability to pay interest, repay
debt
and redeem or repurchase shares of our outstanding capital stock.
We
believe that at all times we have been in compliance with the applicable minimum
net capital rules of the SEC and FINRA.
The
failure of a U.S. broker-dealer to maintain its minimum required net capital
would require it to cease executing customer transactions until it came back
into compliance, and could cause it to lose its FINRA membership, its
registration with the SEC or require its liquidation. Further, the decline
in a
broker-dealer’s net capital below certain “early warning levels,” even though
above minimum net capital requirements, could cause material adverse
consequences to the broker-dealer.
We
are
also subject to “Risk Assessment Rules” imposed by the SEC which require, among
other things, that certain broker-dealers maintain and preserve certain
information, describe risk management policies and procedures and report on
the
financial condition of certain affiliates whose financial and securities
activities are reasonably likely to have a material impact on the financial
and
operational condition of the broker-dealers. Certain “Material Associated
Persons” (as defined in the Risk Assessment Rules) of the broker-dealers and the
activities conducted by such Material Associated Persons may also be subject
to
regulation by the SEC. In addition, the possibility exists that, on the basis
of
the information it obtains under the Risk Assessment Rules, the SEC could seek
authority over our unregulated subsidiary either directly or through its
existing authority over our regulated subsidiary.
In
the
event of non-compliance by us or one of our subsidiaries with an applicable
regulation, governmental regulators and one or more of the SROs may institute
administrative or judicial proceedings that may result in censure, fine, civil
penalties (including treble damages in the case of insider trading violations),
the issuance of cease-and-desist orders, the deregistration or suspension of
the
non-compliant broker-dealer, the suspension or disqualification of officers
or
employees or other adverse consequences. The imposition of any such penalties
or
orders on us or our personnel could have a material adverse effect on our
operating results and financial condition.
Additional
legislation and regulations, including those relating to the activities of
our
broker-dealer, changes in rules promulgated by the SEC, FINRA or other United
States, state or foreign governmental regulatory authorities and SROs or changes
in the interpretation or enforcement of existing laws and rules may adversely
affect our manner of operation and our profitability. Our businesses may be
materially affected not only by regulations applicable to us as a financial
market intermediary, but also by regulations of general
application.
Geographic
Area
MCF
Corporation is domiciled in the United States and all of our revenue is
attributed to United States and Canadian customers. All of our long-lived assets
are located in the United States.
Available
Information
Our
website address is www.merrimanco.com. You may obtain free electronic copies
of
our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and all amendments to those reports on the “Investor Relations”
portion of our website, under the heading “SEC Filings.” These reports are
available on our website as soon as reasonably practicable after we
electronically file them with the Securities and Exchange Commission. We are
providing the address to our Internet site solely for the information of
investors. We do not intend the address to be an active link or to otherwise
incorporate the contents of the website into this report.
9
Item
1a. Risk Factors
We
face a
variety of risks in our business, many of which are substantial and inherent
in
our business and operations. The following are risk factors that could affect
our business which we consider material, our industry and holders of our common
stock. Other sections of this Annual Report on Form 10-K, including reports
which are incorporated by reference may include additional factors which could
adversely impact our business and financial performance. Moreover, we operate
in
a very competitive and rapidly changing environment. New risk factors emerge
from time to time and it is not possible for our management to predict all
risk
factors, nor can we assess the impact of all factors on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking
statements.
We
may not be able to maintain a positive cash flow and
profitability.
Our
ability to maintain a positive cash flow and profitability depends on our
ability to generate and maintain greater revenue while incurring reasonable
expenses. This, in turn, depends, among other things, on the development of
our
securities brokerage and investment banking business, and we may be unable
to
maintain profitability if we fail to do any of the following:
|
·
|
establish,
maintain and increase our client
base;
|
|
·
|
manage
the quality of our services;
|
|
·
|
compete
effectively with existing and potential
competitors;
|
|
·
|
further
develop our business activities;
|
|
·
|
manage
expanding operations; and
|
|
·
|
attract
and retain qualified personnel.
|
We
cannot
be certain that we will be able to sustain or increase a positive cash flow
and
profitability on a quarterly or annual basis in the future. Our inability to
maintain profitability or positive cash flow could result in disappointing
financial results, impede implementation of our growth strategy or cause the
market price of our common stock to decrease. Accordingly, we cannot assure
you
that we will be able to generate the cash flow and profits necessary to sustain
our business expectations, which makes our ability to successfully implement
our
business plan uncertain.
Because
we are a developing company, the factors upon which we are able to base our
estimates as to the gross revenue and the number of participating clients that
will be required for us to maintain a positive cash flow and any additional
financing that may be needed for this purpose are unpredictable. For these
and
other reasons, we cannot assure you that we will not require higher gross
revenue, and an increased number of clients, securities brokerage and investment
banking transactions, and/or more time in order for us to complete the
development of our business that we believe we need to be able to cover our
operating expenses, or obtain the funds necessary to finance this development.
It is more likely than not that our estimates will prove to be inaccurate
because actual events more often than not differ from anticipated events.
Furthermore, in the event that financing is needed in addition to the amount
that is required for this development, we cannot assure you that such financing
will be available on acceptable terms, if at all.
10
Our
financial results may fluctuate substantially from period to period, which
may
impair our stock price.
We
have
experienced, and expect to experience in the future, significant periodic
variations in our revenue and results of operations. These variations may be
attributed in part to the fact that our investment banking revenue is typically
earned upon the successful completion of a transaction, the timing of which
is
uncertain and beyond our control. In most cases we receive little or no payment
for investment banking engagements that do not result in the successful
completion of a transaction. As a result, our business is highly dependent
on
market conditions as well as the decisions and actions of our clients and
interested third parties. For example, a client’s acquisition transaction may be
delayed or terminated because of a failure to agree upon final terms with the
counterparty, failure to obtain necessary regulatory consents or board or
shareholder approvals, failure to secure necessary financing, adverse market
conditions or unexpected financial or other problems in the client’s or
counterparty’s business. If the parties fail to complete a transaction on which
we are advising or an offering in which we are participating, we will earn
little or no revenue from the transaction. This risk may be intensified by
our
focus on growth companies in the technology, healthcare, clean technology and
consumer sectors, as the market for securities of these companies has
experienced significant variations in the number and size of equity offerings.
Recently, more companies initiating the process of an initial public offering
are simultaneously exploring merger and acquisition opportunities. If we are
not
engaged as a strategic advisor in any such dual-tracked process, our investment
banking revenue would be adversely affected in the event that an initial public
offering is not consummated.
As
a
result, we are unlikely to achieve steady and predictable earnings on a
quarterly basis, which could in turn adversely affect our stock
price.
Our
ability to obtain and successfully execute our business depends upon the
personal reputation, judgment, business generation capabilities and project
execution skills of our senior professionals, particularly D. Jonathan Merriman,
our Chief Executive Officer, and the other members of our Executive Committee.
Our senior professionals’ personal reputations and relationships with our
clients are a critical element in obtaining and executing client engagements.
We
encounter intense competition for qualified employees from other companies
in
the investment banking industry as well as from businesses outside the
investment banking industry, such as investment advisory firms, hedge funds,
private equity funds and venture capital funds. From time to time, we have
experienced losses of investment banking, brokerage, research and other
professionals and losses of our key personnel may occur in the future. The
departure or other loss of Mr. Merriman, any other member of our Executive
Committee or any other senior professional who manages substantial client
relationships and possesses substantial experience and expertise, could impair
our ability to secure or successfully complete engagements, protect our market
share or retain assets under management, each of which, in turn, could
materially adversely affect our business and results of operations.
If
any of
our professionals were to join an existing competitor or form a competing
company, some of our clients could choose to use the services of that competitor
instead of our services. The compensation arrangements, non-competition
agreements and lock-up agreements we have entered into with certain of our
professionals may not prove effective in preventing them from resigning to
join
our competitors and the non-competition agreements may not be upheld if we
were
to seek to enforce our rights under these agreements.
If
we are
unable to retain our professionals or recruit additional professionals, our
reputation, business, results of operations and financial condition may be
materially adversely affected.
11
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.
Pricing
and other competitive pressures may impair the revenue and profitability of
our
brokerage business.
We
derive
a significant portion of our revenue from our brokerage business. Along with
other brokerage firms, we have experienced intense price competition in this
business in recent years. Recent developments in the brokerage industry,
including decimalization and the growth of electronic communications networks,
or ECNs, have reduced commission rates and profitability in the brokerage
industry. We expect this trend toward alternative trading systems to continue.
We believe we may experience competitive pressures in these and other areas
as
some of our competitors seek to obtain market share by competing on the basis
of
price. In addition, we face pressure from our larger competitors, which may
be
better able to offer a broader range of complementary products and services
to
brokerage clients in order to win their trading business. As we are committed
to
maintaining our comprehensive research coverage in our target sectors to support
our brokerage business, we may be required to make substantial investments
in
our research capabilities. If we are unable to compete effectively with our
competitors in these areas, brokerage revenue may decline and our business,
financial condition and results of operations may be adversely
affected.
Changes
in laws and regulations governing brokerage and research activities could also
adversely affect our brokerage business.
In
July
2006, the SEC published interpretive guidance regarding the scope of permitted
brokerage and research services in connection with “soft dollar” practices
(i.e., arrangements under which an investment adviser directs client brokerage
transactions to a broker in exchange for research products or services in
addition to brokerage services) and solicited further public comment regarding
soft dollar practices involving third party providers of research. The July
2006
SEC interpretive guidance may affect our
brokerage business and laws or regulations may prompt brokerage customers to
revisit or alter the manner in which they pay for research or brokerage
services. We and firms that compete with us have or may put in place commission
sharing arrangements under which an institutional client will execute trades
with a limited number of brokers and instruct those brokers to allocate a
portion of the commissions generated directly to other broker-dealers or to
independent research providers in exchange for research and other permissible
products and services. As such arrangements are entered into by our clients
with
us and/or other brokerage firms, it may further increase the competitive
pressures within the brokerage business and/or reduce the value our clients
place on high quality research.
In
2005
the SEC promulgated Regulation NMS, which made dramatic changes to the
National Market System, and one of the most significant of those changes, the
“Order Protection Rule” recently became effective. Under the Order Protection
Rule, commonly known as the “trade-through rule,” broker-dealers that trade at a
price higher than the inside offer (or lower than the inside bid) of a market
center’s best quotation will be required to “take out”, or execute against, that
market’s quotation. We cannot fully predict the effect that the implementation
of the Order Protection Rule may have on our brokerage business.
12
We
may experience significant losses if the value of our marketable security
positions deteriorates.
We
conduct active and aggressive securities trading, market-making and investment
activities for our own account, which subjects our capital to significant risks.
These risks include market, credit, counterparty and liquidity risks, which
could result in losses 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.
Difficult
market conditions could adversely affect our business in many
ways.
Difficult
market and economic conditions and geopolitical uncertainties have in the past
adversely affected and may in the future adversely affect our business and
profitability in many ways. Weakness in equity markets and diminished trading
volume of securities could adversely impact our brokerage business, from which
we have historically generated more than half of our revenue. Industry-wide
declines in the size and number of underwritings and mergers and acquisitions
also would likely have an adverse effect on our revenue. In addition, reductions
in the trading prices for equity securities also tend to reduce the deal value
of investment banking transactions, such as underwriting and mergers and
acquisitions transactions, which in turn may reduce the fees we earn from these
transactions. Also, difficult market conditions would likely decrease the value
of assets under management in our asset management business, which would
decrease the amount of asset-based fees we receive, and may also affect our
ability to attract additional or retain existing assets under management within
this business. As we may be unable to reduce expenses correspondingly, our
profits and profit margins may decline.
We
may suffer losses through our investments in securities purchased in secondary
market transactions or private placements.
