SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 

 
FORM 10-K/A
 
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year ended December 31, 2006
 
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
(State or Other Jurisdiction of
Incorporation or Organization)
 
11-2936371
(I.R.S. Employer
Identification No.)
 
600 California Street, 9th Floor
San Francisco, CA
(Address of Principal Executive Offices)
 
 
94108
(Zip Code)

 
(415) 248-5600
(Registrant’s Telephone Number, Including Area Code)
 
Securities Registered Pursuant to Section 12(b) of the Act:
 
Common Stock, $0.0001 per share
 
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
 
Accelerated filer  x
 
Non-accelerated filer  o

 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o    No  x
 
The aggregate market value of the 9,694,647 shares of common stock of the Registrant issued and outstanding as of June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, excluding 841,827 shares of common stock held by affiliates of the Registrant was $69,898,405. This amount is based on the closing price of the common stock on the American Stock Exchange of $7.21 per share on June 30, 2006.
 
The number of shares of Registrant’s common stock outstanding as of February 13, 2007 was 10,591,309.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Part III of this Form 10-K incorporates by reference certain portions of the Registrant’s proxy statement for its 2007 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
 
PART I
   
 
Item 1.
 
 
Business
 
 
1
 
Item 1A.
 
 
Risk Factors
 
 
10
 
Item 1B.
 
 
Unresolved Staff Comments
 
 
16
 
Item 2.
 
 
Properties
 
 
17
 
Item 3.
 
 
Legal Proceedings
 
 
17
 
Item 4.
 
 
Submission of Matters to a Vote of Stockholders
 
 
17
 
PART II
   
 
Item 5.
 
 
Market for Registrant’s Common Stock and Related Stockholder Matters
 
 
18
 
Item 6.
 
 
Selected Financial Data
 
 
19
 
Item 7.
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations  
 
 
20
 
Item 7A.
 
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
32
 
Item 8.
 
 
Financial Statements and Supplementary Data
 
 
34
 
Item 9.
 
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
 
 
63
 
Item 9A.
 
 
Controls and Procedures
 
 
63
 
Item 9B.
 
 
Other Information
 
 
63
 
PART III
   
 
Item 10.
 
 
Directors and Executive Officers of the Registrant
 
 
65
 
Item 11.
 
 
Executive Compensation
 
 
69
 
Item 12.
 
 
Security Ownership of Certain Beneficial Owners and Management
 
 
69
 
Item 13.
 
 
Certain Relationships and Related Transactions
 
 
69
 
Item 14.
 
 
Principal Accounting Fees And Services
 
 
69
 
PART IV
   
 
Item 15.
 
 
Exhibits and Financial Statement Schedules 
 
 
70

 


Explanatory Note
 
This Amendment No. 1 on Form 10-K/A to the Annual Report on Form 10-K of MCF Corporation for the fiscal year ended December 31, 2006 is being filed for the purpose of adding certain exhibits incorporated by reference in Part IV which were omitted from the Annual Report on Form 10-K of MCF Corporation filed on February 15, 2007 (the “Original Filing”). In addition, as required by Rule 12b-15 promulgated under the Securities and Exchange Act of 1934, our Chief Executive Officer and Chief Financial Officer are providing currently dated Rule 13a-14(a) certifications in connection with this Form 10-K/A and currently dated written statements pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Except as described above, no other changes have been made to the Original Filing. For the convenience of the reader, this Form 10-K/A sets forth the original Form 10-K in its entirety. This Amendment continues to speak as of the date of the Original Filing, and the registrant has not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Original Filing. The filing of this Form 10-K/A is not a representation that any statements contained in items of Form 10-K other than the additional exhibits in Part IV are true or complete as of any date subsequent to the date of the Original Filing.
 
This 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 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 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 banking, equity research, institutional brokerage and asset management through our operating subsidiaries, Merriman Curhan Ford & Co. and MCF Asset Management, LLC. We focus on providing a full range of specialized and integrated services to institutional investors and corporate clients.
 
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 and trading of 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.
 
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, 2006, assets under management across our three fund products were nearly $30 million.
 
We acquired Catalyst Financial Planning & Investment Management, Inc. in February 2005. Catalyst, a Registered Investment Advisor, provides investment advice to clients that have invested approximately $130 million of assets. In January 2007, we sold Catalyst in order to focus on other recurring-revenue businesses, such as primary research and asset management, which we believe are faster growing and more profitable opportunities.
 
In November 2006, we signed a definitive agreement to acquire MedPanel, Inc., a privately-held company based in Cambridge, Massachusetts. Upon the closing of this acquisition, we will begin offering primary research services to top biotechnology, pharmaceutical, medical device, and financial services companies. Clients will pay subscription fees directly to MedPanel for access to its online research platform, providing clients with greater strategic direction for investment decisions, product development, and marketing.
 
We are headquartered in San Francisco, with additional offices in New York City, Newport Beach and Portland, Oregon. As of December 31, 2006, we had 166 employees. Merriman Curhan Ford & Co. is registered with the Securities and Exchange Commission as a broker-dealer and is a member of the National Association of Securities Dealers, Inc. and the Securities Investors Protection Corporation. MCF Asset Management, LLC is registered with the Securities and Exchange Commission.
 
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Principal Services
 
We have three business segments: the investment bank and securities broker-dealer, asset management and wealth management. Our investment bank and broker-dealer provides three service offerings: investment banking, brokerage and equity research. 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. We will add primary research as an additional business segment upon the closing of the MedPanel, Inc. acquisition.
 
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, 2006, we had 29 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 550 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.
 
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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, 2006, we were a market maker in approximately 970 securities.
 
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 2006 by adding new customers, and increasing the penetration of existing institutional customers that use our equity research and trading services in their investment process.
 
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 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, 2006, ICD clients have invested over $12 billion in money market funds from which ICD earns brokerage fees. ICD is a division of Merriman Curhan Ford & Co.
 
Capital Access Group. During 2006, we began raising 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 200 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, 2006, approximately 75% of the companies covered by our research professionals had market capitalizations of $1 billion or less.
 
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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.
 
In December 2006, Merriman Curhan Ford & Co. was ranked by The Motley Fool’s new research performance database, CAPS, which tracks the outperform and underperform stock ratings from professional and individual investors. Among professional analysts, Merriman Curhan Ford & Co. ranked fourth out of 116 firms tracked, with 72 percent stock picking accuracy.
 
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 research analysts include:
 
 
 
 
 
 
Telecommunications
 
Next-Generation Energy
 
Health Care
 
• Communications Technology
• Communications Services
• Wireless Technology
 
 
• Next-Generation Energy
• Industry Technology
 
 
• Aging and Aesthetics
• Infectious Disease and Oncology
• Pain, Lifestyle and Stress
Technology
     
Consumer
 
• Internet Applications and Services
• Digital Consumer Semiconductors
• Semiconductor Capital Equipment
• Semiconductor Assembly and Test Outsourcing
• Computer Hardware and Networking
 
 
 
• Gaming
• Media and Entertainment
• Restaurants
• Retail and Apparel
• Branded Consumer
• Retail: Specialty
 
 
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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. 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 market place and we plan to launch additional products in 2007.
 
5

 
Primary Research
 
In November 2006, we signed a definitive agreement to acquire MedPanel, Inc. Upon the closing of this acquisition, we will begin offering primary research services. MedPanel offers customized qualitative, quantitative and syndicated health care and medical research, and is best known for its in-depth, customized online focus groups. MedPanel, Inc. offers an online research platform providing clients across the globe greater strategic direction for investment decisions, product development, and marketing. By leveraging its proprietary methodology and vast network of medical experts, we believe we can quickly provide independent market data and information to clients in the biotechnology, pharmaceutical, medical device, and financial industries.
 
MedPanel’s product and service offerings arise from the intelligent application of its core technology and research platform. MedPanel’s 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, MedPanel has developed proprietary research products which it markets to multiple clients. These reports provide timely, consistent and cross-comparable data on a regular basis to subscribing clients.
 
MedPanel has experienced five consecutive years of revenue growth, recognizing approximately $5 million in revenue during 2006. We believe that once our firms have combined, MedPanel’s 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 MedPanel research through our existing institutional sales force. MedPanel has recently expanded their target market from biotechnology and pharmaceutical companies to investment managers and had not expended significant resources in that area. 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.
 
Wealth Management (Discontinued)
 
In February 2005, we acquired Catalyst Financial Planning & Investment Management, Inc. Catalyst is a Registered Investment Advisor registered with the SEC. Catalyst provides investment advice to clients that have invested approximately $130 million of assets. In January 2007, we sold Catalyst in order to focus on other recurring-revenue businesses, such as primary research and asset management, which we believe are faster growing and more profitable opportunities. While we currently do not have any specific plans, we do intend to pursue a wealth management strategy at some future date.
 
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. See “Item 1A. Risk Factors—Our business is dependent on the services of skilled professionals…” and—“Our business may suffer if we lose the services...”
 
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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.”
 
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.
 
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Liquidity risk is the potential that we would be unable to meet our obligations as they come due because of an inability to liquidate assets or obtain funding. Liquidity risk also includes the risk of having to sell assets at a loss to generate liquid funds, which is a function of the relative liquidity (market depth) of the asset(s) and general market conditions.
 
Compliance risk is the risk of loss, including fines, penalties and suspension or revocation of licenses by self-regulatory organizations, or from failing to comply with federal, state or local laws pertaining to financial services activities.
 
Legal risk is the risk that arises from potential contract disputes, lawsuits, adverse judgments, or adverse governmental or regulatory proceedings that can disrupt or otherwise negatively affect our operations or condition.
 
Reputation risk is the potential that negative publicity regarding our practices, whether factually correct or not, will cause a decline in our customer base, costly litigation, or revenue reductions.
 
We have a risk management program that sets forth various risk management policies, provides for a risk management committee and assigns risk management responsibilities. The program is designed to focus on the following:
 
 
·
Identifying, assessing and reporting on corporate risk exposures and trends;
 
 
·
Establishing and revising 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.
 
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As a broker-dealer registered with the Securities and Exchange Commission, or SEC, and as a member firm of the National Association of Securities Dealers, Inc., or NASD, we are subject to the net capital requirements of the SEC and the NASD. 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.
 
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 the NASD.
 
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 NASD 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.
 
9

 
Additional legislation and regulations, including those relating to the activities of our broker-dealer, changes in rules promulgated by the SEC, NASD 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.
 
 
ITEM 1A. RISK FACTORS
 
Investing in our securities involves a high degree of risk. In addition to the other information contained in this annual report, including reports we incorporate by reference, you should consider the following factors before investing in our securities.
 
We may not be able to maintain a positive cash flow and profitability.
 
Our ability to maintain a positive cash flow and profitability depends on our ability to generate and maintain greater revenue while incurring reasonable expenses. This, in turn, depends, among other things, on the development of our securities brokerage and investment banking business, and we may be unable to maintain profitability if we fail to do any of the following:
 
 
·
establish, maintain and increase our client base;
 
 
·
manage the quality of our services;
 
 
·
compete effectively with existing and potential competitors;
 
 
·
further develop our business activities;
 
 
·
manage expanding operations; and
 
 
·
attract and retain qualified personnel.
 
We cannot be certain that we will be able to sustain or increase a positive cash flow and profitability on a quarterly or annual basis in the future. Our inability to maintain profitability or positive cash flow could result in disappointing financial results, impede implementation of our growth strategy or cause the market price of our common stock to decrease. Accordingly, we cannot assure you that we will be able to generate the cash flow and profits necessary to sustain our business expectations, which makes our ability to successfully implement our business plan uncertain.
 
10

 
Because we are a developing company, the factors upon which we are able to base our estimates as to the gross revenue and the number of participating clients that will be required for us to maintain a positive cash flow and any additional financing that may be needed for this purpose are unpredictable. For these and other reasons, we cannot assure you that we will not require higher gross revenue, and an increased number of clients, securities brokerage and investment banking transactions, and/or more time in order for us to complete the development of our business that we believe we need to be able to cover our operating expenses, or obtain the funds necessary to finance this development. It is more likely than not that our estimates will prove to be inaccurate because actual events more often than not differ from anticipated events. Furthermore, in the event that financing is needed in addition to the amount that is required for this development, we cannot assure you that such financing will be available on acceptable terms, if at all.
 
The markets for securities brokerage and investment banking services are highly competitive. If we are not able to compete successfully against current and future competitors, our business and results of operations will be adversely affected.
 
We are engaged in the highly competitive financial services and investment industries. We compete with large Wall Street securities firms, securities subsidiaries of major commercial bank holding companies, U.S. subsidiaries of large foreign institutions, major regional firms, smaller niche players, and those offering competitive services via the Internet. Many competitors have greater personnel and financial resources than we do. Larger competitors are able to advertise their products and services on a national or regional basis and may have a greater number and variety of distribution outlets for their products, including retail distribution. Discount and Internet brokerage firms market their services through aggressive pricing and promotional efforts. In addition, some competitors have much more extensive investment banking activities than we do and therefore, may possess a relative advantage with regard to access to deal flow and capital.
 
Increased pressure created by any current or future competitors, or by our competitors collectively, could materially and adversely affect our business and results of operations. Increased competition may result in reduced revenue and loss of market share. Further, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service or marketing decisions or acquisitions that also could materially and adversely affect our business and results of operations. We cannot assure you that we will be able to compete successfully against current and future competitors. In addition, new technologies and the expansion of existing technologies may increase the competitive pressures on us.
 
We may experience reduced revenue due to declining market volume, securities prices and liquidity, which can also cause counterparties to fail to perform.
 
Our revenue may decrease in the event of a decline in the market volume of securities transactions, prices or liquidity. Declines in the volume of securities transactions and in market liquidity generally result in lower revenue from trading activities and commissions. Lower price levels of securities may also result in a reduction in our revenue from corporate finance fees, as well as losses from declines in the market value of securities held by us in trading. Sudden sharp declines in market values of securities can result in illiquid markets and the failure of counterparties to perform their obligations, as well as increases in claims and litigation, including arbitration claims from customers. In such markets, we may incur reduced revenue or losses in our principal trading, market-making, investment banking, and advisory services activities.
 
We may experience significant losses if the value of our marketable security positions deteriorates.
 
We conduct securities trading, market-making and investment activities for our own account, which subjects our capital to significant risks. These risks include market, credit, counterparty and liquidity risks, which could result in losses for us. These activities often involve the purchase, sale or short sale of securities as principal in markets that may be characterized as relatively illiquid or that may be particularly susceptible to rapid fluctuations in liquidity and price. Trading losses resulting from such trading could have a material adverse effect on our business and results of operations.
 
11

 
We may experience significant fluctuations in our quarterly operating results due to the nature of our business and therefore may fail to meet profitability expectations.
 
Our revenue and operating results may fluctuate from quarter to quarter and from year to year due to a combination of factors, including:
 
 
·
the level of institutional brokerage transactions and the level of commissions we receive from those transactions;
 
 
·
the valuations of our principal investments;
 
 
·
the number of capital markets transactions completed by our clients, and the level of fees we receive from those transactions; and
 
 
·
variations in expenditures for personnel, consulting and legal expenses, and expenses of establishing new business units, including marketing and technology expenses.
 
We record revenue from a capital markets advisory transaction only when we have rendered the services, the client is contractually obligated to pay and collection is probable; generally, most of the fee is earned only upon the closing of a transaction. Accordingly, the timing of our recognition of revenue from a significant transaction can materially affect our quarterly operating results.
 
We have registered one of our subsidiaries as a securities broker-dealer and, as such, are subject to substantial regulations. If we fail to comply with these regulations, our business will be adversely affected.
 
Because we have registered Merriman Curhan Ford & Co. with the Securities and Exchange Commission, or SEC, and the National Association of Securities Dealers, Inc., or NASD, as a securities broker-dealer, we are subject to extensive regulation under federal and state laws, as well as self-regulatory organizations. The principal purpose of regulation and discipline of broker-dealers is the protection of customers and the securities markets rather than protection of creditors and stockholders of broker-dealers. The Securities and Exchange Commission is the federal agency charged with administration of the federal securities laws. Much of the regulation of broker-dealers, however, has been delegated to self-regulatory organizations, such as the NASD and national securities exchanges. The NASD is our primary self-regulatory organization. These self-regulatory organizations adopt rules, which are subject to SEC approval, that govern the industry and conduct periodic examinations of member broker-dealers. Broker-dealers are also subject to regulation by state securities commissions in the states in which they are registered. The regulations to which broker-dealers are subject cover all aspects of the securities business, including net capital requirements, sales methods, trading practices among broker-dealers, capital structure of securities firms, record keeping and the conduct of directors, officers and employees. The SEC and the self-regulatory bodies may conduct administrative proceedings, which can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees. If we fail to comply with these rules and regulations, our business may be materially and adversely affected.
 
The regulatory environment in which we operate is also subject to change. Our business may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other United States or foreign governmental regulatory authorities or the NASD. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and the NASD.
 
Our business may suffer if we lose the services of our executive officers or operating personnel.
 
We depend on the continued services and performance of D. Jonathan Merriman, our Chairman and Chief Executive Officer, for our future success. In addition to Mr. Merriman, we are currently managed by a small number of key management and operating personnel. Our future success depends, in part, on the continued service of our key executive, management and technical personnel, and our ability to attract highly skilled employees. Our business could be harmed if any key officer or employee were unable or unwilling to continue in his or her current position. From time to time we have experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees. Competition for employees in our industry is significant. If we are unable to retain our key employees or attract, integrate or retain other highly qualified employees in the future, such failure may have a material adverse effect on our business and results of operations.
 
12

 
Our business is dependent on the services of skilled professionals, and may suffer if we can not recruit or retain such skilled professionals.
 
During 2006, no sales professional accounted for more than 10% of our revenue. We have a number of revenue producers employed by our securities brokerage and investment banking subsidiary. We do not have employment contracts with these employees. The loss of one or more of these employees could adversely affect our business and results of operations.
 
Our compensation structure may negatively impact our financial condition if we are not able to effectively manage our expenses and cash flows.
 
We are able to recruit and retain investment banking, research and sales and trading professionals, in part because our business model provides that we pay our revenue producing employees a percentage of their earned revenue. Compensation and benefits is our largest expenditure and this variable compensation component represents a significant proportion of this expense. Compensation for our employees is derived as a percentage of our revenue regardless of our profitability. Therefore, we may continue to pay individual revenue producers a significant amount of cash compensation as the overall business experiences negative cash flows and/or net losses. We may not be able to recruit or retain revenue producing employees if we modify or eliminate the variable compensation component from our business model.
 