Occasionally,
our company, its officers and/or employees may make principal investments in
securities through secondary market transactions or through direct investment
in
companies through private placements. In many cases, employees and officers
with
investment discretion on behalf of our company decide whether to invest in
our
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
face strong competition from larger firms.
The
brokerage, investment banking and asset management industries are intensely
competitive and we expect them to remain so. We compete on the basis of a number
of factors, including client relationships, reputation, the abilities and past
performance of our professionals, market focus and the relative quality and
price of our services and products. We have experienced intense price
competition with respect to our brokerage business, including large block
trades, spreads and trading commissions. Pricing and other competitive pressures
in investment banking, including the trends toward multiple book runners,
co-managers and multiple financial advisors handling transactions, have
continued and could adversely affect our revenue, even during periods where
the
volume and number of investment banking transactions are increasing. Competitive
factors with respect to our asset management activities include the amount
of
firm capital we can invest in new products and our ability to increase assets
under management, including our ability to attract capital for new investment
funds. We believe we may experience competitive pressures in these and other
areas in the future as some of our competitors seek to obtain market share
by
competing on the basis of price.
13
We
are a
relatively small investment bank with approximately 198 employees as of
December 31, 2007 and revenue less than $90 million in 2007. Many of
our competitors in the brokerage, investment banking and asset management
industries have a broader range of products and services, greater financial
and
marketing resources, larger customer bases, greater name recognition, more
senior professionals to serve their clients’ needs, greater global reach and
more established relationships with clients than we have. These larger and
better capitalized competitors may be better able to respond to changes in
the
brokerage, investment banking and asset management industries, to compete for
skilled professionals, to finance acquisitions, to fund internal growth and
to
compete for market share generally.
The
scale
of our competitors has increased in recent years as a result of substantial
consolidation among companies in the brokerage and investment banking
industries. In addition, a number of large commercial banks, insurance companies
and other broad-based financial services firms have established or acquired
underwriting or financial advisory practices and broker-dealers or have merged
with other financial institutions. These firms have the ability to offer a
wider
range of products than we do, which may enhance their competitive position.
They
also have the ability to support investment banking with commercial banking,
insurance and other financial services in an effort to gain market share, which
has resulted, and could further result, in pricing pressure in our businesses.
In particular, the ability to provide financing has become an important
advantage for some of our larger competitors and, because we do not provide
such
financing, we may be unable to compete as effectively for clients in a
significant part of the brokerage and investment banking market.
If
we are
unable to compete effectively with our competitors, our business, financial
condition and results of operations will be adversely affected.
We
have incurred losses in the recent past and may incur losses in the
future.
We
have
incurred losses in the recent past. We recorded net losses of $8,220,000 for
the
year ended December 31, 2006 and $1,514,000 for the year ended
December 31, 2005. We also recorded net losses in certain quarters within
other past fiscal years. We may incur losses in any of our future periods.
If we
are unable to finance future losses, those losses may have a significant effect
on our liquidity as well as our ability to operate.
In
addition, we may incur significant expenses in connection with initiating new
business activities or in connection with any expansion of our underwriting,
brokerage, primary research or asset management businesses. We may also engage
in strategic acquisitions and investments for which we may incur significant
expenses. Accordingly, we will need to increase our revenue at a rate greater
than our expenses to achieve and maintain profitability. If our revenue do
not
increase sufficiently, or even if our revenue increase but we are unable to
manage our expenses, we will not achieve and maintain profitability in future
periods.
Our
investment banking clients generally retain us on a short-term,
engagement-by-engagement basis in connection with specific capital markets
or
mergers and acquisitions transactions, rather than on a recurring basis under
long-term contracts. As these transactions are typically singular in nature
and
our engagements with these clients may not recur, we must seek out new
engagements when our current engagements are successfully completed or are
terminated. As a result, high activity levels in any period are not necessarily
indicative of continued high levels of activity in any subsequent period. If
we
are unable to generate a substantial number of new engagements and generate
fees
from those successful completion of transactions, our business and results
of
operations would likely be adversely affected.
14
A
significant portion of our brokerage revenue is generated from a relatively
small number of institutional clients.
A
significant portion of our brokerage revenue is generated from a relatively
small number of institutional clients. For example, in 2007 we generated 27%
of
our brokerage revenue, or approximately 8% of our total revenue, from our ten
largest brokerage clients. Similarly, in 2006 we generated 22% of our brokerage
revenue, or approximately 13% of our total revenue, from our ten largest
brokerage clients. If any of our key clients departs or reduces its business
with us and we fail to attract new clients that are capable of generating
significant trading volumes, our business and results of operations will be
adversely affected.
Poor
investment performance, pricing pressure and other competitive factors may
reduce our asset management revenue or result in losses.
As
part
of our strategy, we are investing in the expansion of our asset management
business. Our revenue from this business is primarily derived from management
fees which are based on assets under management and incentive fees, which are
earned if the return of our investment funds exceeds certain threshold returns.
Our ability to maintain or increase assets under management is subject to a
number of factors, including investors’ perception of our past performance,
market or economic conditions, competition from other fund managers and our
ability to negotiate terms with investors.
Investment
performance is one of the most important factors in retaining existing clients
and competing for new asset management business and our historical performance
may not be indicative of future results. Poor investment performance and other
competitive factors could reduce our revenue and impair our growth in many
ways:
| · |
existing
clients may withdraw funds from our asset management business in
favor of
better performing products;
|
| · |
our
incentive fees could decline or be eliminated
entirely;
|
| · |
our
capital investments in our investment funds may diminish in value
or may
be lost; and
|
| · |
our
key employees in the business may depart, whether to join a competitor
or
otherwise.
|
To
the
extent our future investment performance is perceived to be poor in either
relative or absolute terms, our asset management revenue will likely be reduced
and our ability to raise new funds will likely be impaired. Even when market
conditions are generally favorable, our investment performance may be adversely
affected by our investment style and the particular investments that we
make.
Limitations
on our access to capital could impair our liquidity and our ability to conduct
our businesses.
Liquidity,
or ready access to funds, is essential to financial services firms. Failures
of
financial institutions have often been attributable in large part to
insufficient liquidity. Liquidity is of importance to our trading business
and
perceived liquidity issues may affect our clients and counterparties’
willingness to engage in brokerage transactions with us. Our liquidity could
be
impaired due to
circumstances that we may be unable to control, such as a general market
disruption or an operational problem that affects our trading clients, third
parties or us. Further, our ability to sell assets may be impaired if other
market participants are seeking to sell similar assets at the same
time.
Merriman
Curhan Ford & Co., our broker-dealer subsidiary, is subject to the net
capital requirements of the SEC and various self-regulatory organizations of
which it is a member. These requirements typically specify the minimum level
of
net capital a broker-dealer must maintain and also mandate that a significant
part of its assets be kept in relatively liquid form. Any failure to comply
with
these net capital requirements could impair our ability to conduct our core
business as a brokerage firm. Furthermore, Merriman Curhan Ford & Co. is
subject to laws that authorize regulatory bodies to block or reduce the flow
of
funds from it to MCF Corporation. As a holding company, MCF Corporation depends
on distributions and other payments from its subsidiaries to fund all payments
on its obligations, including debt obligations. As a result, regulatory actions
could impede access to funds that MCF Corporation needs to make payments on
obligations, including debt obligations.
15
Our
risk management policies and procedures may leave us exposed to unidentified
or
unanticipated risk.
Our
risk
management strategies and techniques may not be fully effective in mitigating
our risk exposure in all market environments or against all types of
risk.
We
are
exposed to the risk that third parties that owe us money, securities or other
assets will not perform their obligations. These parties may default on their
obligations to us due to bankruptcy, lack of liquidity, operational failure,
breach of contract or other reasons. We are also subject to the risk that our
rights against third parties may not be enforceable in all circumstances. As
a
clearing member firm, we finance our customer positions and could be held
responsible for the defaults or misconduct of our customers. Although we
regularly review credit exposures to specific clients and counterparties and
to
specific industries and regions that we believe may present credit concerns,
default risk may arise from events or circumstances that are difficult to detect
or foresee. In addition, concerns about, or a default by, one institution could
lead to significant liquidity problems, losses or defaults by other
institutions, which in turn could adversely affect us. Also, risk management
policies and procedures that we utilize with respect to investing our own funds
or committing our capital with respect to investment banking, trading activities
or asset management activities may not protect us or mitigate our risks from
those activities. If any of the variety of instruments, processes and strategies
we utilize to manage our exposure to various types of risk are not effective,
we
may incur losses.
Our
businesses are highly dependent on our ability to process, on a daily basis,
a
large number of increasingly complex transactions across diverse markets. Our
financial, accounting or other data processing systems may fail to operate
properly or become disabled as a result of events that are wholly or partially
beyond our control, including a disruption of electrical or communications
services or our inability to occupy one or more of our buildings. The inability
of our systems to accommodate an increasing volume of transactions could also
constrain our ability to expand our businesses. If any of these systems do
not
operate properly or are disabled or if there are other shortcomings or failures
in our internal processes, people or systems, we could suffer an impairment
to
our liquidity, financial loss, a disruption of our businesses, liability to
clients, regulatory intervention or reputational damage.
We
also
face the risk of operational failure of any of our clearing agents, the
exchanges, clearing houses or other financial intermediaries we use to
facilitate our securities transactions. Any such failure or termination could
adversely affect our ability to effect transactions and to manage our exposure
to risk.
In
addition, our ability to conduct business may be adversely impacted by a
disruption in the infrastructure that supports our businesses and the
communities in which we are located. This may include a disruption involving
electrical, communications, transportation or other services used by us or
third
parties with which we conduct business, whether due to fire, other natural
disaster, power or communications failure, act of terrorism or war or otherwise.
Nearly all of our employees in our primary locations, including
San Francisco, New York, Cambridge, Newport Beach and Portland, work in
close proximity to each other. If a disruption occurs in one location and our
employees in that location are unable to communicate with or travel to other
locations, our ability to service and interact with our clients may suffer
and
we may not be able to implement successfully contingency plans that depend
on
communication or travel. Insurance policies to mitigate these risks may not
be
available or may be more expensive than the perceived benefit. Further, any
insurance that we may purchase to mitigate certain of these risks may not cover
our loss.
16
Our
operations also rely on the secure processing, storage and transmission of
confidential and other information in our computer systems and networks. Our
computer systems, software and networks may be vulnerable to unauthorized
access, computer viruses or other malicious code and other events that could
have a security impact. If one or more of such events occur, this potentially
could jeopardize our or our clients’ or counterparties’ confidential and other
information processed and stored in, and transmitted through, our computer
systems and networks, or otherwise cause interruptions or malfunctions in our,
our clients’, our counterparties’ or third parties’ operations. We may be
required to expend significant additional resources to modify our protective
measures or to investigate and remediate vulnerabilities or other exposures,
and
we may be subject to litigation and financial losses that are either not insured
against or not fully covered through any insurance maintained by
us.
Strategic
investments or acquisitions and joint ventures may result in additional risks
and uncertainties in our business.
We
intend
to grow our business through both internal expansion and through strategic
investments, acquisitions or joint ventures. To the extent we make strategic
investments or acquisitions or enter into joint ventures, we face numerous
risks
and uncertainties combining or integrating businesses, including integrating
relationships with customers, business partners and internal data processing
systems. In the case of joint ventures, we are subject to additional risks
and
uncertainties in that we may be dependent upon, and subject to liability, losses
or reputational damage relating to, systems, controls and personnel that are
not
under our control. In addition, conflicts or disagreements between us and our
joint venture partners may negatively impact our businesses.
Future
acquisitions or joint ventures by us could entail a number of risks, including
problems with the effective integration of operations, the inability to maintain
key pre-acquisition business relationships and integrate new relationships,
the
inability to retain key employees, increased operating costs, exposure to
unanticipated liabilities, risks of misconduct by employees not subject to
our
control, difficulties in realizing projected efficiencies, synergies and cost
savings, and exposure to new or unknown liabilities.
Any
future growth of our business may require significant resources and/or result
in
significant unanticipated losses, costs or liabilities. In addition, expansions,
acquisitions or joint ventures may require significant managerial attention,
which may be diverted from our other operations.
Evaluation
of our prospects may be more difficult in light of our limited operating
history.
We
have a
limited operating history upon which to evaluate our business and prospects.
As
a relatively young enterprise, we are subject to the risks and uncertainties
that face a company during its formative development. Some of these risks and
uncertainties relate to our ability to attract and retain clients on a
cost-effective basis, expand and enhance our service offerings, raise additional
capital and respond to competitive market conditions. We may not be able to
address these risks adequately, and our failure to do so may adversely affect
our business and the value of an investment in our common stock.
Risks
Related to Our Industry
Risks
associated with regulatory impact on capital markets.
Highly-publicized
financial scandals in recent years have led to investor concerns over the
integrity of the U.S. financial markets, and have prompted Congress, the
SEC, the NYSE and FINRA to significantly expand corporate governance and public
disclosure requirements. To the extent that private companies, in order to
avoid
becoming subject to these new requirements, decide to forgo initial public
offerings, our equity underwriting business may be adversely affected. In
addition, provisions of the Sarbanes-Oxley Act of 2002 and the corporate
governance rules imposed by self-regulatory organizations have diverted many
companies’ attention away from capital market transactions, including securities
offerings and acquisition and disposition transactions. In particular, companies
that are or are planning to be public are incurring significant expenses in
complying with the SEC and accounting standards relating to internal control
over financial reporting, and companies that disclose material weaknesses in
such controls under the new standards may have greater difficulty accessing
the
capital markets. These factors, in addition to adopted or proposed accounting
and disclosure changes, may have an adverse effect on our business.
17
Financial
services firms have been subject to increased scrutiny over the last several
years, increasing the risk of financial liability and reputational harm
resulting from adverse regulatory actions.
Firms
in
the financial services industry have been operating in a difficult regulatory
environment. The industry has experienced increased scrutiny from a variety
of
regulators, including the SEC, the NYSE, FINRA and state attorneys general.
Penalties and fines sought by regulatory authorities have increased
substantially over the last several years. This regulatory and enforcement
environment has created uncertainty with respect to a number of transactions
that had historically been entered into by financial services firms and that
were generally believed to be permissible and appropriate. We may be adversely
affected by changes in the interpretation or enforcement of existing laws and
rules by these governmental authorities and self-regulatory organizations.
We
also may be adversely affected as a result of new or revised legislation or
regulations imposed by the SEC, other United States or foreign governmental
regulatory authorities or self-regulatory organizations that supervise the
financial markets. Among other things, we could be fined, prohibited from
engaging in some of our business activities or subject to
limitations or conditions on our business activities. Substantial legal
liability or significant regulatory action against us could have material
adverse financial effects or cause significant reputational harm to us, which
could seriously harm our business prospects.
In
addition, financial services firms are subject to numerous conflicts of
interests or perceived conflicts. The SEC and other federal and state regulators
have increased their scrutiny of potential conflicts of interest. We have
adopted various policies, controls and procedures to address or limit actual
or
perceived conflicts and regularly seek to review and update our policies,
controls and procedures. However, appropriately dealing with conflicts of
interest is complex and difficult and our reputation could be damaged if we
fail, or appear to fail, to deal appropriately with conflicts of interest.
Our
policies and procedures to address or limit actual or perceived conflicts may
also result in increased costs, additional operational personnel and increased
regulatory risk. Failure to adhere to these policies and procedures may result
in regulatory sanctions or client litigation. For example, the research areas
of
investment banks have been and remain the subject of heightened regulatory
scrutiny which has led to increased restrictions on the interaction between
equity research analysts and investment banking personnel at securities firms.
Several securities firms in the United States reached a global settlement in
2003 and 2004 with certain federal and state securities regulators and
self-regulatory organizations to resolve investigations into equity research
analysts’ alleged conflicts of interest. Under this settlement, the firms have
been subject to certain restrictions and undertakings, which have imposed
additional costs and limitations on the conduct of our businesses.
Financial
service companies have experienced a number of highly publicized regulatory
inquiries concerning market timing, late trading and other activities that
focus
on the mutual fund industry. These inquiries have resulted in increased scrutiny
within the industry and new rules and regulations for mutual funds, investment
advisers and broker-dealers.
Our
exposure to legal liability is significant, and damages that we may be required
to pay and the reputational harm that could result from legal action against
us
could materially adversely affect our businesses.
We
face
significant legal risks in our businesses and, in recent years, the volume
of
claims and amount of damages sought in litigation and regulatory proceedings
against financial institutions have been increasing. These risks include
potential liability under securities or other laws for materially false or
misleading statements made in connection with securities offerings and other
transactions, potential liability for “fairness opinions” and other advice we
provide to participants in strategic transactions and disputes over the terms
and conditions of complex trading arrangements. We are also subject to claims
arising from disputes with employees for alleged discrimination or harassment,
among other things. These risks often may be difficult to assess or quantify
and
their existence and magnitude often remain unknown for substantial periods
of
time.
18
Our
role
as advisor to our clients on important underwriting or mergers and acquisitions
transactions involves complex analysis and the exercise of professional
judgment, including rendering “fairness opinions” in connection with mergers and
other transactions. Therefore, our activities may subject us to the risk of
significant legal liabilities to our clients and aggrieved third parties,
including shareholders of our clients who could bring securities class actions
against us. Our investment banking engagements typically include broad
indemnities from our clients and provisions to limit our exposure to legal
claims relating to our services, but these provisions may not protect us or
may
not be enforceable in all cases.
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.
Employee
misconduct could harm us and is difficult to detect and
deter.
There
have been a number of highly publicized cases involving fraud or other
misconduct by employees in the financial services industry in recent years,
and
we run the risk that employee misconduct could occur at our company. For
example, misconduct by employees could involve the improper use or disclosure
of
confidential information, which could result in regulatory sanctions and serious
reputational or financial harm. It is not always possible to deter employee
misconduct and the precautions we take to detect and prevent this activity
may
not be effective in all cases, and we may suffer significant reputational harm
for any misconduct by our employees.
Risks
Related to Ownership of Our Common Stock
A
significant percentage of our outstanding common stock is owned or controlled
by
our senior professionals and other employees and their interests may differ
from
those of other shareholders.
Our
executive officers and directors, and entities affiliated with them, currently
control approximately 25% 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.
Provisions
of our organizational documents may discourage an acquisition of
us.
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.
In
addition, the Delaware General Corporation Law contains provisions that may
enable our management to retain control and resist our takeover. These
provisions generally prevent us from engaging in a broad range of business
combinations with an owner of 15% or more of our outstanding voting stock for
a
period of three years from the date that such person acquires his or her stock.
Accordingly, these provisions could discourage or make more difficult a change
in control or a merger or other type of corporate reorganization even if it
could be favorable to the interests of our stockholders.
19
The
market price of our common stock may decline.
The
market price of our common stock has in the past been, and may in the future
continue to be, volatile. A variety of events may cause the market price of
our
common stock to fluctuate significantly, including:
|
·
|
variations
in quarterly operating results;
|
|
·
|
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. Declines in the price
of our stock may adversely affect our ability to recruit and retain key
employees, including our senior professionals.
In
addition, the stock market in recent years has experienced significant price
and
volume fluctuations that have particularly affected the market prices of equity
securities of many companies and that often have been unrelated to the operating
performance of such companies. These market fluctuations have adversely impacted
the price of our common stock in the past and may do so in the
future.
Your
interest in our firm may be diluted due to issuance of additional shares of
common stock.
We
have a
significant number of outstanding stock options and warrants. During 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.
20
Your
ability to sell your shares may be restricted because there is a limited trading
market for our common stock.
Although
our common stock is currently traded on the Nasdaq Stock Market, an active
trading market in our stock has been limited. Accordingly, you may not be able
to sell your shares when you want or at the price you want.
We
do not expect to pay any cash dividends in the foreseeable
future.
We
intend
to retain any future earnings to fund the operation and expansion of our
business and, therefore, we do not anticipate paying cash dividends in the
foreseeable future. Accordingly, our shareholders must rely on sales of their
shares of common stock after price appreciation, which may never occur, as
the
only way to realize any future gains on an investment in our common stock.
Investors seeking cash dividends should not purchase our common
stock.
Item
1b. Unresolved Staff Comments
Not
applicable.
Item
2. Properties
As
of
December 31, 2007, all of our properties are leased. Our principal executive
offices are located in San Francisco, California. We lease four additional
offices to support our various business activities. These offices are located
in
New York, NY, Cambridge, MA, Newport Beach, CA and Portland, OR. We believe
the
facilities we are now using are adequate and suitable for business
requirements.
21
Item
3. Legal Proceedings
Thomas
O’Shea v. Merriman Curhan Ford & Co.
In
June
2006, our broker-dealer subsidiary Merriman Curhan Ford & Co. was served
with a claim in NASD Arbitration by Mr. O'Shea. Mr. O'Shea is a former at-will
employee of Merriman Curhan Ford & Co. and worked in the investment banking
department. Mr. O'Shea resigned from Merriman Curhan Ford & Co. in July
2005. Mr. O'Shea alleges breach of an implied employment contract, quantum
meruit, and unjust enrichment based on his allegations that he was to be paid
more for his work. The matter is in the discovery stage and an arbitration
hearing scheduled for June 2007 is being rescheduled between the parties and
the
Arbitration Panel. We believe that we have meritorious defenses and intend
to
contest these claims vigorously. However, in the event that we did not prevail,
based upon the facts as we know them to date, we do not believe that the outcome
will have a material effect on our financial position, financial results or
cash
flows.
S3
Investment Company, Inc. v. Merriman Curhan Ford & Co. and Qualico Capital,
Inc.
In
September 2007, Merriman Curhan Ford & Co. was served with a complaint filed
by a former client S3 Investment Company, Inc. (“S3i”).The matter is pending
before the Superior Count in the City and County of San Francisco. The plaintiff
alleges theories of breach of contract, fraud, negligent misrepresentation,
intentional and negligent interference with prospective economic relations.
We
believe that we have meritorious defenses and intend to contest these claims
vigorously. However, in the event that we did not prevail, based upon the facts
as we know them to date, we do not believe that the outcome will have a material
effect on our financial position, financial results or cash flows.
Item
4. Submission of Matters to a Vote of Stockholders
No
matters were submitted to a vote of stockholders during the fourth quarter
of
2007.
22
PART
II
Item
5. Market for Registrant’s Common Stock and Related Stockholder
Matters
Our
common stock has been quoted on The Nasdaq Stock Market, Inc. (“Nasdaq”) under
the symbol “MERR” since February 12, 2008. Prior to this time, our common stock
traded on the American Stock Exchange under the symbol “MEM.” The following
table sets forth the range of the high and low sales prices per share of our
common stock for the fiscal quarters indicated. The sales prices below have
been
adjusted retroactively to reflect the one-for-seven reverse stock split of
our
authorized and outstanding common stock affected on November 16,
2006.
|
|
High
|
Low
|
|||||
|
2007
|
|
|
|||||
|
Fourth
Quarter
|
$
|
5.50
|
$
|
3.90
|
|||
|
Third
Quarter
|
5.45
|
3.44
|
|||||
|
Second
Quarter
|
6.15
|
3.86
|
|||||
|
First
Quarter
|
5.79
|
3.95
|
|||||
|
2006
|
|||||||
|
Fourth
Quarter
|
$
|
4.97
|
$
|
3.64
|
|||
|
Third
Quarter
|
7.35
|
4.06
|
|||||
|
Second
Quarter
|
10.29
|
7.00
|
|||||
|
First
Quarter
|
10.36
|
6.72
|
|||||
The
closing sale price for our common stock on February 11, 2008 was $5.69. The
market price of our common stock has fluctuated significantly and may be subject
to significant fluctuations in the future. See Item 1A. “Risk
Factors.”