We may be dependent on a limited number of customers for a significant portion of our revenue.
 
During 2006, no single customer accounted for more than 10% of our revenue. However, we have been dependent on one customer or on a small number of customers, for a large percentage of our revenue at some times in the past and we cannot assure you that we will not become so dependent again in the future. If we do become dependent on a single customer or small group of customers, the loss of one or more large customers could materially adversely affect our business and results of operations.
 
We may suffer losses through our investments in securities purchased in secondary market transactions or private placements.
 
Occasionally, our company, its officers and/or employees may make principal investments in securities through secondary market transactions or through direct investment in companies through private placements. In many cases, employees and officers with investment discretion on behalf of our company decide whether to invest in our company’s account or their personal account. It is possible that gains from investing will accrue to these individuals because investments were made in their personal accounts, and our company will not realize gains because it did not make an investment. Conversely, it is possible that losses from investing will accrue to our company, while these individuals do not experience losses in their personal accounts because the individuals did not make investments in their personal accounts.
 
We may be unable to effectively manage rapid growth that we may experience, which could place a continuous strain on our resources and, accordingly, adversely affect our business.
 
We plan to expand our operations. Our growth, if it occurs, will impose significant demands on our management, financial, technical and other resources. We must adapt to changing business conditions and improve existing systems or implement new systems for our financial and management controls, reporting systems and procedures and expand, train and manage a growing employee base in order to manage our future growth. We may not be able to implement improvements to our internal reporting systems in an efficient and timely manner and may discover deficiencies in existing systems and controls. We believe that future growth will require implementation of new and enhanced communications and information systems and training of our personnel to operate such systems. Furthermore, we may acquire existing companies or enter into strategic alliances with third parties, in order to achieve rapid growth. For us to succeed, we must make our existing business and systems work effectively with those of any strategic partners without undue expense, management distraction or other disruptions to our business. We may be unable to implement our business plan if we fail to manage any of the above growth challenges successfully. Our financial results may suffer and we could be materially and adversely affected if that occurs.
 
13

 
Our business and operations would suffer in the event of system failures.
 
Our success, in particular our ability to successfully facilitate securities brokerage transactions and provide high-quality customer service, largely depends on the efficient and uninterrupted operation of our computer and communications systems. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunication failures, break-ins, earthquake and similar events. Despite the implementation of network security measures, redundant network systems and a disaster recovery plan, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss of data or the inability to accept and fulfill customer orders. Additionally, computer viruses may cause our systems to incur delays or other service interruptions, which may cause us to incur additional operating expenses to correct problems we may experience. Any of the foregoing problems could materially adversely affect our business or future results of operations.
 
We are highly dependent on proprietary and third-party systems; therefore, system failures could significantly disrupt our business.
 
Our business is highly dependent on communications and information systems, including systems provided by our clearing brokers. Any failure or interruption of our systems, the systems of our clearing broker or third party trading systems could cause delays or other problems in our securities trading activities, which could have a material adverse effect on our operating results.
 
In addition, our clearing brokers provide our principal disaster recovery system. We cannot assure you that we or our clearing brokers will not suffer any systems failure or interruption, including one caused by an earthquake, fire, other natural disaster, power or telecommunications failure, act of God, act of war or otherwise, or that our or our clearing brokers’ back-up procedures and capabilities in the event of any such failure or interruption will be adequate.
 
Our common stock price may be volatile, which could adversely affect the value of your shares.
 
The market price of our common stock has in the past been, and may in the future continue to be, volatile. A variety of events may cause the market price of our common stock to fluctuate significantly, including:
 
 
·
variations in quarterly operating results;
 
 
·
our announcements of significant contracts, milestones, acquisitions;
 
 
·
our relationships with other companies;
 
 
·
our ability to obtain needed capital commitments;
 
 
·
additions or departures of key personnel;
 
 
·
sales of common stock, conversion of securities convertible into common stock, exercise of options and warrants to purchase common stock or termination of stock transfer restrictions;
 
 
·
general economic conditions, including conditions in the securities brokerage and investment banking markets;
 
 
·
changes in financial estimates by securities analysts; and
 
 
·
fluctuation in stock market price and volume.
 
14

 
Many of these factors are beyond our control. Any one of the factors noted herein could have an adverse effect on the value of our common stock.
 
In addition, the stock market in recent years has experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many companies and that often have been unrelated to the operating performance of such companies. These market fluctuations have adversely impacted the price of our common stock in the past and may do so in the future.
 
Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk.
 
Our risk management strategies and techniques may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk.
 
We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure, and breach of contract or other reasons. We are also subject to the risk that our rights against third parties may not be enforceable in all circumstances. As a clearing member firm, we finance our customer positions and could be held responsible for the defaults or misconduct of our customers. Although we regularly review credit exposures to specific clients and counterparties and to specific industries and regions that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to detect or foresee. In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, which in turn could adversely affect us. If any of the variety of instruments, processes and strategies we utilize to manage our exposure to various types of risk are not effective, we may incur losses.
 
We could be sued in a securities class action lawsuit.
 
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation often has been instituted against that company. Such litigation is expensive and diverts management’s attention and resources. We can not assure you that we will not be subject to such litigation. If we are subject to such litigation, even if we ultimately prevail, our business and financial condition may be adversely affected.
 
Your ability to sell your shares may be restricted because there is a limited trading market for our common stock.
 
Although our common stock is currently traded on the American Stock Exchange, an active trading market in our stock has been limited. Accordingly, you may not be able to sell your shares when you want or at the price you want.
 
Anti-takeover provisions of the Delaware General Corporation Law could discourage a merger or other type of corporate reorganization or a change in control even if it could be favorable to the interests of our stockholders.
 
The Delaware General Corporation Law contains provisions that may enable our management to retain control and resist our takeover. These provisions generally prevent us from engaging in a broad range of business combinations with an owner of 15% or more of our outstanding voting stock for a period of three years from the date that such person acquires his or her stock. Accordingly, these provisions could discourage or make more difficult a change in control or a merger or other type of corporate reorganization even if it could be favorable to the interests of our stockholders.
 
15

 
Because our Board of Directors can issue common stock without stockholder approval, you could experience substantial dilution.
 
Our Board of Directors has the authority to issue up to 300,000,000 shares of common stock and to issue options and warrants to purchase shares of our common stock without stockholder approval in certain circumstances. Future issuance of additional shares of our common stock could be at values substantially below the price at which you may purchase our stock and, therefore, could represent substantial dilution. In addition, our Board of Directors could issue large blocks of our common stock to fend off unwanted tender offers or hostile takeovers without further stockholder approval.
 
Our ability to issue additional preferred stock may adversely affect your rights as a common stockholder and could be used as an anti take-over device.
 
Our Articles of Incorporation authorize our Board of Directors to issue up to an additional 27,450,000 shares of preferred stock, without approval from our stockholders. If you hold our common stock, this means that our Board of Directors has the right, without your approval as a common stockholder, to fix the relative rights and preferences of the preferred stock. This would affect your rights as a common stockholder regarding, among other things, dividends and liquidation. We could also use the preferred stock to deter or delay a change in control of our company that may be opposed by our management even if the transaction might be favorable to you as a common stockholder.
 
Our officers and directors exercise significant control over our affairs, which could result in their taking actions of which other stockholders do not approve.
 
Our executive officers and directors, and entities affiliated with them, currently control approximately 26% of our outstanding common stock including exercise of their options and warrants. These stockholders, if they act together, will be able to exercise substantial influence over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control of us and might affect the market price of our common stock.
 
Any exercise of outstanding stock options and warrants will dilute then-existing stockholders’ percentage of ownership of our common stock.
 
We have a significant number of outstanding stock options and warrants. During 2006, shares issuable upon the exercise of these options and warrants, at prices ranging currently from approximately $0.35 to $49.00 per share, represent approximately 11% of our total outstanding stock on a fully diluted basis using the treasury stock method.
 
The exercise of the outstanding options and warrants would dilute the then-existing stockholders’ percentage ownership of our common stock. Any sales resulting from the exercise of options and warrants in the public market could adversely affect prevailing market prices for our common stock. Moreover, our ability to obtain additional equity capital could be adversely affected since the holders of outstanding options and warrants may exercise them at a time when we would also wish to enter the market to obtain capital on terms more favorable than those provided by such options and warrants. We lack control over the timing of any exercise or the number of shares issued or sold if exercises occur.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
We have filed Amendment No. 2 to our Registration Statement on Form S-4 with the Securities and Exchange Commissions on January 18, 2007 in connection with our acquisition of MedPanel, Inc. There are currently eight unresolved comments from the SEC, seven of which pertain to specific disclosures in the registration statement document and one comment regarding MedPanel’s accounting policy for revenue recognition. There are no unresolved comments from the SEC related to our accounting or periodic disclosures.
 
16

 
ITEM 2. PROPERTIES
 
As of December 31, 2006, all of our properties are leased. Our principal executive offices are located in San Francisco, California. We lease five additional offices to support our various investment banking and broker-dealer related activities. These offices are located in New York, NY, Cambridge, MA, Los Angeles, CA, Newport Beach, CA and Portland, OR. We believe the facilities we are now using are adequate and suitable for business requirements.
 
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 meruits, 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 is scheduled for June 2007. 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.
 
Westerman v. Western Capital Financial Group — NASD Arbitration
 
In May 2005, our broker-dealer subsidiary Merriman Curhan Ford & Co. was served with a claim in NASD Arbitration by Ms. Westerman. The claim names Western Capital Financial Group as one of several defendants. Western Capital Financial Group is the predecessor name of Merriman Curhan Ford & Co., the California corporation. The Western Capital Financial Group name was effective from September June 26, 1986 to July 14, 1998.
 
This claim arises from Ms. Westerman’s purchase of a variable annuity product in January 1990 from a predecessor of our broker-dealer subsidiary. MCF Corporation acquired Merriman Curhan Ford & Co. in December 2001. The Claimant alleges that a registered representative improperly recommended that she move her investment to different products on two occasions.
 
Claimant alleges a theory of predecessor liability against Merriman Curhan Ford & Co. Claimant prays for monetary damages in excess of $300,000 against the eleven named respondents. On May 1, 2006, we reached settlement with Claimant who accepted $8,500 to resolve the dispute. Merriman Curhan Ford & Co. has been dismissed from the arbitration and the matter is resolved.
 
In re Odimo Incorporated Securities Litigation
 
Merriman Curhan Ford & Co. was a defendant in a purported class action suit brought in connection with a registered offering involving Odimo Incorporated in which we served as co-manager for the company. The complaint, filed in the 17th Judicial Circuit Court for Broward County in Florida on September 30, 2005, alleged violations of federal securities laws against Odimo and certain of its officers as well as the company’s underwriters, including us, based on alleged misstatements and omissions in the registration statement. Recently, similar cases were consolidated and lead plaintiff’s counsel was assigned. Thereafter, an amended complaint was filed and the underwriters, including Merriman Curhan Ford & Co., were not named as defendants. This matter is now resolved.

Other Matters
 
Additionally, from time to time, we are involved in ordinary routine litigation incidental to our business.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
 
No matters were submitted to a vote of stockholders during the fourth quarter of 2006.
 
17

 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
Our common stock trades 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
 
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
 
 
2005
             
Fourth Quarter
 
$
8.33
 
$
7.07
 
Third Quarter
   
8.82
   
6.65
 
Second Quarter
   
10.71
   
7.98
 
First Quarter
   
13.93
   
9.31
 
 
The closing sale price for our common stock on February 13, 2007 was $5.27. The market price of our common stock has fluctuated significantly and may be subject to significant fluctuations in the future. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
According to the records of our transfer agent, we had approximately 276 stockholders of record as of February 13, 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.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
Information relating to compensation plans under which our equity securities are authorized for issuance is set forth in Note 9 of the Notes to our Consolidated Financial Statements in Part II, Item 8 of the Annual Report on Form 10-K.
 
Recent Sale of Unregistered Securities
 
None.
 
18

 
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 Item 8. “Financial Statements and Supplementary Data.”
 
   
2006
 
2005
 
2004
 
2003
 
2002
 
Statement of operations data:
                     
Revenue
 
$
51,818,638
 
$
43,184,315
 
$
38,368,310
 
$
18,306,011
 
$
6,469,494
 
Operating expenses
   
58,315,930
   
44,912,772
   
36,194,924
   
16,832,676
   
8,291,735
 
Operating income (loss)
   
(6,497,292
)
 
(1,728,457
)
 
2,173,386
   
1,473,335
   
(1,822,241
)
Gain (loss) on retirement of convertible notes payable(1)
   
(1,348,805
)
 
   
   
3,088,230
   
 
Interest income
   
484,909
   
446,273
   
120,431
   
39,483
   
45,345
 
Interest expense(2)
   
(535,014
)
 
(76,103
)
 
(169,787
)
 
(1,554,901
)
 
(1,364,903
)
Income tax expense
   
   
(142,425
)
 
(249,744
)
 
(74,884
)
 
 
Income (loss) from continuing operations
   
(7,896,202
)
 
(1,500,712
)
 
1,874,286
   
2,971,263
   
(3,141,799
)
Loss from discontinued operations
   
(324,213
)
 
(13,731
)
 
   
   
(262,843
)
Net income (loss)
 
$
(8,220,415
)
$
(1,514,443
)
$
1,874,286
 
$
2,971,263
 
$
(3,404,642
)
Diluted income (loss) from continuing operations
 
$
(0.79
)
$
(0.16
)
$
0.16
 
$
0.39
 
$
(1.24
)
Financial condition data:
                               
Cash and cash equivalents
 
$
13,746,590
 
$
11,138,923
 
$
17,459,113
 
$
6,142,958
 
$
1,402,627
 
Marketable securities owned
   
7,492,914
   
8,627,543
   
2,342,225
   
608,665
   
764,421
 
Total assets
   
30,498,213
   
27,694,413
   
25,007,824
   
9,703,946
   
3,769,127
 
Capital lease obligations
   
1,292,378
   
883,993
   
452,993
   
24,401
   
 
Notes payable, net
   
325,650
   
408,513
   
1,487,728
   
1,927,982
   
8,455,085
 
Stockholders’ equity (deficit)
 
$
16,215,020
 
$
18,403,001
 
$
16,733,850
 
$
5,261,210
 
$
(5,529,354
)
 

(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 $13,000 as of December 31, 2006. 
 
19

 
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 “Selected Consolidated Financial Data” and our consolidated financial statements and notes thereto included elsewhere in the Annual Report on Form 10-K.
 
Overview
 
We are a financial services holding company that provides investment banking, equity research, institutional brokerage and asset management through our operating subsidiaries, Merriman Curhan Ford & Co. and MCF Asset Management, LLC. We focus on providing a full range of specialized and integrated services to institutional investors and corporate clients.
 
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 and trading of 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.
 
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, 2006, assets under management across our three fund products were nearly $30 million.
 
In February 2005, we acquired Catalyst Financial Planning & Investment Management, Inc. Catalyst, a Registered Investment Advisor, provides investment advice to clients that have invested approximately $130 million of assets. In January 2007, we sold Catalyst in order to focus on other recurring-revenue businesses, such as primary research and asset management, which we believe are faster growing and more profitable opportunities. While we currently do not have any specific plans, we do intend to pursue a wealth management strategy at some future date. The results from this segment have been treated as discontinued operations in the consolidated financial statements.
 
Executive Summary
 
Our revenue grew 20% during 2006 to $51,819,000, a record high, with healthy expansion across each of our business lines. We also experienced our largest net loss during the current fiscal year. There were, however, several non-cash items included in the net loss, including the expensing of a stock warrant issued in connection with a financing transaction, stock-based compensation and the decline in value of some security positions held in our trading account. Cash and cash equivalents increased by $2,608,000 during 2006. Our company has consistently grown since we launched Merriman Curhan Ford & Co. at the beginning of 2002. Our focus during 2006 was to expand our revenue and build a stronger franchise through attracting and hiring experienced senior professionals. Our focus during 2007 will be 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. We believe that compensation and benefits expense as a percentage of revenue will decline as our annual revenue exceeds $100 million.
 
The investment banking team led our overall growth in 2006, with a 43% boost in revenue over 2005. We closed more than 30 corporate financing and strategic advisory transactions during the year. Our success in expanding our investment banking practice in 2006 can be attributed to the investment we have made over the last three years in hiring senior investment bankers and support professionals, our focus on fast growing companies in our target sectors such as next-generation energy, and a favorable business environment primarily during the first and fourth quarters.
 
20

 
Our institutional brokerage revenue continued to grow for the fourth consecutive year despite the increasing challenges facing this business. 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. We believe that we can continue to 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.
 
During 2006, our asset management group introduced its first absolute return investment products for institutional and high-net worth clients. The MCF Navigator fund and MCF Voyager fund began raising capital during 2006. Additionally, we were engaged as the sub-advisor for the MCF Focus fund. As of December 31, 2006, assets under management across our three fund products were nearly $30 million. We don’t expect revenue from managing our investment products to be significant until we can accumulate more than $100 million in assets under management.
 
We began raising capital for institutional hedge funds, venture capital and private equity clients for a fee through our newly formed Capital Access Group during 2006. We believe fee-based capital raising is an underserved area of the institutional brokerage industry. As of December 31, 2006, we had two professionals dedicated full-time to this effort. The revenue from Capital Access Group was not significant to our overall revenue during 2006, though we believe that this service offering is complimentary to our institutional brokerage business and has the potential for significant future growth.
 
Our overall headcount increased by 7% to 166 during 2006, which was significantly lower than our 2005 headcount growth rate of 34%. During 2006, we emphasized finding the most qualified employee for each position so that we can increase revenue per employee in future periods. We expect that, outside of the employees that we will assume from our acquisition of MedPanel, we will continue to increase our revenue producing employees at approximately the same rate as 2006 while maintaining our corporate support headcount unchanged.
 
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 entertainment, and other business development activities. These activities resulted in higher operating expenses in 2006.
 
During 2006, we began recording the expense associated with our stock options in accordance with SFAS 123(R). The adoption of this accounting pronouncement resulted in approximately $1.9 million in additional non-cash stock-based compensation during 2006 as compared to 2005. Our total non-cash stock-based compensation expense for 2006 was over $3.8 million. Management excludes non-cash stock-based compensation expense from net income (loss) for operational and financial decision making purposes because this expense may not be indicative of our core business operating results.
 