According
to the records of our transfer agent, we had 698 stockholders of record as
of
December 31, 2007. Because many shares are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of beneficial stockholders represented by these record
holders.
Our
policy is to reinvest earnings in order to fund future growth. Therefore, we
have not paid and currently do not plan to declare dividends on our common
stock.
23
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table gives information about the Company’s common stock that may be
issued upon the exercise of options and warrants under all of our existing
equity compensation plans as of December 31, 2007.
|
Plan Category
|
Number of
Securities to
be Issued
Upon
Exercise of
Outstanding
Options and
Warrants
|
Weighted
Average
Exercise
Price of
Outstanding
Options and
Warrants
|
Number of
Securities
Remaining
Available For
Future
Issuance
Under Equity
Compensation
Plans
|
|||||||
|
Equity
compensation plans approved by stockholders:
|
|
|
|
|||||||
|
1999
Stock Option Plan
|
356,160
|
$
|
3.82
|
28,241
|
||||||
|
2000
Stock Option and Incentive Plan
|
535,816
|
$
|
13.60
|
4,591
|
||||||
|
2001
Stock Option and Incentive Plan
|
505,436
|
$
|
3.19
|
14,122
|
||||||
|
2003
Stock Option and Incentive Plan
|
2,550,687
|
$
|
4.60
|
34,511
|
||||||
|
2006
Directors’ Stock Option and Incentive Plan
|
—
|
$
|
—
|
53,172
|
||||||
|
2002
Employee Stock Purchase Plan
|
—
|
$
|
—
|
—
|
||||||
|
Equity
compensation not approved by stockholders
|
118,160
|
$
|
20.45
|
135,413
|
||||||
Equity
compensation not approved by stockholders includes shares in a Non-Qualified
option plan approved by the Board of Directors of Ratexchange Corporation (now
known as MCF Corporation) in 1999 and a Non-Qualified
option plan that is consistent with the American Stock Exchange Member
Guidelines, Rule 711, approved by the Board of Directors in
2004.
The
American Stock Exchange guidelines require that grants from the option plan
be
made only as an inducement to a new employee, that the grant be approved by
a
majority of the independent member so the Compensation Committee and that a
press release is issued promptly disclosing the terms of the option
grant.
Recent
Sale of Unregistered Securities
None.
24
Item
6. Selected Consolidated Financial Data
The
following selected consolidated financial data should be read in conjunction
with Item 7. “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and the consolidated financial statements and the notes
thereto included in Part II, Item 8 to this Annual Report on Form
10-K.
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
Statement
of operations data:
|
|
|
|
|
|
|||||||||||
|
Revenue
|
$
|
87,655,992
|
$
|
51,818,638
|
$
|
43,184,315
|
$
|
38,368,310
|
$
|
18,306,011
|
||||||
|
Operating
expenses
|
76,194,659
|
58,315,930
|
44,912,772
|
36,194,924
|
16,832,676
|
|||||||||||
|
Operating
income (loss)
|
11,461,333
|
(6,497,292
|
)
|
(1,728,457
|
)
|
2,173,386
|
1,473,335
|
|||||||||
|
Gain
(loss) on retirement of convertible notes
payable
(1)
|
—
|
(1,348,805
|
)
|
—
|
—
|
3,088,230
|
||||||||||
|
Interest
income
|
461,922
|
484,909
|
446,273
|
120,431
|
39,483
|
|||||||||||
|
Interest
expense(2)
|
(138,055
|
)
|
(535,014
|
)
|
(76,103
|
)
|
(169,787
|
)
|
(1,554,901
|
)
|
||||||
|
Income
tax expense
|
(2,462,165
|
)
|
—
|
(142,425
|
)
|
(249,744
|
)
|
(74,884
|
)
|
|||||||
|
Income
(loss) from continuing operations
|
9,323,035
|
(7,896,202
|
)
|
(1,500,712
|
)
|
1,874,286
|
2,971,263
|
|||||||||
|
Loss
from discontinued operations
|
—
|
(324,213
|
)
|
(13,731
|
)
|
—
|
—
|
|||||||||
|
Net
income (loss)
|
$
|
9,323,035
|
$
|
(8,220,415
|
)
|
$
|
(1,514,443
|
)
|
$
|
1,874,286
|
$
|
2,971,263
|
||||
|
Diluted
income (loss) from continuing operations
|
$
|
0.74
|
$
|
(0.79
|
)
|
$
|
(0.16
|
)
|
$
|
0.16
|
$
|
0.39
|
||||
|
Statement
of financial condition data:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
31,962,201
|
$
|
13,746,590
|
$
|
11,138,923
|
$
|
17,459,113
|
$
|
6,142,958
|
||||||
|
Marketable
securities owned
|
14,115,022
|
7,492,914
|
8,627,543
|
2,342,225
|
608,665
|
|||||||||||
|
Total
assets
|
64,573,331
|
30,498,213
|
27,694,413
|
25,007,824
|
9,703,946
|
|||||||||||
|
Capital
lease obligations
|
890,272
|
1,292,378
|
883,993
|
452,993
|
24,401
|
|||||||||||
|
Notes
payable, net
|
238,989
|
325,650
|
408,513
|
1,487,728
|
1,927,982
|
|||||||||||
|
Stockholders’
equity
|
$
|
34,806,048
|
$
|
16,215,020
|
$
|
18,403,001
|
$
|
16,733,850
|
$
|
5,261,210
|
||||||
| (1) |
In
April 2003, we exercised our right to cancel the convertible promissory
note held by Forsythe McArthur & Associates with the principal sum of
$5,949,042. The fair value of the consideration provided to Forsythe
was
less than the carrying amount of the convertible note payable. The
difference between the fair value of the consideration provided to
Forsythe and the carrying amount of the note payable, or $3,088,230,
was
recorded as a gain. In December 2006, MCF Corporation repaid the
$7.5
million variable rate secured convertible note, issued to Midsummer
Investment, Ltd, or Midsummer, in March 2006. Midsummer retained
the stock
warrant to purchase 267,857 shares of our common stock. The loss
on
repayment of the convertible note consists of the write-off of the
unamortized discount related to the stock warrant as well as the
write-off
the unamortized debt issuance
costs.
|
| (2) |
Interest
expense for 2003 included $1,291,000 in amortization of discounts
and debt
issuance costs, while the 2004 amount included $119,000 for amortization
of discounts and debt issuance costs. The higher amortization expense
in
2003 was due to the accelerated amortization that occurred as the
notes
payable were retired or converted to equity instruments during 2003.
The
total amount of discounts that will be amortized in future periods
was
$3,000 as of December 31, 2007.
|
25
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the notes thereto in Part II, Item 8
to
this Annual Report on Form 10-K. This discussion contains forward-looking
statements reflecting our current expectations. Actual results and the timing
of
events may differ significantly from those projected in forward looking
statements due to a number of factors, including those set forth in Item 1A
“Risk Factors” of this Annual Report on Form 10-K.
Overview
We
are a
financial services holding company that provides investment research, capital
markets services, corporate and venture services, investment banking, asset
management and primary research through our operating subsidiaries, Merriman
Curhan Ford & Co., MCF Asset Management, LLC and Panel Intelligence,
LLC.
Merriman
Curhan Ford & Co. is an investment bank and securities broker-dealer focused
on fast growing companies and institutional investors. Our mission is to become
a leader in the researching, advising, financing, trading and investing
in fast growing companies under $2 billion in market capitalization. We
provide equity research, brokerage and trading services primarily to
institutions, as well as investment banking and advisory services to corporate
clients. We are gaining market share by originating differentiated research
for
our institutional investor clients and providing specialized and integrated
services for our fast-growing corporate clients.
In
April
2007, we acquired MedPanel, Inc. (now Panel Intelligence, LLC) and began
offering custom and published primary research to industry clients and
investment professionals through online panel discussions, quantitative surveys
and an extensive research library. Panel Intelligence is positioned to provide
greater access, compliance, insights and productivity to clients in the
healthcare, CleanTech, TMT and financial industries.
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 December 31, 2007, assets under management across our three fund
products exceeded $56 million.
Executive
Summary
Our
revenue grew 69% during 2007 to $87,656,000, a record high, with healthy
expansion across our business lines. Net income was $9,323,000, or $0.74 per
diluted share during 2007 which represents a significant turnaround from our
$8,220,000 net loss in 2006. We were profitable in each of the four quarters
during 2007 and we have had consecutive year-over-year revenue growth since
we
launched Merriman Curhan Ford & Co. at the beginning of 2002. We earned
$0.51 per diluted share during the fourth quarter which primarily resulted
from
strong investment banking revenue and significant gains in our proprietary
trading activity. Our focus during 2007 was to grow our revenue per employee,
generate meaningful operating cash flows, introduce primary research as a new
service offering and closely manage our non-compensation related expenses.
Our
focus in 2008 will be to build on our recent success in our core businesses,
further develop our new businesses, including primary research and OTCQX
advisory, while continuing to lower our compensation expense as a percentage
of
revenue.
Investment
Banking -
The
investment banking team had another strong year with 42% revenue growth in
2007,
which followed 43% revenue growth in 2006. We closed 40 corporate financing
and
strategic advisory transactions during the year with average transaction fees
of
$710,000. Most of the growth in 2007 was resulted from equity underwritten
transaction revenue which nearly doubled over 2006. Our success in expanding
of
this business in 2007 can be attributed to the seasoning of our senior
investment bankers and support professionals and our focus on fast growing
companies in our target sectors such as Clean Technology and healthcare.
Additionally, we were more selective in the investment banking assignments
that
we engaged in 2007 which resulted in a higher transaction closing rate.
26
Principal
Transactions -
Our
principal transactions activity during 2007 was robust with significant gains
in
our proprietary trading activity, investment portfolio and profitable market
making. We particularly benefited from the significant price appreciation in
one
equity security position, Points International, that we had filed a Statement
of
Beneficial Ownership on Schedule 13D with the SEC in 2006. We profitably exited
approximately 3 million shares of the position in late 2007 and no longer are
required to file our beneficial ownership with the SEC. We will from time to
time take significant positions in fast growing companies that we feel are
undervalued in the market place. We believe that our window into these
opportunities, due to the types of companies we research, offers us a
significant competitive advantage. Over the past few years, we have generated
attractive returns on our capital by deploying this strategy.
Commissions
-
Commissions revenue from brokering equity securities to institutional investors
declined slightly in 2007. This business continues to face increasing challenges
including the proliferation of electronic communications networks which have
reduced commission rates and profitability in the brokerage industry. Many
large
investment banks have responded to lower margins within their equity brokerage
divisions by reducing research coverage, particularly for smaller companies,
consolidating sales and trading services, and reducing headcount of sales and
trading professionals. We believe that we can grow our institutional brokerage
revenue by producing differentiated equity research on relatively undiscovered,
fast growing companies within our selected growth sectors and providing this
research to small and mid-sized traditional and alternative investment managers
for whom these companies comprise an important part of their investment
portfolios.
Institutional
Cash Distributors -
Our
Institutional Cash Distributors business continued to expand rapidly in 2007
with average assets brokered nearly doubling over 2006. ICD revenue grew at
a
rate of 114% in 2006 and 70% in 2007. We expect that ICD revenue will continue
to grow in 2008.
Primary
Research -
We
closed the acquisition of MedPanel, Inc. in April 2007 and began offering custom
and published primary research to biotechnology, pharmaceutical and medical
device industry clients, as well as institutional investment companies for
a
subscription fee. In September 2007, we launched independent primary research
for the Clean Technology vertical, which encompasses technologies that reduce
humans’ impact on the environment. We have positioned our firm to be an early
provider of primary research to both our corporate clients as well as financial
service clients who are using our product to facilitate their investment
decisions.
OTCQX
Advisory. During
2007, Merriman Curhan Ford & Co. began offering services to sponsor
companies on the Domestic and International OTCQX markets. This new service
offering has been designed to enable domestic and non-U.S. companies to obtain
greater exposure to U.S. institutional investors without the expense and
regulatory burdens of listing on a traditional U.S. exchanges. The Domestic
and
International OTCQX market tiers do not require full SEC registration or
Sarbanes Oxley compliance. Listing on the market requires the sponsorship of
a
qualified investment bank called a Designated Advisor for Disclosure (DAD)
for
domestic companies or a Principal American Liaison (PAL) for non-U.S. companies.
Merriman Curhan Ford & Co. was the first U.S. investment bank to achieve DAD
and PAL designations.
Employees
-
Our
overall headcount increased by 19% to 198 during 2007, though most of this
growth resulted from the MedPanel acquisition. During 2007, we emphasized
finding the most qualified employee for each position to boost revenue per
employee. We expect that we will continue to increase our employee headcount
by
10% to 15% during 2008, though as always these hiring decisions may be impacted
by our actual financial results and the overall capital markets
environment.
Business
Development -
We
continued to invest in areas of our business that we believe will increase
the
awareness of our franchise and contribute to future revenue opportunities such
as hosting investor conferences, introducing management teams of fast growing
companies to institutional investors, marketing, travel and other business
development activities. These activities resulted in higher operating expenses
in 2007.
While
the
subprime mortgage crisis has not had any direct impact on our firm, the current
economic outlook for 2008 is obscured by credit anxieties, slowing growth,
expensive commodities and the decreasing purchasing power of the U.S. dollar
which may adversely impact our capital markets activities. However, the positive
financial results from 2007 have strengthened our balance sheet and provided
us
with significantly more liquidity than we had at the start of fiscal 2007.
27
Business
Environment
The
equity and commodity markets were highly volatile during 2007 with major U.S.
stock indexes ending the year mixed. After a brief sell-off in the first
quarter, most U.S. stock indexes advanced in the second quarter and third
quarter with many setting record highs. Stocks moved higher based on corporate
earnings and later overcame short periods of increased volatility in July and
August associated with investor’s 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. Investors
also
welcomed two 50 basis point cuts in the fed funds rate and discount rate in
late
summer. Stocks traded lower in the final quarter of 2007 as ongoing weakness
in
the housing market, concerns over sub-prime mortgages and crude oil prices
that
topped $100 per barrel all undermined investor confidence. The Fed reduced
rates
by another 50 basis points during the fourth quarter, however this action did
little for the market.
The
S&P 500 Index, a large-cap benchmark, gained 5.5% for the year while the
technology-sensitive Nasdaq Composite Index rose 9.8% in 2007. U.S. small cap
stocks performed especially poorly in 2007 with the Russell 2000 Index declining
1.6% for all of 2007.
Our
securities broker-dealer and investment banking activities are linked to the
capital markets. In addition, our business activities are focused in the
technology, telecommunications, next-generation energy, health care and consumer
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.
The
financial services industry continues to be affected by an intensifying
competitive environment. There has been an increase in the number and size
of
companies competing for a similar customer base; some of such competitors have
greater capital resources and additional associated services with which to
pursue these activities.
28
Results
of Operations
The
following table sets forth a summary of financial highlights for the three
years
ended December 31, 2007:
|
2007
|
2006
|
2005
|
||||||||
|
Revenue:
|
|
|
|
|||||||
|
Commissions
|
$
|
31,681,563
|
$
|
30,105,085
|
$
|
26,992,427
|
||||
|
Investment
banking
|
30,138,783
|
21,190,786
|
14,816,814
|
|||||||
|
Principal
transactions
|
20,116,392
|
(171,055
|
)
|
1,366,938
|
||||||
|
Primary
research
|
3,848,421
|
—
|
—
|
|||||||
|
Advisory
and other fees
|
1,870,833
|
693,822
|
8,136
|
|||||||
|
Total
revenue
|
87,655,992
|
51,818,638
|
43,184,315
|
|||||||
|
Operating
expenses:
|
||||||||||
|
Compensation
and benefits
|
56,101,887
|
42,840,431
|
31,659,488
|
|||||||
|
Brokerage
and clearing fees
|
2,635,328
|
2,614,513
|
2,312,616
|
|||||||
|
Cost
of primary research
|
1,595,502
|
—
|
—
|
|||||||
|
Professional
services
|
2,823,391
|
2,441,417
|
1,987,317
|
|||||||
|
Occupancy
and equipment
|
1,862,069
|
1,665,410
|
1,522,351
|
|||||||
|
Communications
and technology
|
3,483,752
|
2,969,872
|
1,918,693
|
|||||||
|
Depreciation
and amortization
|
740,445
|
645,129
|
490,165
|
|||||||
|
Amortization
of intangible assets
|
750,185
|
—
|
—
|
|||||||
|
Travel
and business development
|
2,607,042
|
2,738,393
|
1,723,290
|
|||||||
|
Other
|
3,595,058
|
2,400,765
|
3,298,852
|
|||||||
|
Total
operating expenses
|
76,194,659
|
58,315,930
|
44,912,772
|
|||||||
|
Operating
income (loss)
|
11,461,333
|
(6,497,292
|
)
|
(1,728,457
|
)
|
|||||
|
Loss
on retirement of convertible note payable
|
—
|
(1,348,805
|
)
|
—
|
||||||
|
Interest
income
|
461,922
|
484,909
|
446,273
|
|||||||
|
Interest
expense
|
(138,055
|
)
|
(535,014
|
)
|
(76,103
|
)
|
||||
|
Income
(loss) from continuing operations before income taxes
|
11,785,200
|
(7,896,202
|
)
|
(1,358,287
|
)
|
|||||
|
Income
tax expense
|
(2,462,165
|
)
|
—
|
(142,425
|
)
|
|||||
|
Income
(loss) from continuing operations
|
9,323,035
|
(7,896,202
|
)
|
(1,500,712
|
)
|
|||||
|
Loss
on discontinued operations
|
—
|
(324,213
|
)
|
(13,731
|
)
|
|||||
|
Net
income (loss)
|
$
|
9,323,035
|
$
|
(8,220,415
|
)
|
$
|
(1,514,443
|
)
|
||
Our
revenue during 2007 increased by $35,837,000 or 69%, from 2006 reflecting growth
across our businesses, with particular strength in principal transactions and
solid growth in investment banking transactions. Net income for 2007 was
$9,323,000 as compared to net loss of $8,220,000 during 2006.
Our
net
income (loss) during the three years ended December 31, 2007 included the
following non-cash items:
|
2007
|
2006
|
2005
|
||||||||
|
Stock-based
compensation
|
$
|
2,824,107
|
$
|
3,836,781
|
$
|
1,959,329
|
||||
|
Amortization
of intangible assets
|
750,185
|
138,051
|
34,366
|
|||||||
|
Depreciation
and amortization
|
740,445
|
655,334
|
493,672
|
|||||||
|
Provision
for uncollectible accounts receivable
|
368,272
|
383,565
|
556,493
|
|||||||
|
Issuance
of common stock to consultant
|
75,791
|
—
|
—
|
|||||||
|
Amortization
of discounts on debt
|
10,332
|
146,776
|
10,335
|
|||||||
|
Loss
on retirement of convertible note payable
|
—
|
1,348,805
|
—
|
|||||||
|
Amortization
of debt issuance costs
|
—
|
35,757
|
—
|
|||||||
|
Common
stock received for services
|
(400,875
|
)
|
—
|
—
|
||||||
|
Total
|
$
|
4,368,257
|
$
|
6,545,069
|
$
|
3,054,195
|
||||
29
Investment
Banking Revenue
Our
investment banking activity includes the following:
|
·
|
Capital
Raising
-
Capital raising includes private placements of equity and debt instruments
and underwritten public offerings.
|
|
·
|
Financial
Advisory
-
Financial advisory includes advisory assignments with respect to
mergers
and acquisitions, divestures, restructurings and
spin-offs.
|
The
following table sets forth our revenue and transaction volumes from our
investment banking activities during the three years ended December 31,
2007:
|
2007
|
2006
|
2005
|
||||||||
|
Revenue:
|
|
|
|
|||||||
|
Capital
raising
|
$
|
26,996,283
|
$
|
15,939,480
|
$
|
13,396,781
|
||||
|
Financial
advisory
|
3,142,500
|
5,251,306
|
1,420,033
|
|||||||
|
Total
investment banking revenue
|
$
|
30,138,783
|
$
|
21,190,786
|
$
|
14,816,814
|
||||
|
|
||||||||||
|
Transaction
Volumes:
|
||||||||||
|
Public
offerings:
|
||||||||||
|
Capital
underwritten participations
|
$
|
234,596,000
|
$
|
156,500,000
|
$
|
71,238,000
|
||||
|
Number
of transactions
|
13
|
15
|
8
|
|||||||
|
Private
placements:
|
||||||||||
|
Capital
raised
|
$
|
331,480,000
|
$
|
173,101,000
|
$
|
253,939,000
|
||||
|
Number
of transactions
|
26
|
15
|
14
|
|||||||
|
Financial
advisory:
|
||||||||||
|
Transaction
amounts
|
$
|
129,161,000
|
$
|
169,423,000
|
$
|
21,321,000
|
||||
|
Number
of transactions
|
1
|
1
|
1
|
|||||||
Our
investment banking revenue amounted to $30,138,783, or 34% of our revenue during
2007, representing a 42% increase compared to $21,191,000 recognized in 2006.
Revenue growth was driven by equity underwritten transactions which increased
by
95% in 2007 as compared to the prior year. Average fees per investment banking
transaction grew to $710,000 in 2007 from $600,000 in 2006.
Our
investment banking revenue amounted to $21,191,000, or 41% of our revenue during
2006, representing a 43% increase compared to $14,817,000 recognized in 2005.
We
expanded our public underwriting and financial advisory transactions during
2006
which we believe is valuable to us building our long-term franchise. We
participated in 15 equity underwriting transactions and lead our first initial
public offering during 2006.
During
each of the three years ended December 31, 2007, no single investment banking
customer accounted for more than 10% of our revenue.
Commissions
and Principal Transactions Revenue
Our
broker-dealer activity includes the following:
|
·
|
Commissions
-
Commissions include revenue resulting from executing stock trades
for
exchange-listed securities, over-the-counter securities and other
transactions as agent, as well as revenue from brokering money market
mutual funds by our Institutional Cash Distributors
group.
|
|
·
|
Principal
Transactions - Principal
transactions consist of a portion of dealer spreads attributed to
our
securities trading activities as principal in Nasdaq-listed and other
securities, and include transactions derived from our activities
as a
market-maker. Additionally, principal transactions include gains
and
losses resulting from market price fluctuations that occur while
holding
positions in our trading security
inventory.
|
30
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:
|
2007
|
2006
|
2005
|
||||||||
|
Revenue:
|
|
|
|
|||||||
|
Commissions:
|
||||||||||
|
Institutional
equities
|
$
|
25,312,803
|
$
|
26,348,811
|
$
|
25,240,317
|
||||
|
Institutional
Cash Distributors
|
6,368,760
|
3,756,274
|
1,752,110
|
|||||||
|
Total
commissions revenue
|
$
|
31,681,563
|
$
|
30,105,085
|
$
|
26,992,427
|
||||
|
Principal
transactions:
|
||||||||||
|
Customer
principal transactions, proprietary trading and market
making
|
$
|
18,380,237
|
$
|
(207,779
|
)
|
$
|
308,764
|
|||
|
Investment
portfolio
|
1,736,155
|
36,724
|
1,058,174
|
|||||||
|
Total
principal transactions revenue
|
$
|
20,116,392
|
$
|
(171,055
|
)
|
$
|
1,366,938
|
|||
|
Equity
research:
|
||||||||||
|
Publishing
analysts
|
15
|
14
|
14
|
|||||||
|
Companies
covered
|
186
|
194
|
136
|
|||||||
|
Transaction
Volumes:
|
||||||||||
|
Number
of shares traded
|
1,160,782,000
|
937,005,000
|
983,755,000
|
|||||||
|
Number
of active clients
|
597
|
564
|
614
|
|||||||
Commissions
amounted to $31,682,000, or 36%, of our revenue during 2007, representing a
5%
increase over $30,105,000 recognized during 2006. The growth in commissions
revenue was attributed to higher assets brokered by our Institutional Cash
Distributors group during 2007. Commissions revenue from our institutional
equities trading business was down slightly during 2007 due to a decrease in
average commissions per share, partially offset by higher average daily trading
volume.