During 2006, we incurred approximately $2.2 million in losses resulting primarily from a decline in the mark-to-fair market value of positions in our proprietary trading account. Much of these losses were unrealized as of December 31, 2006.
 
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 primarily non-cash 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.
 
21

 
Business Environment
 
The equity and commodity markets were highly volatile during 2006. The first quarter started the year with a broad based U.S. and foreign equity market rally that resulted in many major U.S. indices reaching double digit returns, only to reverse in the second quarter and bring most indices to zero or negative year-to-date returns by June 30. During this period, several commodities reached new highs, including crude oil ($73/barrel), gold ($732/oz), silver ($14.7/oz), and unleaded gas above $3/gallon; all contributing to drive U.S. stock prices and investor confidence to year lows. By the beginning of the third quarter, many commodity markets reversed with crude oil dropping more than $20/barrel and gold spot prices dropping over $166/oz from highs reached only a few months earlier. In July, the Federal Reserve Board stopped raising the Federal Funds Discount rate and left it unchanged for the remainder of the year. In August, the U.S. stock market re-started a broad based rally that lasted to the end of the year. NASDAQ recovered from negative returns to end with a positive 9.5% and the Russell 2000 Growth Index was up over 13% in 2006.
 
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.
 
22

 
Results of Operations
 
The following table sets forth a summary of financial highlights for the three years ended December 31, 2006:
 
   
2006
 
2005
 
2004
 
Revenue:
             
Commissions
 
$
30,105,085
 
$
26,992,427
 
$
21,826,628
 
Principal transactions
   
(171,055
)
 
1,366,938
   
2,788,120
 
Investment banking
   
21,190,786
   
14,816,814
   
13,728,556
 
Other
   
693,822
   
8,136
   
25,006
 
Total revenue
   
51,818,638
   
43,184,315
   
38,368,310
 
Operating expenses:
                   
Compensation and benefits
   
42,840,431
   
31,659,488
   
26,765,265
 
Brokerage and clearing fees
   
2,614,513
   
2,312,616
   
2,383,831
 
Professional services
   
2,441,417
   
1,987,317
   
1,299,540
 
Occupancy and equipment
   
1,665,410
   
1,522,351
   
960,849
 
Communications and technology
   
2,969,872
   
1,918,693
   
1,404,702
 
Depreciation and amortization
   
645,129
   
490,165
   
162,318
 
Travel and entertainment
   
2,738,393
   
1,723,290
   
1,448,283
 
Other
   
2,400,765
   
3,298,852
   
1,770,136
 
Total operating expenses
   
58,315,930
   
44,912,772
   
36,194,924
 
Operating income (loss)
   
(6,497,292
)
 
(1,728,457
)
 
2,173,386
 
Loss on retirement of convertible note payable
   
(1,348,805
)
 
   
 
Interest income
   
484,909
   
446,273
   
120,431
 
Interest expense
   
(535,014
)
 
(76,103
)
 
(169,787
)
Income (loss) from continuing operations before income taxes
   
(7,896,202
)
 
(1,358,287
)
 
2,124,030
 
Income tax expense
   
   
(142,425
)
 
(249,744
)
Income (loss) from continuing operations
   
(7,896,202
)
 
(1,500,712
)
 
1,874,286
 
Loss on discontinued operations
   
(324,213
)
 
(13,731
)
 
 
Net income (loss)
 
$
(8,220,415
)
$
(1,514,443
)
$
1,874,286
 

 
Our revenue during 2006 increased by $8,634,000 or 20%, from 2005 reflecting strong growth in investment banking transactions and continued growth of our brokerage sales and trading activities. We incurred a net loss of $8,220,000 during 2006 as compared to net loss of $1,514,000 during 2005.
 
Our net loss during 2006 included the following non-cash items:
 
Stock-based compensation expense
 
$
3,836,781
 
Loss on retirement of convertible note payable
   
1,348,805
 
Depreciation and amortization
   
655,334
 
Write-off of uncollectible accounts receivable
   
383,565
 
Amortization of discounts on debt
   
146,776
 
Amortization of intangible assets
   
138,051
 
Total
 
$
6,509,312
 
 
23

 
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, 2006:
 
   
2006
 
2005
 
2004
 
Revenue:
             
Capital raising
 
$
15,939,480
 
$
13,396,781
 
$
11,845,148
 
Financial advisory
   
5,251,306
   
1,420,033
   
1,883,408
 
Total investment banking revenue
 
$
21,190,786
 
$
14,816,814
 
$
13,728,556
 
                     
Transaction Volumes:
                   
Public offerings:
                   
Capital underwritten participations
 
$
156,500,000
 
$
71,238,000
 
$
55,637,000
 
Number of transactions
   
15
   
8
   
10
 
Private placements:
                   
Capital raised
 
$
173,101,000
 
$
253,939,000
 
$
176,822,000
 
Number of transactions
   
15
   
14
   
13
 
Financial advisory:
                   
Transaction amounts
 
$
169,423,000
 
$
21,321,000
 
$
32,800,000
 
Number of transactions
   
1
   
1
   
2
 

 
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 more valuable to us building our long-term franchise over private placements. We participated in 15 equity underwriting transactions and lead our first initial public offering during 2006.
 
Our investment banking revenue amounted to $14,817,000, or 34% of our revenue during 2005, representing a 8% increase compared to $13,729,000 recognized in 2004. The increase in our investment banking revenue during 2005 can be primarily attributed to the increased awareness of our brand in the market place and a favorable business environment during 2005. We believe that the increase in revenue was partially offset by a senior management transition in the investment banking department. This transition was completed at the beginning of the third quarter 2005 with the hiring of a new head of investment banking.
 
During each of the three years ended December 31, 2006, no single investment banking customer accounted for more than 10% of our revenue.
 
24

 
Commissions and Principal Transactions Revenue
 
Our broker-dealer activity includes the following:
 
 
·
Commissions—Commissions include revenue resulting from executing stock trades for exchange-listed securities, over-the-counter securities and other transactions as agent.
 
 
·
Principal Transactions—Principal transactions consist of a portion of dealer spreads attributed to our securities trading activities as principal in NASDAQ-listed and other securities, and include transactions derived from our activities as a market-maker. Additionally, principal transactions include gains and losses resulting from market price fluctuations that occur while holding positions in our trading security inventory.
 
The following table sets forth our revenue and several operating metrics which we utilize in measuring and evaluating performance and the results of our trading activity operations:
 
   
2006
 
2005
 
2004
 
Revenue:
             
Commissions
 
$
30,105,085
 
$
26,992,427
 
$
21,826,628
 
Principal transactions:
                   
Customer principal transactions, proprietary trading and market making
 
$
(207,779
)
$
308,764
 
$
1,758,119
 
Investment portfolio
   
36,724
   
1,058,174
   
1,030,001
 
Total principal transactions revenue
 
$
(171,055
)
$
1,366,938
 
$
2,788,120
 
 
Transaction Volumes:
                   
Number of shares traded
   
937,005,000
   
983,755,000
   
919,112,000
 
Number of active clients
   
564
   
614
   
599
 

 
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.
 
Commissions amounted to $26,992,000, or 62%, of our revenue during 2005, representing a 24% increase over $21,827,000 recognized during 2004. The higher commissions were primarily attributed to the hiring of additional sales and research professionals and an increase in the penetration of active client accounts during 2005 as compared to 2004.
 
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 reduced revenue by $171,000 during 2006 and increased revenue by $1,367,000 during 2005. During 2006, we incurred $2,255,000 in losses resulting from a decline in the mark-to-fair market value of positions in our proprietary trading account. These losses were partially offset by revenue from principal trades for customers. During 2005, we recognized a $109,000 gain in our proprietary trading account. The $1,058,000 increase in the fair market value of our investment portfolio, which primarily consists of stock warrants and restricted common stock issued by our small and mid-cap clients, during 2005 resulted from gains in our stock warrant portfolio. The value of this portfolio has increased in each of the three years ended December 31, 2006.
 
25

 
During 2006 and 2005, no single brokerage customer accounted for more than 10% of our revenue, while one brokerage customer accounted for 10% of our revenue during 2004.
 
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, 2006:
 
   
2006
 
2005
 
2004
 
Incentive compensation and discretionary bonuses
 
$
26,563,425
 
$
17,990,288
 
$
17,694,420
 
Salaries and wages
   
9,076,815
   
8,995,642
   
5,801,390
 
Stock-based compensation
   
3,836,781
   
1,959,329
   
1,115,909
 
Payroll taxes, benefits and other
   
3,363,410
   
2,714,229
   
2,153,546
 
 
Total compensation and benefits
 
$
42,840,431
 
$
31,659,488
 
$
26,765,265
 
 
Total compensation and benefits as a percentage of revenue
   
83
%
 
73
%
 
70
%
Cash compensation and benefits as a percentage of revenue
   
75
%
 
69
%
 
67
%

 
The increase in compensation and benefits expense of $11,181,000 or 35%, from 2005 to 2006 and $4,894,000, or 18%, from 2004 to 2005 were 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 is equal to total compensation and benefits expense excluding stock-based compensation. 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. Cash compensation and benefits expense as a percentage of revenue increased to 69% during 2005 as compared to 67% in 2004. This increase is due in part to higher salaries and wages resulting from increased headcount in anticipation of our revenue growth.
 
Our headcount has increased from 116 at December 31, 2004 to 155 at December 31, 2005 to 166 as of December 31, 2006.  No single sales professional accounted for more than 10% of our revenue in 2006. One sales professional accounted for 12% of our revenue during 2005 and one sales professional accounted for 15% of our revenue during 2004.
 
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”. The increase in stock-based compensation during 2005 reflects our decision to grant restricted stock to new and existing employees beginning in the second half of 2003. Prior to 2003, we only granted stock options to employees which are accounted for under the intrinsic value method, in accordance with APB No. 25.
 
26

 
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 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. The decrease in brokerage and clearing fees of $71,000, or 3% from 2004 to 2005 while increasing commissions revenue during the same period reflects the cost savings that we achieved by negotiating lower fees with our clearing broker during the fourth quarter 2004. We anticipate brokerage and clearing fees for 2007 will increase sequentially over 2006 as we are forecasting a higher level of commissions revenue for 2007.
 
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 $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 costs. The increase of $688,000 or 53%, from 2004 to 2005 primarily reflected higher legal costs related to various corporate and investment banking activities. We anticipate professional services expense for 2007 will increase slightly as compared to 2006.
 
Occupancy and equipment expense includes office leases, equipment rental, equipment and leasehold maintenance costs. These expenses are largely fixed in nature and tend to increase as we hire additional employees. The increase of $143,000, or 9%, from 2005 to 2006 and $562,000, or 58%, from 2004 to 2005 resulted mostly from expansion of our offices and computer equipment purchases resulting from the hiring of additional investment banking, research, sales and trading professionals. During 2004, we moved into larger office spaces in San Francisco, New York, Boston, Los Angeles and Portland. During 2006, we leased additional space in San Francisco. We anticipate occupancy and equipment expense for 2007 will increase sequentially over 2006.
 
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 $1,051,000, or 55%, from 2005 to 2006 was primarily due to upgrading our trading order management system, as well as the increase in market data and quote services as we continue to expand our market maker activities. The increase of $514,000 or 37%, from 2004 to 2005 was due to higher telephone and data service fees incurred in our sales and trading operations. The higher telephone and data service charges are the result of increased headcount and the expansion of our offices, as well as higher costs to upgrade our information technology infrastructure. We anticipate communications and technology expense for 2007 will increase sequentially over 2006.
 
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 $155,000, or 32%, from 2005 to 2006 and $328,000, or 202%, from 2004 to 2005 were due to increased capital expenditures, including leasehold improvements to our San Francisco and New York offices during 2004, to facilitate our growth and expansion. We incurred additional leasehold improvements to our San Francisco offices during 2006. We anticipate depreciation and amortization expense for 2007 will increase sequentially over 2006.
 
27

 
Travel and entertainment expense primarily consists of business development costs for our investment banking business, travel expenses for client non-deal road shows and costs for our research analysts to visit the companies that they cover. Non-deal road shows represent meetings in which management teams of our corporate clients present directly to our institutional investors. The increase of $1,015,000, or 59%, from 2005 to 2006, and $275,000, or 19% from 2004 to 2005, were due to our continued effort to extend our penetration with our active clients, as well as seeking new business opportunities with potential clients. We anticipate travel and entertainment expense for 2007 will not increase or decrease significantly from 2006.
 
Other operating expense includes professional liability and property insurance, recruiting, investor conferences, printing, business licenses and taxes, office supplies and other miscellaneous office expenses. The decrease of $898,000 or 27%, from 2005 to 2006 was primarily due to the reversal of $500,000 bad debt write-off 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 increase of $1,529,000, or 86%, from 2004 to 2005 was attributed to higher costs associated with our annual investor conference, recruiting costs, and various business taxes. The 2005 expense also includes the write-off of the $500,000 note receivable from Ascend. We anticipate other operating expense for 2007 will increase sequentially over 2006.
 
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.
 
Interest Income
 
Interest income represents interest earned on our cash balances maintained at financial institutions. The increase of approximately $39,000, or 9%, from 2005 to 2006 and $326,000, or 271% from 2004 to 2005 were due to increases in average interest earning assets and average interest rates during these periods.
 
Interest Expense
 
Interest expense for 2006 included $352,000 for interest expense and $183,000 for amortization of discounts and debt issuance costs, while the 2005 amount included $66,000 for interest expense and $10,000 for amortization of discounts and debt issuance costs. The increase in 2006 resulted from interest incurred for the Midsummer debt from March through December of 2006. The higher amortization of discounts and debt issuance costs in 2006 was due to the issuance of notes payable to Midsummer Investment, Ltd.
 
Income Tax Expense
 
Income tax expense reflected taxes calculated for federal and state tax purposes. Realization of our deferred tax assets depends upon us generating sufficient taxable income in future years from the reversal of temporary differences and from net operating loss carryforwards. Due to the uncertainty of the timing and amount of such realization, we concluded that a full valuation allowance was required as of December 31, 2006 and 2005.
 
28

 
Critical Accounting Policies and Estimates
 
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to the valuation of securities owned and deferred tax assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
 
Valuation of Securities Owned
 
“Securities owned” and “Securities sold, but not yet purchased” in our consolidated statements of financial condition consist of financial instruments carried at fair value or amounts that approximate fair value, with related unrealized gains or losses recognized in our results of operations. The use of fair value to measure these financial instruments, with related unrealized gains and losses recognized immediately in our results of operations, is fundamental to our financial statements and is one of our most critical accounting policies. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
 
Fair values of our financial instruments are generally obtained from quoted market prices in active markets, broker or dealer price quotations, or alternative pricing sources with reasonable levels of price transparency. To the extent certain financial instruments trade infrequently or are non-marketable securities and, therefore, have little or no price transparency, we value these instruments based on management's estimates. The fair value of these securities is subject to a high degree of volatility and may be susceptible to significant fluctuation in the near term. Securities that contain restrictions are stated at a discount to the value of readily marketable securities. Stock warrants are carried at a discount to fair value as determined by using the Black-Scholes Option Pricing model.
 
Revenue Recognition
 
Commissions revenue and related clearing expenses are recorded on a trade-date basis as security transactions occur. Principal transactions in regular-way trades are recorded on the trade date, as if they had settled. Profit and loss arising from all securities and commodities transactions entered into for the account and risk of our company are recorded on a trade-date basis.
 
Investment banking revenue includes underwriting and private placement agency fees earned through our participation in public offerings and private placements of equity and convertible debt securities and fees earned as financial advisor in mergers and acquisitions and similar transactions. Underwriting revenue is earned in securities offerings in which we act as an underwriter and includes management fees, selling concessions and underwriting fees. Management fees are recorded on the offering date, selling concessions on settlement date, and underwriting fees at the time the underwriting is completed and the related income is reasonably determinable. Syndicate expenses related to securities offerings in which we act as underwriter or agent are deferred until the related revenue is recognized or we determine that it is more likely than not that the securities offerings will not ultimately be completed. Merger and acquisition fees and other advisory service revenue are generally earned and recognized only upon successful completion of the engagement. Underwriting revenue is presented net of related expenses. Unreimbursed expenses associated with private placement and advisory transactions are recorded as expenses as incurred.
 
As co-manager for registered equity underwriting transactions, management must estimate our share of transaction related expenses incurred by the lead manager in order to recognize revenue. Transaction related expenses are deducted from the underwriting fee and therefore reduces the revenue that is recognized as co-manager. Such amounts are adjusted to reflect actual expenses in the period in which we receive the final settlement, typically 90 days following the closing of the transaction.
 
29

 
Stock-Based Compensation
 
 On January 1, 2006, we adopted SFAS 123(R), “Shared-Based Payment,” which requires the measurement and recognition of compensation expense, based on estimated fair values, for all share-based awards, made to employees and directors, including stock options, non-vested stock, and participation in our employee stock purchase plan. Share-based compensation expense recognized in our consolidated statement of operations for the twelve months ended December 31, 2006 includes compensation expense for share-based awards granted (i) prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123, and (ii) subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).
 
We estimate the fair value of stock options granted using the Black-Scholes option pricing method. This option pricing model requires the input of highly subjective assumptions, including the option's expected life and the price volatility of the underlying stock. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. The Company calculated the expected term using the lattice model with specific assumptions about the suboptimal exercise behavior, post-vesting termination rates and other relevant factors. The expected stock price volatility was determined using the historical volatility of our common stock. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
 
Because share-based compensation expense is based on awards that are ultimately expected to vest, it has been reduced to account for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In our pro forma information required under SFAS 123 for the periods prior to fiscal 2006, we accounted for forfeitures as they occurred. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. 
 
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, 2006 and 2005 will not be realized based on the scheduling of deferred tax liabilities and projected taxable income. The amount of the deferred tax assets actually realized, however, could vary if there are differences in the timing or amount of future reversals of existing deferred tax liabilities or changes in the actual amounts of future taxable income. Should we determine that we will be able to realize all or part of the deferred tax asset in the future, an adjustment to the deferred tax asset will be recorded in the period such determination is made.
 
Liquidity and Capital Resources
 
Historically, we have satisfied our liquidity and regulatory capital needs through the issuance of equity and debt securities. As of December 31, 2006, liquid assets consisted primarily of cash and cash equivalents of $13,747,000 and marketable securities of $7,493,000, for a total of $21,240,000, which is $1,473,000 higher than $19,767,000 in liquid assets as of December 31, 2005.
 
Cash and cash equivalents increased by $2,608,000 during 2006. Cash provided by our operating activities for 2006 was $2,324,000 which consists of our net loss of $8,220,000 adjusted for non-cash expenses including stock-based compensation of $3,837,000, net unrealized loss on securities owned of $2,172,000, loss on retirement of convertible note payable of $1,349,000, depreciation and amortization of $655,000, provision for doubtful accounts of $384,000, amortization of discounts on debt of $147,000 and amortization of intangible assets of $138,000, partially offset by the increase in commissions and bonus payable of $2,976,000. Cash used in investing activities amounted to $137,000 during 2006 which included (i) an earn out payment in connection with our acquisition of Catalyst and (ii) our purchase of equipment and fixtures. Cash provided in our financing activities was $421,000. 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.
 
30

 
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, 2006, Merriman Curhan Ford & Co. had regulatory net capital of $4,593,000, which exceeded the required amount by $3,150,000.
 
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, 2006, 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
 
2007
 
$
106,775
 
$
2,008,017
 
$
647,858
 
2008
   
243,990
   
1,263,403
   
493,075
 
2009
   
   
832,568
   
273,834
 
2010
   
   
869,731
   
 
2011
   
   
709,898
   
 
Thereafter
   
   
   
 
Total commitments
 
$
350,765
 
$
5,683,617
 
$
1,414,767
 

 
Off-Balance Sheet Arrangements
 
We were not a party to any off-balance sheet arrangements during the three years ended December 31, 2006. In particular, we do not have any interest in so-called limited purpose entities, which include special purpose entities and structured finance entities.
 
Newly Issued Accounting Standards
 
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. We are currently evaluating the impact the adoption of this statement could have on our financial condition, results of operations and cash flows.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which supplements SFAS No. 109 by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. Interpretation No. 48 requires that the tax effects of a position be recognized only if it is “more-likely- than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust their financial statement to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment would be recorded directly to retained earnings in the period of adoption and reported as a change in accounting principle. This Interpretation is effective as of the beginning of the first fiscal year beginning after December 15, 2006. The Company will adopt Interpretation No. 48 on January 1, 2007 and is currently assessing the potential impact on our financial statements.
 
31

 
In February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments” which amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. We do not believe the adoption of this statement will have a material impact on our financial condition, results of operations or cash flows.

 
Quarterly Financial Data
 
The table below sets forth the operating results represented by certain items in our statements of operations for each of the eight quarters in the period ended December 31, 2006. This information is unaudited, but in our opinion reflects all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of such information in accordance with generally accepted accounting principles. The results for any quarter are not necessarily indicative of results for any future period.
 
   
2006
 
   
1st
 
2nd
 
3rd
 
4th
 
Revenue
 
$
11,553,908
 
$
14,871,260
 
$
7,426,490
 
$
17,966,980
 
Operating expenses
   
12,890,718
   
15,542,660
   
12,717,715
   
17,164,837
 
Operating income (loss)
   
(1,336,810
)
 
(671,400
)
 
(5,291,225
)
 
802,143
 
Net income (loss)
   
(1,349,608
)
 
(1,059,935
)
 
(5,109,051
)
 
(701,821
)
Basic net income (loss) per common share
 
$
(0.14
)
$
(0.11
)
$
(0.50
)
$
(0.07
)
Diluted net income (loss) per common share
 
$
(0.14
)
$
(0.11
)
$
(0.50
)
$
(0.07
)

 
   
2005
 
   
1st
 
2nd
 
3rd
 
4th
 
Revenue
 
$
12,408,710
 
$
9,102,641
 
$
8,916,872
 
$
12,756,092
 
Operating expenses
   
11,534,288
   
10,172,975
   
10,432,324
   
12,773,185
 
Operating income (loss)
   
874,422
   
(1,070,334
)
 
(1,515,452
)
 
(17,093
)
Net income (loss)
   
648,425
   
(726,336
)
 
(1,492,744
)
 
56,212
 
Basic net income (loss) per common share
 
$
0.07
 
$
(0.08
)
$
(0.16
)
$
0.01
 
Diluted net income (loss) per common share
 
$
0.05
 
$
(0.08
)
$
(0.16
)
$
0.00
 
 
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.
 
32

 
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.
 
33

 
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.

 
34

 
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, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. 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, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
 
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 effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, 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 12, 2007, expressed an unqualified opinion thereon.
 
 
 
/s/ Ernst & Young LLP
 
San Francisco, California
February 12, 2007

35

 
MCF CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Year ended December 31,
 
   
2006
 
2005
 
2004
 
Revenue:
             
Commissions
 
$
30,105,085
 
$
26,992,427
 
$
21,826,628
 
Principal transactions
   
(171,055
)
 
1,366,938
   
2,788,120
 
Investment banking
   
21,190,786
   
14,816,814
   
13,728,556
 
Other
   
693,822
   
8,136
   
25,006
 
Total revenue
   
51,818,638
   
43,184,315
   
38,368,310
 
                     
Operating expenses:
                   
Compensation and benefits
   
42,840,431
   
31,659,488
   
26,765,265
 
Brokerage and clearing fees
   
2,614,513
   
2,312,616
   
2,383,831
 
Professional services
   
2,441,417
   
1,987,317
   
1,299,540
 
Occupancy and equipment
   
1,665,410
   
1,522,351
   
960,849
 
Communications and technology
   
2,969,872
   
1,918,693
   
1,404,702
 
Depreciation and amortization
   
645,129
   
490,165
   
162,318
 
Travel and entertainment
   
2,738,393
   
1,723,290
   
1,448,283
 
Other
   
2,400,765
   
3,298,852
   
1,770,136
 
Total operating expenses
   
58,315,930
   
44,912,772
   
36,194,924
 
Operating income (loss)
   
(6,497,292
)
 
(1,728,457
)
 
2,173,386
 
Gain (loss) on retirement of convertible note payable
   
(1,348,805
)
 
   
 
Interest income
   
484,909
   
446,273
   
120,431
 
Interest expense
   
(535,014
)
 
(76,103
)
 
(169,787
)
Income (loss) from continuing operations before income taxes
   
(7,896,202
)
 
(1,358,287
)
 
2,124,030
 
Income tax expense
   
   
(142,425
)
 
(249,744
)
Income (loss) from continuing operations
   
(7,896,202
)
 
(1,500,712
)
 
1,874,286
 
Loss from discontinued operations
   
(324,213
)
 
(13,731
)
 
 
Net income (loss)
 
$
(8,220,415
)
$
(1,514,443
)
$
1,874,286
 
Basic net income (loss) per share:
                   
Income (loss) from continuing operations
 
$
(0.79
)
$
(0.16
)
$
0.21
 
Loss from discontinued operations
 
$
(0.03
)
$
 
$
 
Net income (loss)
 
$
(0.82
)
$
(0.16
)
$
0.21
 
                     
Diluted net income (loss) per share:
                   
Income (loss) from continuing operations
 
$
(0.79
)
$
(0.16
)
$
0.16
 
Loss from discontinued operations
 
$
(0.03
)
$
 
$
 
Net income (loss)
 
$
(0.82
)
$
(0.16
)
$
0.16
 
                     
Weighted average number of common shares:
                   
Basic
   
9,989,265
   
9,500,748
   
8,368,293
 
Diluted
   
9,989,265
   
9,500,748
   
11,167,875
 

The accompanying notes are an integral part of these consolidated financial statements.
 
36


MCF CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
   
December 31,
 
   
2006
 
2005
 
ASSETS
         
Cash and cash equivalents
 
$
13,746,590
 
$
11,138,923
 
Securities owned:
             
Marketable, at fair value
   
7,492,914
   
8,627,543
 
Not readily marketable, at estimated fair value
   
1,489,142
   
1,065,743
 
Restricted cash
   
629,427
   
627,606
 
Due from clearing broker
   
551,831
   
973,138
 
Accounts receivable, net
   
2,715,271
   
2,073,195
 
Equipment and fixtures, net
   
1,586,630
   
1,378,235
 
Prepaid expenses and other assets
   
2,286,408
   
1,810,030
 
Total assets
 
$
30,498,213
 
$
27,694,413
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
Accounts payable
 
$
1,121,623
 
$
901,138
 
Commissions and bonus payable
   
7,711,805
   
4,735,892
 
Accrued expenses
   
2,285,670
   
2,201,499
 
Due to clearing and other brokers
   
11,114
   
118,798
 
Securities sold, not yet purchased
   
1,534,953
   
41,579
 
Capital lease obligation
   
1,292,378
   
883,993
 
Convertible notes payable, net
   
187,079
   
176,741
 
Notes payable
   
138,571
   
231,772
 
Total liabilities
   
14,283,193
   
9,291,412
 
               
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, 2006 and 2005, 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, 2006 and 2005; 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, 2006 and 2005; aggregate liquidation preference of $0
   
   
 
Common stock, $0.0001 par value; 300,000,000 shares authorized; 10,602,720 and 10,209,588 shares issued and outstanding as of December 31, 2006 and 2005, respectively
   
1,061
   
1,021
 
Additional paid-in capital
   
114,616,848
   
111,731,293
 
Deferred compensation
   
   
(3,146,839
)
Accumulated deficit
   
(98,402,889
)
 
(90,182,474
)
Total stockholders’ equity
   
16,215,020
   
18,403,001
 
Total liabilities and stockholders’ equity
 
$
30,498,213
 
$
27,694,413
 

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

37

 

MCF CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
   
Preferred Stock
 
 Common Stock
 
 Treasury Stock
 
Additional
Paid-in
 
Deferred
 
Accumulated
      
   
Shares
 
Amount
 
 Shares
 
Amount
 
 Shares
 
Amount
 
Capital
 
Compensation
 
Deficit
 
 Total
 
Balance at December 31, 2003
   
93,886
 
$
9
   
7,993,096
 
$
800
   
(11,429
)
$
(51,950
)
$
95,563,149
 
$
(1,244,490
)
$
(89,006,308
)
$
5,261,210
 
Net income
   
   
   
   
   
   
   
   
   
1,874,286
   
1,874,286
 
Issuance of common stock
   
   
   
1,218,319
   
122
   
   
   
7,682,413
   
   
   
7,682,535
 
Issuance of restricted common stock
   
   
   
200,873
   
20
   
   
   
2,875,191
   
(2,875,191
)
 
   
 
Issuance of treasury stock
   
   
   
   
   
11,429
   
51,950
   
311,703
   
   
(230,853
)
 
132,800
 
Issuance of stock warrants
   
   
   
   
   
   
   
1,222,250
   
   
(1,212,399
)
 
9,851
 
Conversion of preferred stock to common stock
   
(122,457
)
 
(12
)
 
122,457
   
12
   
   
   
   
   
   
 
Conversion of debt to common stock
   
   
   
272,201
   
27
   
   
   
449,973
   
   
   
450,000
 
Preferred stock dividend
   
28,571
   
3
   
   
   
   
   
92,754
   
   
(92,757
)
 
 
Options with intrinsic value to employees
   
   
   
   
   
   
   
160,084
   
(139,250
)
 
   
20,834
 
Amortization of deferred compensation
   
   
   
   
   
   
   
   
1,095,075
   
   
1,095,075
 
Tax benefits from employee stock option plans
   
   
   
   
   
   
   
207,259
   
   
   
207,259
 
 
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
   
   
 
Amortization of deferred 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
         
 
Amortization of 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
 
$
1,061
   
 
$
 
$
114,616,848
 
$
 
$
(98,402,889
)
$
16,215,020
 

The accompanying notes are an integral part of these consolidated financial statements.
 
38

 
MCF CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Year ended December 31,
 
   
2006
 
2005
 
2004
 
Cash flows from operating activities:
             
Net income (loss)
 
$
(8,220,415
)
$
(1,514,443
)
$
1,874,286
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                   
Depreciation and amortization
   
655,334
   
493,672
   
162,318
 
Common stock issued for services
   
   
   
215,800
 
Stock-based compensation
   
3,836,781
   
1,959,329
   
1,125,760
 
Tax benefits from employee stock option plans
   
   
6,397
   
207,259
 
Amortization of discounts on convertible notes payable
   
146,776
   
10,335
   
95,793
 
Amortization of debt issuance costs
   
35,757
   
   
23,340
 
Amortization of intangible asset
   
138,051
   
34,366
   
 
Loss on retirement of convertible note payable
   
1,348,805
   
   
 
Write-off of receivable from common stock issued to Ascend
   
   
556,493
   
 
Loss on disposal of equipment and fixtures
   
14,196
   
   
30,398
 
Provision for doubtful accounts
   
383,565
   
   
21,100
 
Common stock received for services
   
   
   
(461,933
)
Unrealized (gain) loss on securities owned
   
2,172,407
   
(1,491,688
)
 
29,571
 
Changes in operating assets and liabilities:
                   
Marketable and non-marketable securities owned
   
(203,536
)
 
(5,558,454
)
 
(923,230
)
Restricted cash
   
(1,821
)
 
(2,606
)
 
(125,000
)
Due from clearing broker
   
421,307
   
(185,276
)
 
(12,165
)
Accounts receivable
   
(789,908
)
 
(550,295
)
 
(1,102,257
)
Prepaid expenses and other assets
   
(786,306
)
 
(474,907
)
 
(596,998
)
Accounts payable
   
220,485
   
468,387
   
252,036
 
Commissions and bonus payable
   
2,975,913
   
78,657
   
1,834,047
 
Accrued liabilities
   
84,171
   
956,932
   
1,813,339
 
Due to clearing and other brokers
   
(107,684
)
 
19,593
   
(55,790
)
Net cash provided by (used in) operating activities
   
2,323,878
   
(5,193,508
)
 
4,407,674
 
 
Cash flows from investing activities:
                   
Purchase of equipment and fixtures
   
(78,216
)
 
(203,665
)
 
(546,899
)
Acquisition of Catalyst
   
(58,558
)
 
(353,882
)
 
 
Investment in MCF Navigator fund
   
(7,500,000
)
 
   
 
Redemption from MCF Navigator fund
   
7,500,000
   
   
 
Proceeds from sale of equipment and fixtures
   
   
   
2,000
 
Net cash used in investing activities
   
(136,774
)
 
(557,547
)
 
(544,899
)
 
Cash flows from financing activities:
                   
Proceeds from the issuance of common stock
   
603,070
   
591,648
   
6,579,377
 
Proceeds from the exercise of stock options and warrants
   
302,017
   
126,220
   
1,020,158
 
Proceeds from convertible debenture and stock warrant
   
7,500,000
   
   
 
Repayment of convertible debenture
   
(7,500,000
)
 
   
 
Debt service principal payments
   
(484,524
)
 
(1,287,003
)
 
(146,155
)
Net cash provided by (used in) financing activities
   
420,563
   
(569,135
)
 
7,453,380
 
Increase (decrease) in cash and cash equivalents
   
2,607,667
   
(6,320,190
)
 
11,316,155
 
Cash and cash equivalents at beginning of year
   
11,138,923
   
17,459,113
   
6,142,958
 
Cash and cash equivalents at end of year
 
$
13,746,590
 
$
11,138,923
 
$
17,459,113
 

The accompanying notes are an integral part of these consolidated financial statements.
 
39

 
MCF CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
   
Year ended December 31,
 
   
2006
 
2005
 
2004
 
Supplementary disclosure of cash flow information:
             
Cash paid during the year:
             
Interest
 
$
323,345
 
$
99,442
 
$
101,613
 
Income taxes
 
$
18,800
 
$
179,147
 
$
311,928
 
Non-cash investing and financing activities:
                   
Conversion of notes payable to common stock
 
$
 
$
 
$
450,000
 
Issuance of restricted stock
 
$
 
$
1,954,292
 
$
2,875,211
 
Issuance of treasury stock
 
$
 
$
 
$
230,853
 
Stock warrants issued to investors
 
$
 
$
 
$
1,212,399
 
Issuance / cancellation of stock options with intrinsic value
 
$
 
$
12,000
 
$
139,250
 
Preferred stock dividends
 
$
 
$
 
$
92,757
 
Purchase of equipment and fixtures with capital lease
 
$
799,709
 
$
625,445
 
$
488,193
 
Conversion of preferred stock to common stock
 
$
 
$
 
$
86
 
Acquisition of Catalyst
 
$
 
$
74,940
 
$
 

The accompanying notes are an integral part of these consolidated financial statements.
 
40

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. Description of Business
 
MCF Corporation is a financial services holding company that provides investment banking, equity research, institutional brokerage and asset management through its operating subsidiaries, Merriman Curhan Ford & Co. and MCF Asset Management, LLC. Merriman Curhan Ford & Co. is an investment bank and securities broker-dealer focused on fast growing companies and growth-oriented institutional investors. MCF Asset Management, LLC manages absolute return investment products for institutional and high-net worth clients. Merriman Curhan Ford & Co. is registered with the Securities and Exchange Commission as a broker-dealer and is a member of the National Association of Securities Dealers, Inc. and Securities Investor Protection Corporation.
 
MCF Corporation, also referred to as the Company, formerly Ratexchange Corporation, NetAmerica.com Corporation and Venture World, Ltd., is a Delaware corporation organized on May 6, 1987. In July 2000, the Company’s common stock was listed on the American Stock Exchange and currently trades under the symbol “MEM.” The Company’s corporate office is located in San Francisco, California.
 
Prior to 2002, the Company was engaged in the creation of liquid marketplaces for bandwidth and other telecommunications products, as well as providing trading strategies in the futures and derivatives markets. This prior business experienced significant net losses that resulted in an accumulated deficit of $87,731,000 as of December 31, 2001.
 
In December 2001, the Company acquired Instream Securities, Inc. and later changed the name of the entity to RTX Securities Corporation, then to Merriman Curhan Ford & Co. The Company formed MCF Asset Management, LLC in January 2004 and MCF Wealth Management, LLC in January 2005 as wholly owned subsidiaries. MCF Wealth Management, LLC is accounted for as discontinued operations in these consolidated financial statements.
 
2. Summary of Significant Accounting Policies
 
Principles of Consolidation
 
As of December 31, 2006, MCF Corporation wholly owned three U.S. subsidiaries that have been consolidated in the accompanying financial statements. The subsidiaries are Merriman Curhan Ford & Co., MCF Asset Management, LLC and MCF Wealth Management, LLC. All significant inter-company accounts and transactions have been eliminated.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments purchased with original maturities of ninety days or less to be cash equivalents.
 
Restricted Cash
 
Restricted cash includes cash deposited with our clearing broker and cash collateral for a stand-by letter of credit with a commercial bank.
 