Commissions
amounted to $30,105,000, or 58%, of our revenue during 2006, representing an
11%
increase over $26,992,000 recognized during 2005. The higher commissions can
be
attributed to the increase in the number of companies in our selected growth
sectors that are covered by our research analysts from 136 at December 31,
2005
to 194 at December 31, 2006. The increase in revenue during 2006 was also due
to
an increase in average commissions per share, partially offset by a slight
decrease in our average daily trading volume in equity securities. Finally,
assets brokered by our Institutional Cash Distributors group have more than
doubled during 2006.
Principal
transaction revenue consists of four different activities - customer principal
trades, market making, trading for our proprietary account, and realized and
unrealized gains and losses in our investment portfolio. As a broker-dealer,
we
account for all of our marketable security positions on a trading basis and
as a
result, all security positions are marked to fair market value each day. Returns
from market making and proprietary trading activities tend to be more volatile
than acting as agent or principal for customers.
Principal
transactions amounted to $20,116,000, or 23%, of our revenue during 2007, while
principal transactions decreased revenue by $171,000 during 2006. Of the 2007
revenue, $14,164,000 resulted from our concentrated position in Points
International Ltd (PTSEF.OB). Merriman Curhan Ford & Co. had accumulated a
5,000,000 share position in this security during 2006. During 2007, the price
of
this security appreciated significantly resulting in a large gain for our firm.
We sold approximately 3,000,000 shares of Points during the fourth quarter
of
2007. This significant principal transactions gain in 2007 may not be recurring
in future periods as we cannot predict overall market conditions. Other
components of principal transactions revenue during 2007 included principal
trades for customers, realized and unrealized gains from our investment
portfolio and trading gains from making markets in equity
securities.
During
2006, we incurred $2,255,000 in losses resulting primarily from an unrealized
loss from our position in Points International Ltd. This loss was partially
offset by revenue from principal trades for customers.
During
the three years ended December 31, 2007, no single brokerage customer accounted
for more than 10% of our revenue.
Primary
Research Revenue
Primary
research revenue represents the operating results of Panel Intelligence from
the
date of the MedPanel acquisition, April 17, 2007, through December 31,
2007. We are now offering independent market data and information to
clients in the biotechnology, pharmaceutical, medical device, clean tech and
financial industries.
31
Compensation
and Benefits Expenses
Compensation
and benefits expense represents the majority 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 years ended December 31, 2007:
|
|
2007
|
2006
|
2005
|
|||||||
|
Incentive
compensation and discretionary bonuses
|
$
|
34,681,099
|
$
|
26,563,425
|
$
|
17,990,288
|
||||
|
Salaries
and wages
|
14,627,800
|
9,076,815
|
8,995,642
|
|||||||
|
Stock-based
compensation
|
2,824,107
|
3,836,781
|
1,959,329
|
|||||||
|
Payroll
taxes, benefits and other
|
3,968,881
|
3,363,410
|
2,714,229
|
|||||||
|
Total
compensation and benefits
|
$
|
56,101,887
|
$
|
42,840,431
|
$
|
31,659,488
|
||||
|
Total
compensation and benefits as a percentage of revenue
|
64
|
%
|
83
|
%
|
73
|
%
|
||||
|
Cash
compensation and benefits as a percentage of revenue
|
61
|
%
|
75
|
%
|
69
|
%
|
||||
The
increase in compensation and benefits expense of $13,261,000, or 31%, from
2006
to 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 61% during 2007 as compared to 75% during 2006. This
improvement in 2007 was largely attributed to our overall revenue growth which
was 69% higher than 2006 and our extraordinary principal transactions revenue
as
this activity has a low compensation expense ratio.
The
increase in compensation and benefits expense of $11,181,000 or 35%, from 2005
to 2006 was due primarily to higher incentive compensation which is directly
correlated to revenue production. Additionally, our stock-based compensation
expenses increased by $1,877,000 during 2006 as a result of adopting SFAS No.
123(R). Cash compensation and benefits expense as a percentage of revenue
increased to 75% during 2006 as compared to 69% in 2005. The proprietary trading
losses of $2,255,000 during 2006 added 3% to cash compensation as a percentage
of revenue as the losses reduced revenue but did not impact compensation
expense. The balance of this variance was caused by our increasing certain
incentive payouts during the current year.
Stock-based
compensation increased by $1,877,000 in 2006 as compared to 2005. We adopted
SFAS 123(R), “Share-Based Payment,” on January 1, 2006 which requires that we
recognize compensation expense for all share-based awards made to employees
and
directors based on estimated fair values. We used the modified prospective
application transition method and, accordingly, have not restated financial
statements for prior periods to include the impact of SFAS 123(R). To determine
the valuation of share-based awards under SFAS 123(R), we continue to use the
Black-Scholes option pricing model that we utilized to determine our pro forma
share-based compensation in prior periods. Additional information regarding
our
adoption of SFAS 123(R) during 2006 is set forth in the notes to the
consolidated financial statements and in “Critical Accounting Policies and
Estimates”.
Our
headcount has increased from 155 at December 31, 2005 to 166 as of December
31,
2006 to 198 at December 31, 2007. No single sales professional accounted for
more than 10% of our revenue in 2007 and 2006. One sales professional accounted
for 12% of our revenue during 2005.
32
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. Security trades are executed by third-party
broker-dealers and electronic trading systems. These expenses are almost
entirely variable with commissions revenue and the volume of brokerage
transactions. The slight increase in brokerage and clearing fees of $21,000,
or
1% from 2006 to 2007 reflected increased market making activity during the
latest year. The increase in brokerage and clearing fees of $302,000, or 13%
from 2005 to 2006 was inline with our growth in the brokerage commission
activities. We anticipate brokerage and clearing fees for 2008 will increase
sequentially over 2007 as we are forecasting a higher level of commissions
revenue for 2008.
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 and various consulting fees. Many of these
expenses, such as legal and accounting fees, are to a large extent fixed in
nature. The increase of $382,000, or 16%, from 2006 to 2007 reflected higher
legal fees for litigation defense and corporate matters, as well as higher
accounting and consulting fees mostly in connection with the integration of
the
MedPanel acquisition. The increase of $454,000 or 23%, from 2005 to 2006
included higher legal fees in connection with investment banking transactions,
costs involved with introducing our new investment products and litigation
related costs. We anticipate professional services expense for 2008 will
increase slightly as compared to 2007.
Occupancy
and equipment includes rental costs for our office facilities and equipment,
as
well as equipment, software and leasehold improvement expenses. Occupancy
expense is largely fixed in nature while equipment expense tends to increase
as
we hire additional employees. The increase of $197,000, or 12%, from 2006 to
2007 and the increase of $143,000, or 9%, from 2005 to 2006 resulted mostly
from
expansion of our offices as well as computer equipment purchases resulting
from
the hiring of additional investment banking, research, sales and trading
professionals. During 2007, we added the office lease in Cambridge, MA as a
result of our MedPanel acquisition. During 2006, we leased additional space
in
San Francisco. We anticipate occupancy and equipment expense in 2008 will
increase by approximately $1 million over 2007 as our office lease in New York
expires in March 2008 and current office rents are substantially higher than
our
existing lease.
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 $514,000, or 17%,
from 2006 to 2007 and the increase of $1,051,000, or 55%, from 2005 to 2006
was
primarily due to upgrading our trading order management system in June 2006,
as
well as the increase in market data and quote services as we continue to expand
our market maker activities. We anticipate communications and technology expense
for 2008 will increase by approximately 10% sequentially over 2007.
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 $95,000, or 15%, from 2006 to 2007 mostly
resulted from the depreciation of assets acquired with MedPanel. The increase
of
$155,000, or 32%, from 2005 to 2006 was due to increased capital expenditures,
including additional leasehold improvements to our San Francisco office during
2006. We anticipate depreciation and amortization expense for 2008 will be
slightly higher as compared to 2007.
33
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. Amortization of intangible assets
expense for 2007 was $750,000. We anticipate amortization of intangible assets
expense for 2008 will be approximately $500,000
Travel
and business development expenses are incurred by each of our lines of business
and include business development costs by our investment bankers, travel costs
for our research analysts to visit the companies that they cover and non-deal
road show expenses. Non-deal road shows represent meetings in which management
teams of our corporate clients present directly to our institutional investors.
The decrease of $131,000, or 5%, from 2006 to 2007 resulted from fewer
uncompleted investment banking transaction in 2007 as compared to 2006. The
increase of $1,015,000, or 59%, from 2005 to 2006, was due a greater level
of
uncompleted investment banking transactions and to our continued effort to
extend our penetration with our active clients and seeking new business
opportunities with potential clients. Syndicate expenses related to securities
offerings in which we act as underwriter or agent are deferred until either
the
related revenue is recognized or we determine that the security offerings are
unlikely to be completed. We anticipate travel and entertainment expense for
2008 will likely be higher than 2007.
The
following expenses are included in other operating expenses for the three years
ended December 31, 2007:
|
|
2007
|
2006
|
2005
|
|||||||
|
Investor
conferences
|
$
|
920,186
|
$
|
947,793
|
$
|
831,652
|
||||
|
Recruiting
|
548,051
|
316,021
|
452,139
|
|||||||
|
Public
and investor relations
|
512,589
|
294,664
|
242,543
|
|||||||
|
Provision
for uncollectible accounts receivable
|
368,271
|
(116,435
|
)
|
556,493
|
||||||
|
Insurance
|
315,286
|
271,725
|
273,845
|
|||||||
|
Supplies
|
311,523
|
300,598
|
221,729
|
|||||||
|
Dues
and subscriptions
|
218,113
|
162,064
|
152,961
|
|||||||
|
Other
|
401,039
|
224,335
|
567,490
|
|||||||
|
Total
other operating expenses
|
$
|
3,595,058
|
$
|
2,400,765
|
$
|
3,298,852
|
||||
The
increase of $1,194,000, or 50%, was due primarily to one-time events in 2006
that reduced other expense by approximately $600,000. The increase also
reflected higher public and investor relations as well as recruiting fees.
The
decrease of $898,000 or 27%, from 2005 to 2006 was primarily due to the reversal
of $500,000 of bad debt expense from 2005 related to the note receivable from
Ascend Services Ltd. We collected the full balance of the Ascend note receivable
in 2006. The decrease in 2006 also reflects the receipt of a favorable legal
judgment to the firm related to a brokerage activity claim, as well as decrease
in recruiting expense. The 2005 expense also includes the write-off of the
$500,000 note receivable from Ascend. We anticipate other operating expense
for
2008 will increase sequentially over 2007.