Securities Owned
 
“Securities owned” and “Securities sold, but not yet purchased” in the consolidated statements of financial condition consist of financial instruments carried at fair value or amounts that approximate fair value, with related unrealized gains or losses recognized in the results of operations. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
 
41

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
Fair values of the financial instruments are generally obtained from quoted market prices in active markets, broker or dealer price quotations, or alternative pricing sources with reasonable levels of price transparency. To the extent certain financial instruments trade infrequently or are non-marketable securities and, therefore, have little or no price transparency, the Company values these instruments based on management's estimates. The fair value of these securities is subject to a high degree of volatility and may be susceptible to significant fluctuation in the near term. Securities that contain resale restrictions are stated at a discount to the value of readily marketable securities. Stock warrants are carried at a discount to fair value as determined by using the Black-Scholes Option Pricing model due to illiquidity.
 
Equipment and Fixtures
 
Equipment and fixtures are reported at historical cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over useful lives of three to five years. Leasehold improvements are amortized using the straight-line method over the lesser of the life of the lease or the service lives of the improvements.
 
Long-Lived Assets
 
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. When assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
 
Discontinued Operations and Assets Held For Sale

For those businesses where management has committed to a plan to divest, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. For businesses classified as discontinued operations, statement of operations results are reclassified from their historical presentation to discontinued operations in the consolidated statements of operations for all periods presented. The gains or losses associated with these divested businesses are recorded in income (loss) from discontinued operations in the consolidated statements of operations. Additionally, segment information does not include the results of businesses classified as discontinued operations.
 
Commissions and Principal Transactions Revenue
 
Commissions revenue includes revenue resulting from executing stock exchange-listed securities, over-the counter securities and other transactions as agent for the Company's clients. Principal transactions consist of a portion of dealer spreads attributed to the Company's securities trading activities as principal in NASDAQ-listed and other securities, and include transactions derived from activities as a market-maker. Additionally, principal transactions include gains and losses resulting from market price fluctuations that occur while holding positions in trading security inventory.
 
Commissions revenue and related clearing expenses are recorded on a trade-date basis as security transactions occur. Principal transactions in regular-way trades are recorded on the trade date, as if they had settled. Profit and loss arising from all securities and commodities transactions entered into for the account and risk of the Company are recorded on a trade-date basis.
 
42

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
Investment Banking Revenue
 
Investment banking revenue includes underwriting and private placement agency fees earned through the Company's participation in public offerings and private placements of equity and convertible debt securities and fees earned as financial advisor in mergers and acquisitions and similar transactions. Underwriting revenue is earned in securities offerings in which the Company acts as an underwriter and includes management fees, selling concessions and underwriting fees. Management fees are recorded on the offering date, selling concessions on settlement date, and underwriting fees at the time the underwriting is completed and the related income is reasonably determinable. Syndicate expenses related to securities offerings in which the Company acts as underwriter or agent are deferred until the related revenue is recognized or we determine that it is more likely than not that the securities offerings will not ultimately be completed. Merger and acquisition fees and other advisory service revenue are generally earned and recognized only upon successful completion of the engagement. Underwriting revenue is presented net of related expenses. Unreimbursed expenses associated with private placement and advisory transactions are recorded as expenses as incurred.

As co-manager for registered equity underwriting transactions, management must estimate the Company's share of transaction related expenses incurred by the lead manager in order to recognize revenue. Transaction related expenses are deducted from the underwriting fee and therefore reduces the revenue that is recognized as co-manager. Such amounts are adjusted to reflect actual expenses in the period in which the Company receives the final settlement, typically 90 days following the closing of the transaction.
 
Share-Based Compensation Expense
 
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) 123 (Revised 2004), “Share-Based Payment,” or SFAS 123(R),which requires the measurement and recognition of compensation expense, based on estimated fair values, for all share-based awards, made to employees and directors, including stock options, non-vested stock, and participation in the Company's employee stock purchase plan. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 107 relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

The Company adopted SFAS 123(R) using the modified prospective application transition method, as of January 1, 2006, the first day of the Company's fiscal year 2006. The Company's consolidated financial statements as of and for the year ended December 31, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective application transition method, the Company's consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation expense recognized under SFAS 123(R) for the year ended December 31, 2006 was $3,837,000.
 
Prior to the adoption of SFAS 123(R), the Company accounted for share-based awards to employees and directors using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” as allowed under SFAS 123, “Accounting for Stock-Based Compensation.” Share-based compensation expense of $1,959,000 for the year ended December 31, 2005 and $1,116,000 for the year ended December 31, 2004 was solely related to non-vested stock awards and stock options granted with intrinsic value that the Company had been recognizing in its consolidated statements of operations in accordance with the provisions set forth above. In accordance with the intrinsic value method, no share-based compensation expense was otherwise recognized in the Company's consolidated statements of operations because the exercise price of nearly all of the Company's stock options granted to employees and directors equaled the fair market value of the underlying stock at the grant date.
 
43

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
SFAS 123(R) requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company's consolidated statements of operations over the requisite service periods. Share-based compensation expense recognized in the Company's consolidated statement of operations for the year ended December 31, 2006 includes compensation expense for share-based awards granted (i) prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123, and (ii) subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Compensation expense for all share-based awards subsequent to December 31, 2005 is recognized using the straight-line single-option method. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense has been reduced to account for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company's pro forma information required under SFAS 123 for periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

To calculate option-based compensation under SFAS 123(R), the Company used the Black-Scholes option pricing model, which it had previously used for valuation of option-based awards for its pro forma information required under SFAS 123 for periods prior to fiscal 2006. The Company's determination of fair value of option-based awards on the date of grant using the Black-Scholes model is affected by the Company's stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to the Company's expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.
 
No tax benefits were attributed to the share-based compensation expense because a valuation allowance was maintained for all net deferred tax assets.

Income Taxes
 
The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce deferred tax assets to an amount whose realization is more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.
 
Earnings (Loss) Per Share
 
Basic earnings (loss) per share is computed by dividing net income (loss), less dividends on preferred stock, by the weighted average number of common shares outstanding. Diluted earnings per share is calculated for the year ended December 31, 2004 by dividing net income less dividends on preferred stock, by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding. Diluted loss per share is unchanged from basic loss per share for the years ended December 31, 2006 and 2005, because the addition of common shares that would be issued assuming exercise or conversion would be anti-dilutive.
 
44

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
Concentrations
 
Substantially all of the Company’s cash and cash equivalents are held at three major U.S. financial institutions. The majority of the Company’s cash equivalents consist of short-term marketable securities. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand.
 
As of December 31, 2006, the Company owned 5,000,000 shares of Points International in its proprietary trading account with a fair market value of $3,200,000. The Company did not own any concentrated security positions as of December 31, 2005.
 
During 2006, no sales professional accounted for more than 10% of revenue, while one sales professional accounted for 12% of revenue in 2005 and 15% of revenue in 2004. During 2006 and 2005, no single customer accounted for more than 10% of revenue while one customer accounted for 10% of revenue during 2004.
 
Fair Value of Financial Instruments
 
The carrying amounts of the Company’s financial instruments, which include securities owned, cash deposited with the Company’s clearing organization, receivables, accounts payable, and other accrued expenses, approximate their fair values due to their short maturities. The fair value of the Company’s long-term notes payable is estimated based on the current rates offered to the Company for debt of the same remaining maturities.
 
Segment Reporting
 
The Company organizes its operations into three operating segments for the purpose of making operating decisions and assessing performance. These operating segments are organized along operating subsidiaries, Merriman Curhan Ford & Co., MCF Asset Management, LLC and MCF Wealth Management, LLC. Accordingly, the Company operated in three reportable operating segments in the United States during 2006 and 2005. However, only Merriman Curhan Ford & Co. produced financial results that were material to the Company. As of December 31, 2006, MCF Wealth Management, LLC has been classified as held for sale and the results of operations for this subsidiary have been treated as discontinued operations.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates.
 
45

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
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. The Company is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which supplements SFAS No. 109 by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. Interpretation No. 48 requires that the tax effects of a position be recognized only if it is “more-likely- than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust their financial statement to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment would be recorded directly to retained earnings in the period of adoption and reported as a change in accounting principle. This Interpretation is effective as of the beginning of the first fiscal year beginning after December 15, 2006. The Company will adopt Interpretation No. 48 on January 1, 2007 and is currently assessing the potential impact on its financial statements.

In February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments” which amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. The Company does not believe the adoption of this statement will have a material impact on its financial condition, results of operations or cash flows.

3. Securities Owned
 
The Company trades equity and debt securities for clients in a broker or dealer capacity. While trading activities are primarily generated by client order flow, the Company also takes selective proprietary positions based on expectations of future market movements and conditions. As of December 31, 2006 and 2005, fair value of marketable equity securities owned by the Company was approximately $7,493,000 and $8,628,000, respectively.
 
Securities owned that are not readily marketable consisted of notes receivable, convertible notes receivable, unregistered common stock and stock warrants. As of December 31, 2006 and 2005, the discounted fair value of the securities owned that are not readily marketable was approximately $1,118,000 and $1,066,000, respectively, based on management estimates.
 
46

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
4. Equipment and Fixtures
 
Equipment and fixtures consisted of the following:
 
   
December 31,
 
   
2006
 
2005
 
Computer equipment
 
$
723,751
 
$
597,470
 
Furniture and equipment
   
1,051,994
   
729,675
 
Software
   
151,821
   
151,821
 
Leasehold improvements
   
1,023,729
   
621,270
 
     
2,951,295
 
2,100,236
 
Less accumulated depreciation
   
(1,364,665
)
 
(722,001
)
   
$
1,586,630
 
$
1,378,235
 

 
Equipment and fixtures purchased with capital lease financing during 2006 and 2005 were $800,000 and $625,000, respectively.
 
5. Notes Payable, Convertible Notes Payable and Lines of Credit
 
Notes payable and convertible notes payable outstanding at December 31, 2006 and 2005 consisted of the following amounts, presented net of certain discounts:
 
   
December 31,
 
   
2006
 
2005
 
Convertible notes payable issued in 2003
 
$
187,079
 
$
176,741
 
Note payable issued to Donald Sledge 
 
$
138,571
 
$
231,772
 
 
Interest payable in connection with the notes described below is included with accrued liabilities balance in the statements of financial condition. As of December 31, 2006 and 2005, interest payable amounted to $29,000 and $2,000, respectively.
 
Convertible Notes Payable Issued in 2003
 
In April 2003, the Company completed a private placement financing that included convertible notes payable with aggregate principal of $1,000,000, due April 2008. The notes bear interest at 3% per annum payable quarterly on January 1, April 1, July 1 and October 1 beginning July 1, 2003. The notes can be converted to common stock at a rate of $1.40 per share. In connection with the private placement, the Company issued warrants to purchase 178,300 shares of common stock with an exercise price of $2.10 per share and a five-year term. The convertible notes were recorded in the statements of financial condition net of discounts resulting from the relative fair value of the stock warrants and beneficial conversion feature totaling $258,000. The discount is being amortized over the five-year term. In October 2003, notes payable with a face amount of $500,000 were converted under their original terms into 51,021 shares of common stock resulting in the accelerated amortization of discounts in the amount of $118,000. In December 2004, notes payable with a face amount of $300,000 were converted under their original terms into 30,613 shares of common stock resulting in the accelerated amortization of discounts in the amount of $50,000. Amortization of discounts during 2006 and 2005 was approximately $10,000. The remaining unamortized discount as of December 31, 2006 was $13,000.
 
47

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
Note Payable Held By Donald Sledge
 
During 2001, the Company renegotiated the severance terms included in its employment agreement with Donald Sledge, the former Chairman and CEO of the Company. Upon his leaving the Company in May 2001, the Company issued to Mr. Sledge a 7% convertible note, in an aggregate principal amount of $400,000, due May 2003. Interest was payable at the maturity of the two-year term. In May 2003, the Company and Mr. Sledge agreed to convert the principal and interest due at maturity into a fully amortizing note payable over five years using an effective interest rate of 4.0%. Mr. Sledge is a member of the Company’s Board of Directors.
 
Convertible Note Payable Issued in 2006
 
In March 2006, the Company completed a $7.5 million private placement of a variable rate secured convertible debenture with a detachable stock warrant. The issue was placed with Midsummer Investment, Ltd (“Midsummer”). The Company invested the proceeds in one of the proprietary funds managed by MCF Asset Management, LLC, a wholly owned subsidiary. The debenture bears interest at a variable rate based on the annual investment performance of the investment in the proprietary funds managed by MCF Asset Management, LLC. The maturity date of the note was December 31, 2010.
 
The debenture was convertible into the Company's common stock at a conversion price of $9.87 per share, subject to certain anti-dilutive adjustments. Midsummer could have elected to convert the debenture into common stock of the Company at the conversion price at any time following the closing date. The Company could have redeemed all or part of the debenture after three years at 110% of the principal amount being redeemed. The Company could have elected to force conversion of the debenture into common stock if the Company's common stock trades above $34.58 for 20 consecutive trading days. The debenture contained covenants that could have precluded the Company from issuing additional debt over a specified limit, entering into certain new liens on company assets, repurchasing stock or paying dividends when the debenture remains outstanding with balance of at least $2 million. The maturity date of the notes was December 31, 2010. Stock warrants to purchase 267,858 shares of common stock at $9.87 per share were also issued to the investor. The stock warrants have a six year term.
 
The $7,500,000 raised in the transaction described above was accounted for under generally accepted accounting principles, primarily APB 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”, SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, EITF Issue 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, and EITF Issue 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock”. The Company accounted for this transaction as the issuance of convertible debt, an embedded derivative referred to as a participation interest obligation, and a detachable stock warrant.  The $7,500,000 was allocated to the derivative using its fair value with the balance allocated to the debt and the stock warrant based on their relative fair value as determined by management. During the third quarter of 2006, the Company obtained an appraisal from a third party to support the fair market values used to allocate the proceeds. Management's initial estimates were adjusted to the appraisal amounts.
 
The fair value of the stock warrant of $1,291,000 was recorded as a discount to the convertible debenture and an increase to additional paid-in capital. The fair value of the participation interest obligation of $2,276,000 was also treated as a discount to the convertible debenture and was based on a forecast of future cash flows to be paid to the lender discounted at a risk adjusted yield.  The discount to the convertible debenture of $3,567,000 was amortized to interest expense using the level yield method over the term of the debenture.
 
48

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
In December 2006, the Company repaid the $7.5 million variable rate secured convertible note. The proceeds to repay the $7.5 million convertible note were provided by redemption from the MCF Navigator fund. Midsummer 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.
 
Line of Credit
 
The Company has a line of credit with a commercial bank that provides borrowing availability up to $3,000,000. The line of credit is secured by the assets of the Company and is due upon demand. The interest rate on amounts borrowed is payable monthly at the prime interest rate. As of December 31, 2006, there was no borrowing under this line of credit.
 
6. Stockholders’ Equity
 
Reverse Stock Split
 
At the Company’s annual meeting on May 5, 2006, stockholders approved a proposal to authorize the Board of Directors, in its discretion, to affect a one-for-seven reverse stock split at anytime prior to the 2008 annual meeting, without further action by stockholders. On August 4, 2006, the Company’s Board of Directors approved a one-for-seven reverse stock split of the Company’s common stock. The reverse stock split became effective at 11:59 pm, Eastern Time, on November 15, 2006. Pursuant to the reverse stock split, each seven shares of authorized and outstanding common stock was reclassified and combined into one share of new common stock.
 
The reverse stock split did not change the number of authorized shares or the par value per share of common stock or preferred stock designated by the Company’s Certificate of Incorporation. Currently, the Company has authorized 300,000,000 shares of common stock and 27,450,000 shares of preferred stock. All references to share and per share data for all periods presented have been retroactively adjusted to give effect to the one-for-seven reverse stock split.
 
Common Stock
 
In May 2005, the Company entered into a stock purchase agreement with Ascend Services Ltd., or Ascend. The Company issued 154,107 shares of its common stock and Ascend issued an unsecured promissory note payable to the Company in the amount of $1.5 million. The shares were initially held in escrow. Upon Ascend achieving specified milestones related to its credit standing, the 154,107 shares of common stock would be released from escrow in three installments of 51,369 shares each and provided to Ascend. Upon satisfaction of the conditions specified in the escrow agreement and simultaneous with the release of the related stock certificates, the related amount of the promissory note became effective and started accruing interest. The promissory note accrued interest at 10% per annum and matured on February 28, 2006.
 
Ascend was attempting to raise capital financing in order to enter the reinsurance business. In May 2005, the Company released the first installment of 51,369 shares of common stock to Ascend while the related promissory note with a face value of $500,000 became effective. In December 2005, the Company learned that Ascend had not been able to execute on their business plan and would not have the financial resources to repay the Company’s $500,000 note receivable at maturity. As a result, the Company recorded a charge to other operating expense in 2005 to write-off the $500,000 note receivable balance. The remaining 102,738 shares of common stock were returned to the Company from escrow in February 2006. In April 2006, the Company entered into a settlement agreement with Ascend. As a result, the Company reversed the $500,000 charge to write-off the note receivable balance upon the receipt of $500,000 in April 2006.
 
49

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
In August 2004, London Merchant Securities plc, or LMS, made a private investment of $6,000,000 in MCF Corporation. The Company issued 659,341 shares of common stock to LMS at $9.10 per share. The $9.10 value attributed to the 659,341 shares of common stock issued to LMS was based upon a negotiated discount to the fair market value of MCF Corporation’s quoted stock price over a specified time period. The discount was allowed in order induce LMS to purchase the unregistered shares in view of their lack of liquidity. LMS was also issued warrants to purchase an additional 197,803 shares of common stock at a price of $10.36 per share. The value attributed to the stock warrant was $1,212,399. The stock warrants are immediately exercisable from the issue date and have a four year exercise period. The Company registered these shares with the Securities and Exchange Commission in October 2004.
 
During 2004, investors of the Company’s convertible notes payable issued in 2001 and 2003 converted notes payable into 57,916 and 214,286 shares of common stock, respectively. Investors also converted shares of Series A preferred stock into 102,743 shares of common stock. Additionally, the Company issued 19,715 shares of its common stock to certain former holders of the Series A convertible preferred stock pursuant to anti-dilution provisions in the Certificate of Designation of the Series A preferred stock.
 
As of December 31, 2003, the Company held 11,429 shares of treasury stock with a basis of $363,661. During 2004, the 11,429 shares were issued out of treasury. The Company recorded a charge to accumulated deficit in the amount of $231,000 for the difference between the fair value of the 11,429 shares on the date of issuance and the basis in the treasury stock.
 
7. Acquisition and Disposition of Catalyst
 
In February 2005, the Company acquired Catalyst Financial Planning & Investment Management, Inc., or Catalyst, a registered investment advisor. The Company paid to the sole shareholder of Catalyst, or Catalyst Shareholder, $330,000 as initial consideration at the closing and placed into escrow 79,314 shares of common stock to be issued over the three year period following the closing date. The issuance of these shares was conditioned upon the Catalyst Shareholder being a full-time employee at the anniversary dates. The Catalyst Shareholder was entitled to additional consideration that would be payable in either cash or common stock at the Catalyst Shareholder's option. The additional consideration would be based on a multiple of revenue growth at the end of the first three anniversary dates from the closing.
 
With the adoption of SFAS 123(R) in January 2006, the Company treated the 79,314 common shares as a non-vested stock grant that vests over three years, subject to performance conditions. The Company initially determined that the issuance of the common stock over the service period was probable and recorded an expense of $23,000 per month over the three year service period. At the first anniversary date in February 2006, the Company issued 26,438 shares of common stock from escrow and paid $59,000 to the Catalyst Shareholder for additional consideration that resulted from growth in the Catalyst revenue. The additional consideration was recorded as an increase in the intangible assets acquired.
 
50

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
In December 2006, the Company decided to sell Catalyst to an entity controlled by the Catalyst Shareholder. In January 2007, the Company sold Catalyst to the Mallory Acquisition Corp. for $282,000 and 79,314 shares of MCF Corporation common stock. An impairment loss was recognized in 2006 in the amount of $92,000, which is presented as “Other expenses” in the table below to reduce the carrying value of this business to its estimated fair value less costs to sell. During 2006, the Company recorded approximately $47,000 as stock-based compensation expense resulting from the 26,438 shares issued from escrow in February 2006.
 
As of December 31, 2006, Catalyst is being accounted for as held for sale in accordance with SFAS 144. As a result, the revenue and expenses of Catalyst and MCF Wealth Management, LLC for 2006 and 2005 have been reclassified and included in discontinued operations in the consolidated statements of operations.
 
The following revenue and expenses have been reclassified as discontinued operations for the years ended December 31, 2006 and 2005:
 
   
2006
 
2005
 
Revenue
 
$
865,808
 
$
654,405
 
Operating expenses:
             
Compensation and benefits
   
736,536
   
462,720
 
Professional services
   
34,834
   
10,722
 
Occupancy and equipment
   
121,794
   
63,781
 
Communications and technology
   
15,410
   
11,094
 
Depreciation and amortization
   
56,137
   
37,873
 
Travel and entertainment
   
72,260
   
35,104
 
Other expenses
   
156,563
   
48,166
 
     
1,193,534
   
669,460
 
Operating loss
   
(327,726
)
 
(15,055
)
Interest income, net
   
3,513
   
1,324
 
Net loss
 
$
(324,213
)
$
(13,731
)

The following assets and liabilities of operations held for sale have been included in the consolidated statements of financial condition as of December 31, 2006 and 2005:
 
   
December 31,
 
   
2006
 
2005
 
Assets:
         
Cash and cash equivalents
 
$
68,503
 
$
164,118
 
Accounts receivable
   
11,155
   
374
 
Furniture and equipment
   
34,234
   
8,710
 
Intangible assets, net of accumulated amortization of $172,417
   
314,963
   
394,456
 
Prepaid expenses and other assets
   
24,024
   
27,128
 
   
$
452,879
 
$
594,786
 
Liabilities:
             
Accounts payable
   
   
9,874
 
Commissions and bonus payable
   
8,368
   
11,652
 
Accrued liabilities
   
87,176
   
180,953
 
Capital leases
   
   
1,273
 
   
$
95,544
 
$
203,752
 
 
51

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED

8. Share-Based Compensation Expense
 
Stock Options
 
The 1999 Stock Option Plan, 2000 Stock Option and Incentive Plan, 2001 Stock Option and Incentive Plan, 2003 Stock Option and Incentive Plan, 2004 Non-Qualified Stock Option and Inducement Plan and 2006 Directors' Stock Option and Incentive Plan, collectively the Option Plans, permit the Company to grant employees, outside directors, and consultants incentive stock options, nonqualified stock options or stock purchase rights to purchase shares of the Company's common stock. The Option Plans do not permit the exercise of non-vested stock options, and therefore as of December 31, 2006 and 2005 there were no shares subject to repurchase.
 
As of December 31, 2006, there were 4,991,430 shares authorized for issuance under the Option Plans, and 612,858 shares authorized for issuance outside of the Option Plans. As of December 31, 2006, 370,004 shares were available for future option grants under the Option Plans. There were no shares available for future option grants outside of the Options Plans. Compensation expense for stock options during the year ended December 31, 2006 was $1,336,000.

The following table is a summary of the Company's stock option activity for the three years ended December 31, 2006:

   
2006
 
 2005
 
 2004
 
   
Shares
 
Wtd-Avg
Exercise
Price
 
 Shares
 
Wtd-Avg
Exercise
Price
 
 Shares
 
Wtd-Avg
Exercise
Price
 
Outstanding at beginning of year
   
3,324,358
 
$
6.24
   
3,078,001
 
$
6.25
   
3,135,225
 
$
6.15
 
Granted
   
398,538
   
6.27
   
460,538
   
8.77
   
265,366
   
11.59
 
Exercised
   
(52,819
)
 
(2.08
)
 
(33,938
)
 
(2.77
)
 
(122,825
)
 
(3.64
)
Canceled
   
(99,707
)
 
(10.38
)
 
(180,243
)
 
(13.55
)
 
(199,765
)
 
(13.39
)
Outstanding at end of year
   
3,570,370
 
$
6.19
   
3,324,358
 
$
6.24
   
3,078,001
 
$
6.25
 
Exercisable at end of year
   
2,934,029
 
$
6.00
   
2,677,958
 
$
6.02
   
2,456,107
 
$
6.13
 

The total intrinsic value of options exercised during the year ended December 31, 2006 was $296,000.

The following table summarizes information with respect to stock options outstanding at December 31, 2006, based on the Company’s closing stock price on December 29, 2006 of $4.75 per share:
 
 
     
Options Outstanding at December 31, 2006   
   
Vested Options at December 31, 2006 
 
 
Range of  Exercise Price
   
 Number 
   
Weighted
Average
Remaining
Contractual
 Life Years)
   
Weighted
Average
Exercise
Price
   
Aggregate
Intrinsic
Value
   
Number
   
Weighted
Average
Exercise
Price
   
 
Aggregate
Intrinsic
Value 
 
$ 0.35 -- $ 3.50
   
2,080,468
   
6.09
 
$
2.95
 
$
3,750,252
   
2,055,387
 
$
2.95
 
$
3,690,858
 
$ 3.51 -- $ 7.00
   
513,183
   
7.19
 
$
4.52
   
118,853
   
284,101
   
3.97
   
222,082
 
$ 7.01 -- $14.00
   
681,051
   
8.17
 
$
8.89
   
--
   
298,873
   
9.51
   
--
 
$14.01 -- $28.00
   
256,381
   
3.85
 
$
22.04
   
--
   
256,381
   
22.04
   
--
 
$28.01 -- $49.00
   
39,287
   
3.15
 
$
49.00
   
--
   
39,287
   
49.00
   
--
 
   
   
3,570,370
   
6.45
 
$
6.19
 
$
3,869,105
   
2,934,029
 
$
6.00
 
$
3,912,940
 
 
52

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
As of December 31, 2006, total unrecognized compensation expense related to unvested stock options was $2,783,000. This amount is expected to be recognized as expense over a weighted-average period of 1.3 years.

Non-Vested Stock
 
At the date of grant, the recipients of non-vested stock have most of the rights of a stockholder other than voting rights, subject to certain restrictions on transferability and a risk of forfeiture. Non-vested shares typically vest over a two to four year period beginning on the date of grant. The fair value of non-vested stock is equal to the market value of the shares on the date of grant. The Company recognizes the compensation expense for non-vested stock on a straight-line basis over the requisite service period. Compensation expense for non-vested stock during the three years ended December 31, 2006 was $1,915,000, $, $1,885,000 and $1,023,000, respectively.

The following table is a summary of the Company's non-vested stock activity, based on the Company’s closing stock price on December 29, 2006 of $4.75 per share: 
 
     
Non-Vested
Stock
Outstanding
   
Weighted
Average
Grant Date
Fair Value
   
Aggregate
Intrinsic
Value
 
Balance as of December 31, 2003
    335,679  
$
3.68
       
Granted
    229,840    
12.99
       
Vested
    (45,692 )  
(4.27
)
     
Canceled
    (28,934 )  
(3.78
)
     
Balance as of December 31, 2004
    490,893  
$
7.38
 
$
3,623,000
 
Granted
    324,561    
10.38
       
Vested
    (91,240 )  
(5.74
)
     
Canceled
    (142,802 )  
(9.91
)
     
Balance as of December 31, 2005
   
581,412
 
$
7.84
 
$
4,558,000
 
Granted
   
90,003
   
7.16
     
Vested
   
(327,900
)
 
(4.19
)
   
Canceled
   
(37,506
)
 
(10.78
)
   
Balance as of December 31, 2006
   
306,009
 
$
10.04
 
$
3,072,000
 
 
The total intrinsic value of non-vested stock which vested during the year ended December 31, 2006 was $1,374,000.
 
 As of December 31, 2006, total unrecognized compensation expense related to non-vested stock was $1,578,000. This expense is expected to be recognized over a weighted-average period of 1.00 years.
 
Employee Stock Purchase Plan
 
The Company offers an Employee Stock Purchase Plan, or ESPP, to its employees. As of December 31, 2006, 364,304 shares have been authorized by the stockholders of the Company for issuance under the ESPP, of which 319,447 have been issued. Compensation expense for ESPP during the year ended December 31, 2006 was $539,000.
 
53

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
Under the ESPP, eligible employees may enroll in a 24-month offer period during certain open enrollment periods. New offer periods begin February 15 and August 15 of each year. Each offer period consists of four, six-month purchase periods during which employee payroll deductions are accumulated. These deduction amounts, which are subject to certain limitations, are accumulated, and, at the end of each purchase period, are used to purchase shares of common stock. The purchase price of the shares is 15% less than the fair market value on either the first day of an offer period or the last day of a purchase period, whichever is lower. If the fair market value on the purchase date is less than the fair market value on the first day of an offer period, then participants automatically commence a new 24-month offer period. The ESPP has a ten-year term.
 
As of December 31, 2006, unrecognized compensation expense related to the ESPP was $173,000. This amount is expected to be recognized as expense over a weighted-average period of 0.77 year.
 
Share-Based Compensation under SFAS 123(R) for 2006 and APB 25 for 2005 and 2004
 
On January 1, 2006, the Company adopted SFAS 123(R), which requires the measurement and recognition of compensation expense, based on estimated fair values, for all share-based payments awards made to the Company’s employees and directors including stock options, non-vested stock, and stock purchased under the Company’s ESPP.
 
Prior to the adoption of SFAS 123(R), the Company accounted for share-based awards to employees and directors using the intrinsic value method in accordance with APB 25, as allowed under SFAS 123, “Accounting for Stock-Based Compensation.” Share-based compensation expense of $1,959,000 for the year ended December 31, 2005 was solely related to share-based awards resulting from non-vested stock awards and stock options granted with intrinsic value that the Company had been recognizing in its consolidated statements of operations in accordance with the provisions set forth above. In accordance with the intrinsic value method, no share-based compensation expense was otherwise recognized in the Company’s consolidated statements of operations because the exercise price of nearly all of the Company’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the grant date.
 
Pro Forma Share-Based Compensation under SFAS 123 for Fiscal 2005 and 2004
 
If the Company had recognized compensation expense over the relevant service period under the fair value method consistent with the provisions of SFAS 123, “Accounting for Stock Based Compensation” as amended by SFAS 148, “Accounting for Stock Based Compensation-Transition and Disclosure,” with respect to stock options granted for the two years ended December 31, 2005, net income (loss) would have changed, resulting in pro forma net income (loss) and pro forma net income (loss) per share as presented below:
 
54

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 

   
2005
 
2004
 
Net income (loss), as reported
 
$
(1,514,443
)
$
1,874,286
 
Add: Stock-based employee compensation expense included in the reported net income (loss)
   
74,812
   
93,078
 
Less: Stock-based employee compensation expense determined under fair value method for all awards
   
(1,897,647
)
 
(1,838,982
)
Pro forma net income (loss)
 
$
(3,337,278
)
$
128,382
 
Net income (loss) per share, as reported:
             
Basic
 
$
(0.16
)
$
0.22
 
Diluted
 
$
(0.16
)
$
0.17
 
Net income (loss) per share, pro forma:
             
Basic
 
$
(0.35
)
$
0.02
 
Diluted
 
$
(0.35
)
$
0.01
 

 
The above pro forma disclosures are not necessarily representative of the effects on reported net income or loss for future years. The pro forma share based compensation expense for the twelve months ended December 31, 2005 has increased by $293,000 since it was initially disclosed in the Annual Report on Form 10-K for the year of 2005. The increase primarily relates to the accounting for the contingent shares issuable to the Catalyst Shareholder that is subject to performance conditions. The Company determined in 2005 that the issuance of the common stock over the service period is probable and should have disclosed $23,000 per month as pro forma expense from March to December 2005.
 
Fair Value and Assumptions Used to Calculate Fair Value under SFAS 123(R) and SFAS 123
 
The weighted average fair value of each stock option granted for 2006, 2005 and 2004 was $3.59, $5.55 and $6.58, respectively.
 
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 2005, 2004 and 2003:
 
 
 
2006
 
2005
 
2004
 
Volatility
 
 
81
%
 
94
%
 
100
%
Average expected term (years)
 
 
4.4
 
 
3.7
 
 
2.0
 
Risk-free interest rate                                        
 
 
4.75
%
 
3.85
%
 
2.40
%
Dividend yield
 
 
 
 
 
 
 
 
Assumptions for Option-Based Awards under SFAS 123(R)
 
Consistent with SFAS 123(R) and SAB 107, the Company considered the historical volatility of its stock price in determining its expected volatility, and, finding this to be reliable, determined that the historical volatility would result in the best estimate of expected volatility. Because the Company does not have any traded options or other traded financial instruments such as convertible debt, implied volatilities are not available.
 
The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. The Company calculated the expected term using the lattice model with specific assumptions about the suboptimal exercise behavior, post-vesting termination rates and other relevant factors.
 
55

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of the Company’s employee stock options.
 
The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The Company has not paid and currently do not plan to declare dividends on our common stock.
 
As share-based compensation expense recognized in the consolidated statement of operations for the year ended December 31, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures were estimated based on the Company’s historical experience.
 
Assumptions for Option-Based Awards under SFAS 123
 
Prior to the first quarter of fiscal 2006, the Company considered the historical volatility of its stock price in determining its expected volatility. The risk-free interest rate was based upon assumption of interest rates appropriate for the term of the Company’s employee stock options. The dividend yield assumption was based on the Company’s history and expectation of dividend payouts. Forfeitures prior to the first quarter of fiscal 2006 were accounted for as they occurred in accordance with APB No. 25.
 
Assumptions for Non-Vested Stock Awards under SFAS 123(R) and SFAS 123
 
The fair value of each non-vested stock award is estimated on the date of grant using the intrinsic value method. The weighted average fair value of the non-vested stock granted under the Company’s stock option plans for 2006, 2005 and 2004 was $7.16, $10.38 and $13.00 per share, respectively.
 
Assumptions for Employee Stock Purchase Plan Awards under SFAS 123(R)
 
The fair value is determined as of the grant date, using the graded vesting approach. Under the graded vesting approach, the 24-month ESPP offer period, which consists of four, six-month purchase periods, is treated for valuation purposes as four separate option tranches with individual lives of six, 12, 18 and 24 months, each commencing on the initial grant date. Each tranche is expensed straight-line over its individual life.

9. Employee Benefit Plans
 
The Company has a 401(k) defined contribution plan. The 401(k) plan allows eligible employees to contribute up to 15% of their compensation, subject to a statutory prescribed annual limit. Employee contributions and earnings thereon vest immediately. Although the Company may make discretionary contributions to the 401(k) plan, none were made during 2006, 2005 and 2004.
 
10. Income Taxes
 
Income tax expense consisted of the following for the three years ended December 31, 2006:
 
   
2006
 
2005
 
2004
 
Current:
             
Federal
 
$
 
$
 
$
213,165
 
State
   
   
142,425
   
36,579
 
Total
 
$
 
$
142,425
 
$
249,744
 
 
56

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
The following table reconciles the federal statutory rate to the effective tax rate of the provision for income taxes for the three years ended December 31, 2006:
 
   
2006
 
2005
 
2004
 
Federal statutory income tax rate (benefit)
   
(34
%)
   
(34
%)
   
34
%
State income taxes
   
(5
)
   
3
     
2
 
Loss on retirement of convertible note payable
   
5
     
     
 
Permanent differences
   
13
     
10
     
6
 
Losses for which no benefit has been recognized
   
21
     
31
     
(30
)
Effective tax rate
   
%
   
10
%
   
12
%

 
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets as of December 31, 2006 and 2005 are presented as follows:
 
   
December 31,
 
   
2006
 
2005
 
Deferred tax assets:
         
Net operating loss carryforwards
 
$
20,834,803
 
$
19,266,395
 
Stock options and warrants for services
   
12,771,213
   
11,741,067
 
Other
   
26,370
   
(20,759
)
Total deferred tax assets
   
33,632,386
   
30,986,703
 
Valuation allowance
   
(33,632,386
)
 
(30,986,703
)
Net deferred tax assets
 
$
 
$
 

 
The net change in the valuation allowance for the year ended December 31, 2006 was an increase of $2,646,000. The Company has established a valuation allowance against that portion of deferred tax assets where management was not able to determine that it is more likely than not that the asset will be realized.
 
As of December 31, 2006, the Company had federal and state operating loss carryforwards of approximately $56,279,000 and $31,660,000, respectively. If not earlier utilized, the federal net operating loss carryforward will expire between 2019 and 2026 and the state loss carryforward will expire between 2006 and 2016.
 
Utilization of the net operating loss carry-forwards and credits is subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation will result in the expiration of a portion of net operating loss carryforwards before utilization.
 