Loss
on Retirement of Convertible Note Payable
In
March
2006, we raised $7.5 million in a private placement of a five year convertible
debenture with a detachable stock warrant. We raised the capital so that we
could invest the proceeds as general partner in the MCF Navigator fund. In
December 2006, we repaid the $7.5 million secured convertible note. The proceeds
to repay the $7.5 million convertible note were provided by redemption from
the
MCF Navigator fund. The investor, Midsummer Investment, Ltd., retained the
stock
warrant to purchase 267,858 shares of common stock. The Company recorded a
loss
on the repayment of the convertible note in the amount of $1,349,000, which
consisted of $1,154,000 for the write-off of the unamortized discount related
to
the stock warrant and $195,000 for the write-off the unamortized debt issuance
costs. Midsummer reinvested the $7.5 million directly into the MCF Voyager
fund
and MCF Navigator fund as limited partner.
34
Interest
Income
Interest
income represents interest earned on our cash balances maintained at financial
institutions. The decrease of $23,000, or 5%, from 2006 to 2007 and the increase
of approximately $39,000, or 9%, from 2005 to 2006 were due to changes in
average interest earning assets and average interest rates during these
periods.
Interest
Expense
Interest
expense for 2007 included $128,000 for interest expense and $10,000 for
amortization of discounts while 2006 included $352,000 for interest expense
and
$183,000 for amortization of discounts and debt issuance costs. The 2006 expense
included interest and amortization expenses from the note payable to Midsummer
Investments, Ltd.
Income
Tax Expense
Income
tax expense was $2,462,000 in 2007 resulting in an effective tax rate of 21%.
We
did not record income tax expense in 2006. The effective tax rate differs from
the statutory rate primarily due to the existence and utilization of net
operating loss carryforwards which have been offset by a valuation allowance
resulting in a tax provision equal to our expected current expense for the
year.
We historically have had current tax expense primarily related to alternative
minimum, state and minimum tax liabilities.
Historically
and currently, we have recorded a valuation allowance on our deferred tax
assets, the significant component of which relates to net operating loss tax
carryforwards. Management continually evaluates the realizability of its
deferred tax assets based upon negative and positive evidence available. Based
on the evidence available at this time, we continue to conclude that it is
not
"more likely than not" that we will be able to realize the benefit of our
deferred tax assets in the near future.
We
adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes -
an Interpretation of FASB Statement 109 (“FIN 48”) on January 1, 2007. As a
result of the implementation of FIN 48, we recognized no adjustment in the
liability for unrecognized income tax benefits and no corresponding change
in
retained earnings. We do not have any material accrued interest or penalties
associated with any unrecognized tax benefits. We do not believe it is
reasonably possible that our unrecognized tax benefits will significantly
change
within the next twelve months. There were no unrecognized tax benefits as
of
December 31, 2007. We are subject to taxation in the US and various state
and
foreign jurisdictions. The tax years 2002-2006 remain open in several
jurisdictions, none of which have individual significance.
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.
35
Revenue
Recognition
Investment
banking revenue includes underwriting and private placement agency fees earned
through our participation in public offerings and private placements of equity
and convertible debt securities and fees earned as financial advisor in mergers
and acquisitions and similar transactions. Underwriting revenue is earned in
securities offerings in which we act as an underwriter and includes management
fees, selling concessions and underwriting fees. Fee revenue relating to
underwriting commitments is recorded when all significant items relating to
the
underwriting cycle have been completed and the amount of the underwriting
revenue has been determined. This generally is the point at which all of the
following have occurred: (i) the issuer's registration statement has become
effective with the SEC, or other offering documents are finalized, (ii) we
have
made a firm commitment for the purchase of the shares or debt from the issuer,
and (iii) we have been informed of the exact number of shares or the principal
amount of debt that it has been allotted.
Syndicate
expenses related to securities offerings in which we act as underwriter or
agent
are deferred until the related revenue is recognized or we determine that it
is
more likely than not that the securities offerings will not ultimately be
completed. Underwriting revenue is presented net of related expenses. As
co-manager for registered equity underwriting transactions, management must
estimate our share of transaction related expenses incurred by the lead manager
in order to recognize revenue. Transaction related expenses are deducted from
the underwriting fee and therefore 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.
Merger
and acquisition fees and other advisory service revenue are generally earned
and
recognized only upon successful completion of the engagement. Unreimbursed
expenses associated with private placement and advisory transactions are
recorded as expenses as incurred.
Commissions
revenue and related clearing expenses are recorded on a trade-date basis as
security transactions occur. Principal transactions in regular-way trades are
recorded on the trade date, as if they had settled. Profit and loss arising
from
all securities and commodities transactions entered into for the account and
risk of our company are recorded on a trade-date basis.
Primary
research revenue is recognized on a proportional performance basis as services
are provided.
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.
36
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 two years ended December 31, 2007 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 December 31, 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.
Goodwill
Goodwill
is related to the acquisitions of MedPanel, Inc. Goodwill, totaling $3,130,000,
was allocated to the Primary Research segment pursuant to SFAS No. 142,
“Goodwill and Other Intangible Assets”. Goodwill represents the excess cost of a
business acquisition over the fair value of the net assets acquired. In
accordance with this pronouncement, indefinite-life intangible assets and
goodwill are not amortized. Rather, they are subject to impairment testing
on an
annual basis, or more often if events or circumstances indicate there may be
impairment. This test involves assigning tangible assets and liabilities,
identified intangible assets and goodwill to reporting units and comparing
the
fair value of each reporting unit to its carrying amount. If the fair value
is
less than the carrying amount, a further test is required to measure the amount
of the impairment.
When
available, we use recent, comparable transactions to estimate the fair value
of
the respective reporting unit. We calculate an estimated fair value based on
multiples of revenue, earnings, and book value of comparable transactions.
However, when such comparable transactions are not available or have become
outdated, we use discounted cash flow scenarios to estimate the fair value
of
the reporting units. As of December 31, 2007, we noted no indicators
of impairment of goodwill. However, changes in current circumstances or business
conditions could result in an impairment of goodwill. As required, we will
perform impairment testing on an annual basis or when an event occurs or
circumstances change that would more likely than not reduce the fair value
of a
reporting unit below its carrying amount.
37
Liquidity
and Capital Resources
Historically,
we have satisfied our liquidity and regulatory capital needs through the
issuance of equity and debt securities. As of December 31, 2007, liquid assets
consisted primarily of cash and cash equivalents of $31,962,000 and marketable
securities of $14,115,000, for a total of $46,077,000, which is $24,837,000
higher than $21,240,000 in liquid assets as of December 31, 2006.
Cash
and
cash equivalents increased by $18,216,000 during 2007. Cash provided by our
operating activities for 2007 was $18,216,000 which consists of our net income
of $9,323,000 adjusted for non-cash expenses including stock-based compensation
of $2,824,000, net unrealized gain on securities owned of $6,764,000
depreciation and amortization of $740,000, provision for doubtful accounts
of
$368,000, amortization of intangible assets of $750,000, partially offset by
the
increase in commissions and bonus payable of $9,618,000. Cash used in investing
activities amounted to $32,000 during 2007 which included (i) net proceeds
in
connection with our sales of Catalyst and (ii) our purchase of equipment and
fixtures. Cash used in our financing activities was $324,000. Our financing
activities included proceeds from the issuance of common stock in connection
with our employee stock purchase plan, partially offset by debt service
payments.
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 December 31, 2007,
Merriman Curhan Ford & Co. had regulatory net capital of $17,848,000, which
exceeded the required amount by $16,419,000.
We
believe that our existing cash balances and investments will be sufficient
to
meet our liquidity and capital spending requirements, both for the next twelve
months as well as for the long-term. However, we may require additional capital
investment to fund our working capital if we incur future operating losses.
We
cannot be certain that additional debt or equity financing will be available
when required or, if available, that we can secure it on terms satisfactory
to
us.
The
following is a table summarizing our significant commitments as of December
31,
2007, consisting of debt payments related to convertible and non-convertible
notes payable and capital leases and future minimum lease payments under all
non-cancelable operating leases with initial or remaining terms in excess of
one
year.
|
|
Notes
Payable
|
Operating
Leases
|
Capital
Leases
|
|||||||
|
2008
|
$
|
243,573
|
$
|
2,628,402
|
$
|
563,526
|
||||
|
2009
|
—
|
2,444,011
|
341,674
|
|||||||
|
2010
|
—
|
2,019,930
|
50,880
|
|||||||
|
2011
|
—
|
1,923,516
|
—
|
|||||||
|
2012
|
—
|
1,174,323
|
—
|
|||||||
|
Thereafter
|
—
|
572,000
|
—
|
|||||||
|
Total
commitments
|
$
|
243,573
|
$
|
10,762,182
|
$
|
956,080
|
||||
Off-Balance
Sheet Arrangements
We
were
not a party to any off-balance sheet arrangements during the three years ended
December 31, 2007. In particular, we do not have any interest in so-called
limited purpose entities, which include special purpose entities and structured
finance entities.
38
Newly
Issued Accounting Standards
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. On February 6, 2008, the FASB
deferred the effective date of Statement 157 for one year for all nonfinancial
assets and nonfinancial liabilities, except for those items that are recognized
or disclosed at fair value in the financial statements on a recurring basis
(at
least annually). The adoption of SFAS 157 did not have a material impact on
our
consolidated financial statements.
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. We did not adopt SFAS 159 on any individual instrument as of January
1, 2008.
In
May
2007, the FASB issued FSP FIN No. 46R-7, "Application of FASB Interpretation
No.
46(R) to Investment Companies." FSP FIN No. 46R-7 amends the scope of the
exception to FIN 46R to state that investments accounted for at fair value
in
accordance with the specialized accounting guidance in the American Institute
of
Certified Public Accountants ("AICPA") Audit and Accounting Guide, Investment
Companies, are not subject to consolidation under FIN 46R. This interpretation
is effective for fiscal years beginning on or after December 15, 2007. We do
not
expect the adoption of FSP FIN No. 46R-7 will have a material impact on our
consolidated financial statements.
39
Item
7a. Quantitative and Qualitative Disclosures about Market
Risk
The
following discussion about market risk disclosures involves forward-looking
statements. Actual results could differ materially from those projected in
the
forward-looking statements. We may be exposed to market risks related to changes
in equity prices, interest rates and foreign currency exchange rates. We do
not
use derivative financial instruments for speculative, trading or any other
purpose.
Equity
Price Risk
The
potential for changes in the market value of our trading positions is referred
to as “market risk.” Our trading positions result from proprietary trading
activities. These trading positions in individual equities and equity indices
may be either long or short at any given time. Equity price risks result from
exposures to changes in prices and volatilities of individual equities and
equity indices. We seek to manage this risk exposure through diversification
and
limiting the size of individual positions within the portfolio. The effect
on
earnings and cash flows of an immediate 10% increase or decrease in equity
prices generally is not ascertainable and could be positive or negative,
depending on the positions we hold at the time. We do not establish hedges
in
related securities or derivatives. From time to time, we also hold equity
securities received as compensation for our services in investment banking
transactions. These equity positions are always long. However, as the prices
of
individual equity securities do not necessarily move in tandem with the
direction of the general equity market, the effect on earnings and cash flows
of
an immediate 10% increase or decrease in equity prices generally is not
ascertainable.
Interest
Rate Risk
Our
exposure to market risk resulting from changes in interest rates relates
primarily to our investment portfolio and long term debt obligations. Our
interest income and cash flows may be impacted by changes in the general level
of U.S. interest rates. We do not hedge this exposure because we believe that
we
are not subject to any material market risk exposure due to the short-term
nature of our investments. We would not expect an immediate 10% increase or
decrease in current interest rates to have a material effect on the fair market
value of our investment portfolio.
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.
40
Item
8. Financial Statements and Supplementary Data
The
following financial statements are included in this report:
|
·
|
Report
of Independent Registered Public Accounting
Firm
|
|
·
|
Consolidated
Statements of Operations
|
|
·
|
Consolidated
Statements of Financial Condition
|
|
·
|
Consolidated
Statements of Stockholders’ Equity
|
|
·
|
Consolidated
Statements of Cash Flows
|
|
·
|
Notes
to Consolidated Financial
Statements
|
Schedules
other than those listed above are omitted because of the absence of conditions
under which they are required or because the required information is presented
in the financial statements or notes thereto.