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which supplements SFAS No. 109 by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. Interpretation No. 48 requires that the tax effects of a position be recognized only if it is “more-likely- than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust their financial statement to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment would be recorded directly to retained earnings in the period of adoption and reported as a change in accounting principle. The Company will adopt Interpretation No. 48 on January 1, 2007 and is currently assessing the potential impact on its financial statements.
 
57

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
 
11. Earnings (Loss) per Share
 
The following is a reconciliation of the basic and diluted net income (loss) available to common stockholders and the number of shares used in the basic and diluted net income (loss) per common share computations for the periods presented:
 
   
2006
 
2005
 
2004
 
Net income (loss)
 
$
(8,220,415
)
$
(1,514,443
)
$
1,874,286
 
Preferred stock dividends
   
   
   
(92,757
)
Net income (loss) available to common stockholders—basic and diluted
 
$
(8,220,415
)
$
(1,514,443
)
$
1,781,529
 
Weighted-average number of common shares—basic
   
9,989,265
   
9,500,748
   
8,368,293
 
Assumed exercise or conversion of all potentially dilutive common shares outstanding
   
   
   
2,799,582
 
Weighted-average number of common shares—diluted
   
9,989,265
   
9,500,748
   
11,167,875
 
Basic net income (loss) per share:
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
  $
(0.79
) $ (0.16 ) $
0.21
 
Loss from discontinued operations
    (0.03
)
       
Net income (loss)
 
$
(0.82 ) $ (0.16 ) $
0.21
 
                   
Diluted net income (loss) per share:
                   
Income (loss) from continuing operations
 
$
(0.79
)
$
(0.16
)
$
0.16
 
Loss from discontinued operations
   
(0.03
)
   
 
Net income (loss)
 
$
(0.82
)
$
(0.16
)
$
0.16
 
 
Basic earnings (loss) per share is computed by dividing net income (loss), less dividends on preferred stock, by the weighted average number of common shares outstanding, excluding unvested restricted stock. Diluted earnings per share is calculated for 2004 by dividing net income, less dividends on preferred stock, by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding, including unvested restricted stock. Diluted loss per share is unchanged from basic loss per share for 2006 and 2005 because the addition of common shares that would be issued assuming exercise or conversion would be anti-dilutive.
 
Shares used in the diluted net income (loss) per share computation in the above table include the dilutive impact of the Company’s stock options and warrants. The impact of the Company’s stock options and warrants on shares used for the diluted earnings per share computation is calculated based on the average share price of the Company’s common stock for each period using the treasury stock method. Under the treasury stock method, the tax-effected proceeds that would be hypothetically received from the exercise of all stock options and warrants with exercise prices below the average share price of the Company’s common stock are assumed to be used to repurchase shares of the Company’s common stock. The dilutive impact of the Company’s stock options was calculated using an average price of the Company’s common stock of $6.41, $8.68 and $12.74 per share for 2006, 2005 and 2004, respectively.
 
58

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
The Company excludes all potentially dilutive securities from its diluted net income (loss) per share computation when their effect would be anti-dilutive. The following common stock equivalents were excluded from the earnings per share computation, as their inclusion would have been anti-dilutive: 
 
   
2006
 
2005
 
2004
 
Stock options and warrants excluded due to the exercise price exceeding the average fair value of the Company’s common stock during the period
   
1,397,022
   
1,150,239
   
769,351
 
Weighted average restricted stock, stock options and stock warrants, calculated using the treasury stock method, that were excluded due to the Company reporting a net loss during the period
   
1,833,389
   
2,450,587
   
 
Weighted average shares issuable upon conversion of the convertible notes payable
   
704,960
   
142,858
   
360,572
 
Weighted average shares issuable upon conversion of the convertible preferred stock
   
   
   
25,582
 
Weighted average shares contingently issuable
   
73,402
   
136,376
   
 
 
Total common stock equivalents excluded from diluted net income (loss) per share
   
4,008,773
   
3,880,060
   
1,155,505
 

 
12. Commitments and Contingencies
 
The following is a table summarizing significant commitments as of December 31, 2006, consisting of debt service payments related to convertible and non-convertible notes payable and future minimum lease payments under all non-cancelable operating leases and capital leases with initial or remaining terms in excess of one year.
 
   
Notes
Payable
 
Operating
Leases
 
Capital
Leases
 
2007
 
$
106,775
 
$
2,008,017
 
$
647,858
 
2008
   
243,990
   
1,263,403
   
493,075
 
2009
   
   
832,568
   
273,834
 
2010
   
   
869,731
   
 
2011
   
   
709,898
   
 
Thereafter
   
   
   
 
Total commitments
 
$
350,765
 
$
5,683,617
 
$
1,414,767
 

 
The Company leases its San Francisco corporate office under a noncancelable operating lease which expires in August 2011. Future annual minimum lease payments related to its various operating leases are included in the table above. Rent expense was approximately $1,043,000, $1,006,000 and $753,000 in 2006, 2005 and 2004, respectively.
 
Legal Proceedings
 
Thomas O’Shea v. Merriman Curhan Ford & Co.
 
In June 2006, 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 meruits, 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 is scheduled for June 2007. The Company believes that it has meritorious defenses and intends to contest these claims vigorously. However, in the event that the Company did not prevail, based upon the facts known to date, the Company does not believe that the outcome will have a material effect on its financial position, financial results or cash flows.
 
59

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
Westerman v. Western Capital Financial Group — NASD Arbitration
 
In May 2005, Merriman Curhan Ford & Co. was served with a claim in NASD Arbitration by Ms. Westerman. The claim named Western Capital Financial Group as one of several defendants. Western Capital Financial Group is the predecessor name of Merriman Curhan Ford & Co., the California corporation. The Western Capital Financial Group name was effective from September June 26, 1986 to July 14, 1998. On May 1, 2006, the Company reached settlement with Claimant who accepted $8,500 to resolve the dispute. Merriman Curhan Ford & Co. has been dismissed from the arbitration and the matter is resolved.
 
In re Odimo Incorporated Securities Litigation
 
Merriman Curhan Ford & Co. was a defendant in a purported class action suit brought in connection with a registered offering involving Odimo Incorporated in which Merriman Curhan Ford & Co. served as co-manager for the company. The complaint, filed in the 17th Judicial Circuit Court for Broward County in Florida on September 30, 2005, alleged violations of federal securities laws against Odimo and certain of its officers as well as the company’s underwriters, including Merriman Curhan Ford & Co., based on alleged misstatements and omissions in the registration statement. Recently, similar cases were consolidated and lead plaintiff’s counsel was assigned. Thereafter, an amended complaint was filed and the underwriters, including Merriman Curhan Ford & Co., were not named as defendants. This matter is now resolved.
 
Other Matters
 
Additionally, from time to time, the Company is involved in ordinary routine litigation incidental to its business.
 
13. Financial Instruments, Off-Balance Sheet Arrangements and Credit Risk
 
Financial Instruments
 
The Company’s broker-dealer entity trades securities that are primarily traded in United States markets. As of December 31, 2006 and 2005, the Company had not entered into any transactions involving financial instruments, such as financial futures, forward contracts, options, swaps or derivatives that would expose the Company to significant related off-balance-sheet risk.
 
In addition, the Company, from time to time, has sold securities it does not currently own in anticipation of a decline in the fair value of that security (securities sold, not yet purchased). Securities sold, not yet purchased represent obligations of the Company to deliver the specified security at the contracted price and thereby create a liability to purchase the security in the market at prevailing prices. These transactions result in off-balance sheet risk as the Company’s ultimate obligation to purchase such securities may exceed the amount recognized in the consolidated statements of financial condition.
 
60

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
Market risk is primarily caused by movements in market prices of the Company’s trading and investment account securities. The Company’s trading securities and investments are also subject to interest rate volatility and possible illiquidity in markets in which the Company trades or invests. The Company seeks to control market risk through monitoring procedures. The Company’s principal transactions are primarily long and short equity transactions.
 
Off-Balance Sheet Arrangements
 
The Company was not a party to any off-balance sheet arrangements during the three years ended December 31, 2006. In particular, the Company does not have any interest in so-called limited purpose entities, which include special purpose entities and structured finance entities.
 
Credit Risk
 
The Company’s broker-dealer subsidiary functions as an introducing broker that places and executes customer orders. The orders are then settled by an unrelated clearing organization that maintains custody of customers’ securities and provides financing to customers. Through indemnification provisions in agreements with clearing organizations, customer activities may expose the Company to off-balance-sheet credit risk. Financial instruments may have to be purchased or sold at prevailing market prices in the event a customer fails to settle a trade on its original terms or in the event cash and securities in customer margin accounts are not sufficient to fully cover customer obligations. The Company seeks to control the risks associated with customer activities through customer screening and selection procedures as well as through requirements on customers to maintain margin collateral in compliance with various regulations and clearing organization policies.
 
The Company is also exposed to credit risk as it relates to the collection of receivables from third parties, including lead managers in underwriting transactions and the Company’s corporate clients related to private placements of securities and financial advisory services.
 
14. Regulatory Requirements
 
Merriman Curhan Ford & Co. is a broker-dealer subject to Rule 15c3-1 of the Securities and Exchange Commission, which specifies uniform minimum net capital requirements, as defined, for their registrants. As of December 31, 2006, Merriman Curhan Ford & Co. had regulatory net capital, as defined, of $4,593,000, which exceeded the amount required by $3,150,000. Merriman Curhan Ford & Co. is exempt from Rules 15c3-3 and 17a-13 under the Securities Exchange Act of 1934 because it does not carry customer accounts, nor does it hold customer securities or cash.
 
15. Related Party Transactions
 
As described in Note 5, the Company issued a $400,000 convertible note payable during 2001 to the former Chairman and CEO of the Company in connection with severance terms included in his employment agreement. In May 2003, the Company and Mr. Sledge agreed to convert the principal and interest due at maturity into a five year fully amortizing note payable. As of December 31, 2006, the remaining principal amount of the note payable was $139,000. Mr. Sledge currently serves as a member of the Company’s Board of Directors.
 
From time to time, officers, directors, employees and/or certain large stockholders of the Company may invest in private placements which the Company arranges and for which the Company charges investment banking fees.
 
61

 
MCF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED
 
16. Acquisition of MedPanel, Inc.
 
On November 6, 2006, the Company signed a definitive agreement to acquire MedPanel, Inc., a privately-held company based in Cambridge, Massachusetts. MedPanel, Inc. is an online medical market intelligence firm that serves life sciences companies and health care investors through its proprietary methodologies and vast network of leading physicians, medical researchers, allied health professionals and other important health care constituencies. Under the terms of the merger agreement, the Company will pay $6.5 million in common stock for MedPanel, Inc. Additionally, the selling stockholders will be entitled to additional consideration on the third anniversary from the closing which is based upon MedPanel achieving specific revenue and profitability milestones. The payment of the incentive consideration will be 50% in cash and 50% in the Company’s common stock and may not exceed $11,455,000. The Company will register the $6.5 million of common stock for resale with the Securities and Exchange Commission prior to the closing of the transaction. The consummation of the acquisition is subject to the effectiveness of the registration statement with the Securities and Exchange Commission.
 
62

 
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
The financial statements included in this report have been audited by Ernst & Young LLP, independent auditors, as stated in their audit report appearing herein.
 
During the year ended December 31, 2006 and through the date of this Annual Report on Form 10-K, there were no disagreements with Ernst & Young LLP on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Ernst & Young LLP’s satisfaction, would have caused them to make reference to the subject matter in connection with their report on our consolidated financial statements; and there were no reportable events as set forth in applicable SEC regulations.
 
ITEM 9A. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures—We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors.
 
Based on their evaluation as of December 31, 2006, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective.
 
Management’s Report on Internal Control Over Financial Reporting—Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2006. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
 
Changes in internal controls—No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) of the Exchange Act) occurred during the quarter ended December 31, 2006, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
ITEM 9B. OTHER INFORMATION
 
Not applicable.
 
63

 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders of
MCF Corporation and subsidiaries
 
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that MCF Corporation and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of the Company as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006 of the Company and our report dated February 12, 2007 expressed an unqualified opinion thereon.
 
 
/s/ Ernst & Young LLP
 
San Francisco, California
February 12, 2007
 
 
64

 
PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
The table below sets forth certain information concerning each of the Directors and executive officers of MCF Corporation:
 
Name
   
Age
 
Position
D. Jonathan Merriman
 
46
 
Chairman of the Board of Directors and Chief Executive Officer
Gregory S. Curhan
 
45
 
Executive Vice President
Robert E. Ford
 
46
 
President and Chief Operating Officer
John D. Hiestand
 
38
 
Chief Financial Officer
Christopher L. Aguilar
 
44
 
General Counsel
Patrick H. Arbor
 
70
 
Director
Anthony B. Helfet
 
61
 
Director
Raymond J. Minehan
 
65
 
Director
Scott Potter
 
38
 
Director
Dennis G. Schmal
 
59
 
Director
Donald H. Sledge
 
66
 
Director
Ronald E. Spears
 
58
 
Director
Steven W. Town
 
46
 
Director

 
D. Jonathan Merriman has served as our Chairman and Chief Executive Officer from February 2002. Prior to that period, Mr. Merriman was President and CEO of Ratexchange Corporation, the predecessor company to MCF Corporation. Mr. Merriman and his team engineered the transition of Ratexchange, a software trading platform company, into a full-service institutional investment bank, MCF Corporation. From June 1998 to October 2000, Mr. Merriman was Managing Director and Head of the Equity Capital Markets Group and member of the Board of Directors at First Security Van Kasper. In this capacity, he oversaw the Research, Institutional Sales, Equity Trading, Syndicate and Derivatives Trading departments. From June 1997 to June 1998, Mr. Merriman served as Managing Director and Head of Capital Markets at The Seidler Companies in Los Angeles, where he also served on the firm’s Board of Directors. Before Seidler, Mr. Merriman was Director of Equities for Dabney/Resnick/Imperial, LLC. In 1989, Mr. Merriman co-founded the hedge fund company Curhan, Merriman Capital Management, Inc., which managed money for high net worth individuals and corporations. Before Curhan, Merriman Capital Management, Inc., he worked in the Risk Arbitrage Department at Bear Stearns & Co. as a trader. Prior to Bear Stearns, Mr. Merriman worked at Merrill Lynch as a financial analyst and as an institutional equity salesman. Mr. Merriman received his Bachelor of Arts in Psychology from Dartmouth College and completed coursework at New York University’s Graduate School of Business. Mr. Merriman has served on the Boards of several organizations and currently holds seats on the Board of Directors of MCF Corporation, Leading Brands, Inc. and Points International Ltd.
 
Gregory S. Curhan has served as our Executive Vice President from January 2002 to present and served as Chief Financial Officer from January 2002 to January 2004. Previously, he served as Chief Financial Officer of WorldRes.com from May 1999 through June 2001. Prior to joining WorldRes.com, Mr. Curhan served as Director of Global Technology Research Marketing and Managing Director Specialty Technology Institutional Equity Sales at Merrill Lynch & Co. from May 1998 to May 1999. Prior to joining Merrill Lynch, Mr. Curhan was a partner in the investment banking firm of Volpe Brown Whelan & Co., serving in various capacities including Internet research analyst and Director of Equities from May 1993 to May 1998. Mr. Curhan was a founder and principal of the investment advisor Curhan, Merriman Capital Management from July 1988 through December 1992. Prior to founding Curhan, Merriman, Mr. Curhan was a Vice President institutional equity sales for Montgomery Securities from June 1985 through June 1988. From August 1983 to May 1985, Mr. Curhan was a financial analyst in the investment banking group at Merrill Lynch. Mr. Curhan earned his Bachelor of Arts degree from Dartmouth College.
 
65

 
Robert E. Ford had served as President and Chief Operating Officer for MCF Corporation since February 2001. He brings 20 years of executive and operations experience to the Company. Prior to joining MCF Corporation from February 2000 to February 2001, Mr. Ford was a co-Founder and CEO of Metacat, Inc., a content management ASP that specialized in enabling supplier catalogs for Global 2000 private exchanges and eMarketplaces. From June 1996 to December 1999, he was President/COO and on the founding team of JobDirect.com, a leading resume and job matching service for university students, which was acquired by Korn Ferry International. Previously, Mr. Ford co-founded and managed an education content company from September 1994 to 1996. Prior to that, from May 1992 to August 1994, he headed up a turnaround and merger as General Manager of a 65 year-old manufacturing and distribution company. Mr. Ford started his career as VP of Business Development at Lazar Enterprises, a technology-consulting firm he helped operate from June 1989 to February 1992. He earned his Masters in International Business and Law from the Fletcher School of Law and Diplomacy in 1989 at Tufts University and a BA with high distinction from Dartmouth College in 1982.
 
John D. Hiestand joined MCF Corporation as the Controller in January 2002 and became Chief Financial Officer in January 2004. From December 2000 to November 2001, he served as the Controller of the Metro-Switching Division at CIENA Corporation. Mr. Hiestand had come to CIENA through the merger with Cyras Systems, Inc., where he served as the Controller from March 2000 to December 2000. Prior to joining Cyras Systems, Inc., Mr. Hiestand served as a Senior Manager in the audit practice at KPMG LLP in San Francisco. Mr. Hiestand received a Bachelor of Arts in Business from California Polytechnic State University at San Luis Obispo in 1991, and holds the Certified Public Accountant (CPA) and Chartered Financial Analyst (CFA) designations.
 
Christopher L. Aguilar has served as General Counsel of MCF Corporation from March 2000 to present and serves as General Counsel and Chief Compliance Officer of Merriman Curhan Ford & Co. He brings 15 years of legal and regulatory experience to the Company. From August 1995 to March 2000, Mr. Aguilar was a partner at Bradley, Curley & Asiano, a San Francisco law firm, where he represented the interests of public and private corporations, small businesses and individuals in commercial litigation. Mr. Aguilar has also worked for the San Francisco City Attorney and Alameda County District Attorney’s offices. Mr. Aguilar received his juris doctorate degree from the University of California, Hastings College of the Law. He also attended Oxford University as an undergraduate and received his Bachelor of Arts degree from the Integral Program at St. Mary’s College of California where he was included in Who’s Who among American Colleges and Universities. Mr. Aguilar is presently an adjunct professor at University of California, Hastings College of the Law.
 
Patrick H. Arbor has served as a member of our Board of Director since February 2001 and has served as a member of the audit committee since April 2001. Mr. Arbor is currently Chairman of United Financial Holdings Inc., a bank holding company. Mr. Arbor has been a principal of the trading firm of Shatkin-Arbor & Co. from 1997 to the present time. He is a longtime member of the Chicago Board of Trade (CBOT), the world’s oldest derivatives exchange, serving as the organization’s Chairman from 1993 to 1999. During that period, Mr. Arbor also served on the Board of Directors of the National Futures Association. Prior to that, he served as Vice Chairman of the CBOT for three years and ten years as a Director. Mr. Arbor’s other exchange memberships include the Chicago Board Options Exchange, the Mid-America Commodity Exchange and the Chicago Stock Exchange. Mr. Arbor received his undergraduate degree in business and economics from Loyola University.
 
Anthony B. Helfet, a retired investment banker, has been a director since February 2004. Mr. Helfet was a Special Advisor to UBS Warburg from September 2001 through December 2001. From 1991 to August 31, 2001, Mr. Helfet was a Managing Director of Dillon, Read & Co. Inc. and its successor organization, UBS Warburg. Mr. Helfet was also a Managing Director of the Northwest Region of Merrill Lynch Capital Markets from 1979 to 1989. Mr. Helfet received his A.B. degree from Columbia College in 1966 and his M.B.A. from the graduate school of business at Columbia University in 1972. From 1967 until 1970, Mr. Helfet served as an infantry officer in the United States Marine Corps and served in Vietnam in 1968 and 1969. Mr. Helfet serves on the Board of Directors of Layne Christensen Company and Alliance Imaging Inc.
 
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Raymond J. Minehan has served as a member of our Board of Directors and as a member of our audit committee and compensation committee since August 2003. Since May 2005, Mr. Minehan has served as Chief Financial Officer for the Conservation and Liquidation Office of the State of California. From February 2002 to May 2005, Mr. Minehan was retired. From February 2001 to February 2002, Mr. Minehan served as the Chief Financial Officer at Memestreams, Inc., a startup company that was developing information management software. From January 1997 to August 2000, he served as the Chief Administrative Officer at Sutro & Co. where he was responsible for all administrative functions including finance, management information systems, telecommunications, operations, human resources and facilities. From 1989 to 1997, he served as chief financial officer at Hambrecht & Quist, Inc. From 1972 to 1989, Mr. Minehan served as a partner with Arthur Andersen LLP. Mr. Minehan served in the United States Air Force as a navigator assigned to the Strategic Air Command as B-52 navigator/electronic warfare officer. He attained the rank of Captain. Mr. Minehan received his Bachelor of Arts degree in Finance from Golden Gate University.
 
Scott Potter became a Director of MCF Corporation in August 2004. From February 2005 until the present, he has served as a Managing General Partner of San Francisco Equity Partners (SFEP), a private equity firm focused on expansion stage companies within the information technology, media, consumer, and service industries. Prior to founding SFEP in February 2005, Mr. Potter served as Director of LMS Capital, the venture capital arm  of London Merchant Securities plc (LON:LMSO) from January 2003 to February 2005, where Mr. Potter oversaw LMS’ North American Private Equity portfolio. Prior to joining LMS, Mr. Potter held the position of Senior Vice President, Field Operations at Inktomi Corporation from August 2002 to January 2003 where he had responsibility for Inktomi’s sales force, business development, consulting services, and field offices. From January 2000 to August 2002, Mr. Potter served as President and CEO of Quiver, Inc., an enterprise software company funded by some of the world’s leading Venture Capital firms. Under Mr. Potter’s leadership, Quiver became a leading company in the Information Management space, and ultimately was acquired by Inktomi in August of 2002. Prior to his tenure at Quiver, Mr. Potter was Executive Vice President in charge of business development and corporate development at Worldres, Inc., an online travel technology company. Mr. Potter’s career began as an attorney for one of Silicon Valley’s leading law firms, Venture Law Group. A frequent speaker at technology industry conferences and investor forums, Mr. Potter holds a BA in Industrial Psychology from the University of California at Berkeley and a JD Degree from UC Berkeley’s Boalt Hall School of Law. Mr. Potter currently serves as Chairman of The Guild, Inc. and serves on the board of directors of Method Products, Modviz, Penguin Computing, and Rave Motion Pictures.
 
Dennis G. Schmal has served as a member of our Board of Directors and as a member of our audit committee since August 2003. From February 1972 to April 1999, Mr. Schmal served as a partner in the audit practice at Arthur Andersen LLP. Mr. Schmal now performs a variety of consulting services for a number of companies. As a senior business advisor with special focus in finance, he has extensive knowledge of financial reporting and holds the CPA designation. Besides serving on the boards of two private companies, Mr. Schmal also serves on the Board of Directors for Varian Semiconductor Equipment Associates , Inc. (VSEA), a public company. Mr. Schmal attended California State University, Fresno where he received a Bachelor of Science in Business Administration- Finance and Accounting Option.
 
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Donald H. Sledge has served as a member of our Board of Directors from September 1999 to present and Chairman of our Board of Directors from February 2000 to June 2001. He has served as a member of the compensation committee from April 2001 to present. He also served as Chief Executive Officer from February 2000 to October 2000. From September 1999 to February of 2000 he served as President, Chief Executive Officer and Chairman of our subsidiary Ratexchange I, Inc. From October 2000 to October 2003, Mr. Sledge was a general partner in Fremont Communications, a venture capital fund, based in San Francisco. From January 1996 to September 1999, Mr. Sledge was Vice Chairman and Chief Executive Officer of TeleHub Communications Corporation, a next generation ATM-based telecommunications company. From 1994 to 1995, Mr. Sledge served as President and Chief Operating Officer of WCT, a $160-million long distance telephone company that was one of Fortune Magazine’s 25 fastest growing public companies before it was acquired by Frontier Corporation. From 1993 to 1994, Mr. Sledge was head of operations for New T&T, a Hong Kong-based start-up. He was Chairman and Chief Executive Officer of New Zealand Telecom International from 1991 to 1993 and a member of the executive board of TCNZ, Mr.. Sledge held various other senior positions with Telecom New Zealand from 1988 until 1993 as was instrumental in leading the IPO of the company. Mr. Sledge also served four years as president and Chief Executive Officer of Pacific Telesis International. Mr. Sledge is also an owner and Board Member of DataProse, a company providing direct mail and billing statement solutions. In addition, Mr.. Sledge serves on the Board of MobilePro (OTCBB:MOBL) and the Board of CasaByte, a private company providing quality of service testing for cellular networks. Mr. Sledge holds a Masters of Business Administration and Bachelor of Arts degree in industrial management from Texas Technological University.
 
Ronald E. Spears has served as a member of our Board of Directors from March 2000 to present and served as a member of the Audit Committee from April 2001 to August 2003. Since March 2002, Mr. Spears has served as President of AT&T’s Signature Client Group, the sales organization that serves AT&T’s largest 325 Global accounts. From October 1990 until joining AT&T in 2002, Mr. Spears served in a number of early stage ventures primarily involved in the development and sale of technology solutions to large corporate enterprises . During this time, he served as Chief Operating Officer of e.Spire Communications, an East Coast CLEC; Chief Executive Officer of CMGI Solutions, an Internet Professional Services firm; and Chief Executive Officer of Vaultus, a wireless software company. In these roles, he led several successful equity and debt offerings for these ventures. Mr. Spears also served in various capacities at MCI Communications from 1979 to 1990; his last position was President of MCI’s Midwest Division from 1984 to 1990. A pioneer of the competitive long distance industry, Mr. Spears began his career in telecommunications as a manager at AT&T Long Lines in 1978, following eight years as an officer in the United States Army. He is a graduate of the United States Military Academy at West Point, and also holds a Master’s Degree in Public Service from Western Kentucky University.
 
Steven W. Town has served as a member of our Board of Directors from October 2000 to present and has served as a member of the compensation committee since April 2001. Mr. Town has served as Co-Chief Executive Officer of the Amerex Natural Gas, Amerex Power and Amerex Bandwidth, Ltd. Mr. Town began his commodities career in 1987 in the retail futures industry prior to joining the Amerex Group of Companies. He began the Amerex futures and forwards brokerage group in natural gas in 1990, in Washington D.C., and moved this unit of Amerex to Houston in 1992. During Mr. Town’s tenure as Co-Chief Executive Officer, the Amerex companies have become the leading brokerage organizations in their respective industries. Amerex currently provides energy, power and bandwidth brokerage services to many of the energy companies. Mr. Town is a graduate of Oklahoma State University.
 
The Company has a standing audit committee whose members are Dennis G. Schmal, Raymond J. Minehan and Patrick H. Arbor.
 
There is no family relationship among any of the foregoing officers or between any of the foregoing executive officers and any Director of the Company.
 
The information set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated by reference to the Company’s definitive 2007 Proxy Statement.
 
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Audit Committee Financial Expert
 
The board of directors has determined that Dennis G. Schmal and Raymond J. Minehan are “audit committee financial experts” and “independent” as defined under applicable SEC and American Stock Exchange rules. The board’s affirmative determination for Dennis G. Schmal was based, among other things, upon his 27 years at Arthur Andersen LLP, most of those years as a partner in the audit practice. The board’s affirmative determination for Raymond J. Minehan was based, among other things, upon his extensive experience as chief administrative officer of Sutro & Co. and, prior to that, as chief financial officer of Hambrecht & Quist, Inc. and, prior to that, as audit partner of Arthur Andersen LLP.
 
Financial Code of Ethics
 
The Company has adopted its “Finance Code of Professional Conduct”, a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer and other finance organization employees. The finance code of ethics is publicly available on our website at www.merrimanco.com. If we make any substantive amendments to the finance code of ethics or grant any waiver, including any implicit waiver, from a provision of the code to our Chief Executive Officer or Chief Financial Officer, we will disclose the nature of such amendment or waiver on that website or in a report on Form 8-K.
 
ITEM 11. EXECUTIVE COMPENSATION
 
The information is incorporated by reference to the Company’s definitive 2007 Proxy Statement.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
The information is incorporated by reference to the Company’s definitive 2007 Proxy Statement.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
The information is incorporated by reference to the Company’s definitive 2007 Proxy Statement.
 
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 
The information is incorporated by reference to the Company’s definitive 2007 Proxy Statement.
 

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PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a)
1.
The information required by this item is included in Item 8 of Part II of this Annual Report on Form 10-K.
 
2.
Financial Statement Schedules
 
The required schedules are omitted because of the absence of conditions under which they are required or because the required information is presented in the financial statements or notes thereto.
 
3.
Exhibits
 
The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K.
 

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
MCF Corporation
 
 
By:
 
/s/ D. Jonathan Merriman
   
D. Jonathan Merriman,
Chairman of the Board and
Chief Executive Officer
 
March 23, 2007
   

 
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 
Signature
     
Title
     
Date
 
 
/s/ D. Jonathan Merriman
 
 
Chairman of the Board and
 
 
March 23, 2007
D. Jonathan Merriman
 
Chief Executive Officer
   
 
/s/ John D. Hiestand
 
 
Chief Financial Officer and
 
 
March 23, 2007
John D. Hiestand
 
Principal Accounting Officer
   
 
/s/ Patrick H. Arbor
 
 
Director
 
 
March 23, 2007
Patrick H. Arbor
       
 
/s/ Anthony B. Helfet
 
 
Director
 
 
March 23, 2007
Anthony B. Helfet
       
 
/s/ Raymond J. Minehan
 
 
Director
 
 
March 23, 2007
Raymond J. Minehan
       
 
/s/ Scott Potter
 
 
Director
 
 
March 23, 2007
Scott Potter
       
 
/s/ Steven W. Town
 
 
Director
 
 
March 23, 2007
Steven W. Town
       

 
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EXHIBIT INDEX
 
Exhibit
No.
 
Description
3.1
 
Certificate of Incorporation, as amended (incorporated herein by reference to Exhibit 3.1 to MCF’s Registration Statement on Form S-1 (Reg. No. 333-37004)).
     
3.3
 
Amended and Restated Bylaws, as amended. (incorporated by reference to Exhibit 10.3 to MCF’s Registration Statement on Form S-1 (Reg. No. 333-53316)).
     
4.1
 
Form of Convertible Subordinated Note related to MCF private financing, dated November 26, 2001 (incorporated by reference to Exhibit 4.1 to MCF’s Form 10-K for the year ended December 31, 2001).
     
4.2
 
Form of Class A Redeemable Warrant to Purchase Common Stock of MCF related to MCF Corporation private financing, dated November 26, 2001 (incorporated by reference to Exhibit 4.2 to MCF’s Form 10-K for the year ended December 31, 2001).
     
10.13+
 
Employment Agreement between MCF and D. Jonathan Merriman dated October 5, 2000 (incorporated herein by reference to Exhibit 10.15 to MCF’s Registration Statement on Form S-1 (Reg. No. 333-53316)).
     
10.15+
 
1999 Stock Option Plan (incorporated herein by reference to Exhibit 4.1 to MCF’s Registration Statement on Form S-8 (Reg. No.333-43776)).
     
10.16+
 
Form of Non-Qualified, Non-Plan Stock Option Agreement dated February 24, 2000 between MCF and Phillip Rice, Nick Cioll, Paul Wescott, Ross Mayfield, Russ Matulich, Terry Ginn, Donald Sledge, Christopher Vizas, Douglas Cole, Ronald Spears and Jonathan Merriman (incorporated by reference to Exhibit 4.2 to MCF’s Registration Statement on Forms S-8 (Reg. No. 333-43776)).
     
10.17+
 
Schedule of non-plan option grants made under Non-Qualified, Non-Plan Stock Option Agreements to directors and executive officers (incorporated herein by reference to Exhibit 10.19 to MCF’s Registration Statement on Form S-1 (Reg. No. 333-53316)).
     
10.18+
 
2000 Stock Option and Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.20 to MCF’s Registration Statement on Form S-1 (Reg. No. 333-53316)).
     
10.23
 
Master Equipment Lease Agreement dated March 16, 2000 (incorporated by reference to Exhibit 10.6 to MCF’s Registration Statement on Form S-1 (Reg. No. 333-37004)).
     
10.29
 
Agreement between MCF and BL Partners related to RMG Partners Corporation, dated April 8, 2001 (incorporated by reference to Exhibit 10.1 to MCF’s Form 10-Q for the quarter ended June 30, 2001).
     
10.30+
 
Offer of Employment Agreement between MCF Corporation and Robert E. Ford, dated February 19, 2001, is Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2001, and is hereby incorporated by reference.
     
10.31
 
Ratexchange Placement Agreement with Murphy & Durieu, dated November 28, 2001, for private financing transaction (incorporated by reference to Exhibit 10.31 to MCF’s Form 10-K for the year ended December 31, 2001).
     
 
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Exhibit
No. 
 
Description 
10.32
 
Form of Placement Agent Warrant to Murphy & Durieu, dated November 28, 2001 (incorporated by reference to Exhibit 10.32 to MCF’s Form 10-K for the year ended December 31, 2001).
     
10.33
 
Convertible Promissory Note held by Forsythe/McArthur Associates, Inc., dated September 1, 2001, related to restructure of Master Equipment Lease Agreement that is Exhibit 10.23 to Form 10K for the year ended December 31, 2000 (incorporated by reference to Exhibit 10.33 to MCF’s Form 10-K for the year ended December 31, 2001).
     
10.34+
 
Employment Agreement between MCF and Gregory S. Curhan, dated January 9, 2002 (incorporated by reference to Exhibit 10.34 to MCF’s Form 10-K for the year ended December 31, 2001).
     
10.35+
 
Employment Agreement between MCF Corporation and Robert E. Ford, dated January 1, 2002 (incorporated by reference to Exhibit 10.35 to MCF’s Form 10-K for the year ended December 31, 2001).
     
10.37
 
Stock Purchase Agreement by and among MCF and InstreamSecurities, Inc, (formerly known as Spider Securities, Inc.) and Independent Advantage Financial & Insurance Services, Inc., dated December 7, 2001 (incorporated by reference to Exhibit 10.37 to MCF’s Form 10-K for the year ended December 31, 2001).
     
10.38
 
Agreement to Restructure Convertible Promissory Note held by Forsythe McArthur Associates, dated November 20, 2002 (incorporated by reference to Exhibit 10.38 to MCF’s Form 10-K for the year ended December 31, 2001).
     
10.39
 
Securities Exchange Agreement in connection with MCF Corporation dated June 22, 2003 (incorporated by reference to Exhibit 99.1 to MCF’s Form 8-K filed on July 3, 2003).
     
10.40
 
April 3, 2003 Series B Convertible Preferred Transaction: Form of Subscription Agreement and Investment Letter, Class B Warrant to purchase common stock, Certificate of Designation of Series B Convertible Preferred Stock and Registration Rights Agreement (incorporated by reference to Exhibit 10.40 to MCF’s Form 10-K for the year ended December 31, 2003).
     
10.41
 
April 24, 2003 Series C Convertible Preferred Transaction: Form of Subscription Agreement and Investment Letter, Class B Warrant to purchase common stock and Registration Rights Agreement (incorporated by reference to Exhibit 10.41 to MCF’s Form 10-K for the year ended December 31, 2003).
     
10.42
 
April 3, 2003, 3% Convertible Subordinated Note Transaction with Highfields entities: Form of Securities Purchase Agreement, Registration Rights Agreement, Class C Warrant to purchase common stock and 3% Convertible Subordinated Note (incorporated by reference to Exhibit 10.42 to MCF’s Form 10-K for the year ended December 31, 2003).
     
10.43
 
Stock Purchase Agreement by and between MCF Corporation and Ascend Services Ltd., dated April 29, 2005; together with the following documents which form exhibits thereto: Escrow Agreement and Registration Rights Agreement (incorporated by reference to the registrant’s Report on Form 10-Q for the quarter ended March 31, 2005).
     
10.44
 
Promissory Note issued by Ascend Services Ltd dated April 29, 2005 (incorporated by reference to the registrant’s Report on Form 10-Q for the quarter ended March 31, 2005).
     
10.45
 
Employment Agreement between MCF Corporation and Gregory S. Curhan, dated January 1, 2005 (incorporated by reference to the registrant’s Report on Form 10-Q for the quarter ended June 30, 2005).
     
10.46
 
Employment Agreement between MCF Corporation and Robert E. Ford, dated January 1, 2005. (incorporated by reference to the registrant’s Report on Form 10-Q for the quarter ended June 30, 2005).
     
21.1
 
List of Subsidiaries of MCF.
     
23.1
 
Consent of Independent Registered Public Accounting Firm.
     
31.1
 
Certification of Principal Executive Officer Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of Principal Financial Officer Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.

+ Represents management contract or compensatory plan or arrangement.
 
 
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