41
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders of
MCF
Corporation and subsidiaries
We
have
audited the accompanying consolidated statements of financial condition of
MCF
Corporation and subsidiaries (the “Company”) as of December 31, 2007 and 2006,
and the related consolidated statements of operations, stockholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2007.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial condition of MCF Corporation
and
subsidiaries at December 31, 2007 and 2006, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 2 to the consolidated financial statements, in 2007 the
Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109.” As discussed in Note 2 to the consolidated financial
statements, in 2006
the Company adopted Statement of Financial Accounting Standards No. 123 (revised
2004),
"Share-Based Payment."
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 11, 2008, expressed
an
unqualified opinion thereon.
|
/s/
Ernst & Young LLP
|
||
|
San
Francisco, California
February
11, 2008
|
||
42
MCF
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Year ended December 31,
|
||||||||||
|
|
2007
|
2006
|
2005
|
|||||||
|
Revenue:
|
|
|
|
|||||||
|
Commissions
|
$
|
31,681,563
|
$
|
30,105,085
|
$
|
26,992,427
|
||||
|
Principal
transactions
|
20,116,392
|
(171,055
|
)
|
1,366,938
|
||||||
|
Investment
banking
|
30,138,783
|
21,190,786
|
14,816,814
|
|||||||
|
Primary
research
|
3,848,421
|
—
|
—
|
|||||||
|
Advisory
and other fees
|
1,870,833
|
693,822
|
8,136
|
|||||||
|
Total
revenue
|
87,655,992
|
51,818,638
|
43,184,315
|
|||||||
|
Operating
expenses:
|
||||||||||
|
Compensation
and benefits
|
56,101,887
|
42,840,431
|
31,659,488
|
|||||||
|
Brokerage
and clearing fees
|
2,635,328
|
2,614,513
|
2,312,616
|
|||||||
|
Cost
of primary research services
|
1,595,502
|
—
|
—
|
|||||||
|
Professional
services
|
2,823,391
|
2,441,417
|
1,987,317
|
|||||||
|
Occupancy
and equipment
|
1,862,069
|
1,665,410
|
1,522,351
|
|||||||
|
Communications
and technology
|
3,483,752
|
2,969,872
|
1,918,693
|
|||||||
|
Depreciation
and amortization
|
740,445
|
645,129
|
490,165
|
|||||||
|
Amortization
of intangible assets
|
750,185
|
—
|
—
|
|||||||
|
Travel
and business development
|
2,607,042
|
2,738,393
|
1,723,290
|
|||||||
|
Other
|
3,595,058
|
2,400,765
|
3,298,852
|
|||||||
|
Total
operating expenses
|
76,194,659
|
58,315,930
|
44,912,772
|
|||||||
|
Operating
income (loss)
|
11,461,333
|
(6,497,292
|
)
|
(1,728,457
|
)
|
|||||
|
Loss
on retirement of convertible note payable
|
—
|
(1,348,805
|
)
|
—
|
||||||
|
Interest
income
|
461,922
|
484,909
|
446,273
|
|||||||
|
Interest
expense
|
(138,055
|
)
|
(535,014
|
)
|
(76,103
|
)
|
||||
|
Income
(loss) from continuing operations before income taxes
|
11,785,200
|
(7,896,202
|
)
|
(1,358,287
|
)
|
|||||
|
Income
tax expense
|
(2,462,165
|
)
|
—
|
(142,425
|
)
|
|||||
|
Income
(loss) from continuing operations
|
9,323,035
|
(7,896,202
|
)
|
(1,500,712
|
)
|
|||||
|
Loss
from discontinued operations
|
—
|
(324,213
|
)
|
(13,731
|
)
|
|||||
|
Net
income (loss)
|
$
|
9,323,035
|
$
|
(8,220,415
|
)
|
$
|
(1,514,443
|
)
|
||
|
Basic
net income (loss) per share:
|
||||||||||
|
Income
(loss) from continuing operations
|
$
|
0.81
|
$
|
(0.79
|
)
|
$
|
(0.16
|
)
|
||
|
Loss
from discontinued operations
|
$
|
—
|
$
|
(0.03
|
)
|
$
|
—
|
|||
|
Net
income (loss)
|
$
|
0.81
|
$
|
(0.82
|
)
|
$
|
(0.16
|
)
|
||
|
Diluted
net income (loss) per share:
|
||||||||||
|
Income
(loss) from continuing operations
|
$
|
0.74
|
$
|
(0.79
|
)
|
$
|
(0.16
|
)
|
||
|
Loss
from discontinued operations
|
$
|
—
|
$
|
(0.03
|
)
|
$
|
—
|
|||
|
Net
income (loss)
|
$
|
0.74
|
$
|
(0.82
|
)
|
$
|
(0.16
|
)
|
||
|
Weighted
average number of common shares:
|
||||||||||
|
Basic
|
11,528,187
|
9,989,265
|
9,500,748
|
|||||||
|
Diluted
|
12,643,524
|
9,989,265
|
9,500,748
|
|||||||
The
accompanying notes are an integral part of
these consolidated financial statements.
43
MCF
CORPORATION
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
December 31,
|
|||||||
|
|
2007
|
2006
|
|||||
|
ASSETS
|
|
|
|||||
|
Cash
and cash equivalents
|
$
|
31,962,201
|
$
|
13,746,590
|
|||
|
Securities
owned:
|
|||||||
|
Marketable,
at fair value
|
14,115,022
|
7,492,914
|
|||||
|
Not
readily marketable, at estimated fair value
|
4,504,788
|
1,489,142
|
|||||
|
Restricted
cash
|
689,157
|
629,427
|
|||||
|
Due
from clearing broker
|
1,251,446
|
551,831
|
|||||
|
Accounts
receivable, net
|
4,008,729
|
2,715,271
|
|||||
|
Prepaid
expenses and other assets
|
1,716,814
|
1,971,445
|
|||||
|
Equipment
and fixtures, net
|
1,245,692
|
1,586,630
|
|||||
|
Intangible
assets
|
1,949,815
|
314,963
|
|||||
|
Goodwill
|
3,129,667
|
—
|
|||||
|
Total
assets
|
$
|
64,573,331
|
$
|
30,498,213
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Accounts
payable
|
$
|
957,969
|
$
|
1,121,623
|
|||
|
Commissions
and bonus payable
|
17,517,032
|
7,711,805
|
|||||
|
Accrued
expenses
|
6,351,598
|
2,285,670
|
|||||
|
Due
to clearing and other brokers
|
6,865
|
11,114
|
|||||
|
Securities
sold, not yet purchased
|
3,804,558
|
1,534,953
|
|||||
|
Capital
lease obligation
|
890,272
|
1,292,378
|
|||||
|
Convertible
notes payable, net
|
197,416
|
187,079
|
|||||
|
Notes
payable
|
41,573
|
138,571
|
|||||
|
Total
liabilities
|
29,767,283
|
14,283,193
|
|||||
|
|
|||||||
|
Commitments
and contingencies
|
|||||||
|
Stockholders’
equity:
|
|||||||
|
Convertible
Preferred stock, Series A—$0.0001 par value; 2,000,000 shares
authorized;
0 shares issued and outstanding as of December 31, 2007 and
2006,
respectively; aggregate liquidation preference of $0
|
—
|
—
|
|||||
|
Convertible
Preferred stock, Series B—$0.0001 par value; 12,500,000 shares
authorized;
1,250,000 shares issued and 0 shares outstanding as of December 31,
2007 and 2006; aggregate liquidation preference of $0
|
—
|
—
|
|||||
|
Convertible
Preferred stock, Series C—$0.0001 par value; 14,200,000 shares
authorized;
1,685,714 shares issued and 0 shares outstanding as of December 31,
2007 and 2006; aggregate liquidation preference of $0
|
—
|
—
|
|||||
|
Common
stock, $0.0001 par value; 300,000,000 shares authorized; 12,310,886
and
10,602,720 shares issued and 12,284,448 and 10,602,720 shares outstanding
as of December 31, 2007 and 2006, respectively
|
1,232
|
1,061
|
|||||
|
Additional
paid-in capital
|
124,010,283
|
114,616,848
|
|||||
|
Treasury
stock
|
(125,613
|
)
|
—
|
||||
|
Accumulated
deficit
|
(89,079,854
|
)
|
(98,402,889
|
)
|
|||
|
Total
stockholders’ equity
|
34,806,048
|
16,215,020
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
64,573,331
|
$
|
30,498,213
|
|||
The
accompanying notes are an integral part of
these consolidated financial statements.
44
MCF
CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
Preferred Stock
|
Common Stock
|
Treasury Stock
|
Additional
Paid-in
Capital
|
Deferred
Compensation
|
Accumulated
Deficit
|
||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Total
|
|||||||||||||||||||||||||
|
Balance
at December 31, 2004
|
—
|
$
|
—
|
9,806,946
|
$
|
981
|
—
|
$
|
—
|
$
|
108,564,776
|
$
|
(3,163,876
|
)
|
$
|
(88,668,031
|
)
|
$
|
16,733,850
|
||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(1,514,443
|
)
|
(1,514,443
|
)
|
|||||||||||||||||||
|
Issuance
of common stock
|
—
|
—
|
220,899
|
22
|
—
|
—
|
1,217,846
|
—
|
—
|
1,217,846
|
|||||||||||||||||||||
|
Issuance
of restricted common stock
|
—
|
—
|
181,743
|
18
|
—
|
—
|
1,954,274
|
(1,954,292
|
)
|
—
|
—
|
||||||||||||||||||||
|
Options
with intrinsic value to employees
|
—
|
—
|
—
|
—
|
—
|
—
|
(12,000
|
)
|
12,000
|
—
|
—
|
||||||||||||||||||||
|
Stock-based
compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
1,959,329
|
—
|
1,959,329
|
|||||||||||||||||||||
|
Tax
benefits from employee stock option plans
|
—
|
—
|
—
|
—
|
—
|
—
|
6,397
|
—
|
—
|
6,397
|
|||||||||||||||||||||
|
Balance
at December 31, 2005
|
—
|
$
|
—
|
10,209,588
|
$
|
1,021
|
—
|
$
|
—
|
$
|
111,731,293
|
$
|
(3,146,839
|
)
|
$
|
(90,182,474
|
)
|
$
|
18,403,001
|
||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(8,220,415
|
)
|
(8,220,415
|
)
|
|||||||||||||||||||
|
Issuance
of common stock
|
—
|
—
|
247,808
|
25
|
—
|
—
|
713,062
|
—
|
—
|
713,087
|
|||||||||||||||||||||
|
Issuance
of restricted common stock
|
—
|
—
|
52,465
|
6
|
—
|
—
|
(6
|
)
|
—
|
—
|
—
|
||||||||||||||||||||
|
Exercise of
stock warrants
|
—
|
—
|
92,859
|
9
|
—
|
—
|
191,991
|
—
|
—
|
192,000
|
|||||||||||||||||||||
|
Removal
of opening deferred stock compensation balance upon adoption of
SFAS
123(R)
|
—
|
—
|
—
|
—
|
—
|
—
|
(3,146,839
|
)
|
3,146,839
|
—
|
|||||||||||||||||||||
|
Stock-based
compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
3,836,781
|
—
|
—
|
3,836,781
|
|||||||||||||||||||||
|
Issuance
of stock warrants
|
—
|
—
|
—
|
—
|
—
|
—
|
1,290,566
|
—
|
—
|
1,290,566
|
|||||||||||||||||||||
|
Balance
at December 31, 2006
|
—
|
$
|
—
|
10,602,720
|
|||||||||||||||||||||||||||