Unassociated Document
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2007
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the Transition Period from                 to                .
 
Commission file number: 1-15831
 
MCF CORPORATION
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
11-2936371
(I.R.S. Employer
Identification No.)
 
600 California Street, 9th Floor
San Francisco, CA
(Address of Principal Executive Offices)
 
94108
(Zip Code)
 
(415) 248-5600
(Registrant's Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨
Accelerated filer  x
Non-accelerated filer  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ¨ No  x

The number of shares of Registrant's common stock outstanding as of November 5, 2007 was 12,234,448.


 
Form 10-Q
For the Three Months Ended September 30, 2007
 
 
 
Page No.
 
PART I FINANCIAL INFORMATION
 
 
 
ITEM 1. Financial Statements (unaudited)
 
 
 
Condensed Consolidated Statements of Operations For the Three Months and Nine Months Ended September 30, 2007 and 2006
 
2
 
Condensed Consolidated Statements of Financial Condition as of September 30, 2007 and December 31, 2006
 
3
 
Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2007 and 2006
   
Notes to Condensed Consolidated Financial Statements
 
5
 
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
15
 
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 
24
 
ITEM 4. Controls and Procedures
 
24
 
PART II OTHER INFORMATION
 
 
 
ITEM 1. Legal Proceedings
 
25
 
ITEM 1A. Risk Factors
 
25
 
ITEM 2. Unregistered Sales of Equity Securities
 
31
 
ITEM 6. Exhibits
 
32
 
Signatures
 
33
 
Certifications
     
 

 
PART I.  FINANCIAL INFORMATION
 
Item 1.   Financial Statements (unaudited)
 
MCF CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
   
Three Months Ended
 
Nine Months Ended
 
   
September 30, 2007
 
September 30, 2006
 
September 30, 2007
 
September 30, 2006
 
Revenue:
 
 
 
 
 
 
 
 
 
Commissions
 
$
7,923,963
 
$
6,700,416
 
$
22,807,243
 
$
23,344,124
 
Principal transactions
   
2,478,297
   
(1,148,313
)
 
10,804,073
   
(1,480,963
)
Investment banking
   
5,616,491
   
1,839,288
   
15,480,518
   
11,750,176
 
Primary research
   
1,165,428
   
   
2,116,490
   
 
Advisory and other fees
   
476,015
   
35,099
   
1,147,363
   
238,321
 
Total revenue
   
17,660,194
   
7,426,490
   
52,355,687
   
33,851,658
 
Operating expenses:
                         
Compensation and benefits
   
12,096,131
   
8,534,218
   
35,673,505
   
29,987,310
 
Brokerage and clearing fees
   
627,223
   
598,644
   
1,921,920
   
1,987,504
 
Cost of primary research services
   
555,185
   
   
950,403
   
 
Professional services
   
518,045
   
567,535
   
1,603,163
   
1,850,916
 
Occupancy and equipment
   
499,459
   
406,047
   
1,395,048
   
1,195,202
 
Communications and technology
   
921,853
   
800,061
   
2,618,799
   
2,123,963
 
Depreciation and amortization
   
193,284
   
156,760
   
556,332
   
467,870
 
Amortization of intangible assets
   
264,771
   
   
485,414
   
 
Travel and entertainment
   
635,353
   
611,712
   
1,789,971
   
1,960,304
 
Other
   
1,277,519
   
1,042,738
   
2,993,878
   
1,578,024
 
Total operating expenses
   
17,588,823
   
12,717,715
   
49,988,433
   
41,151,093
 
Operating income (loss)
   
71,371
   
(5,291,225
)
 
2,367,254
   
(7,299,435
)
Interest income
   
132,965
   
117,945
   
362,919
   
367,711
 
Interest expense
   
(15,876
)
 
134,895
   
(97,087
)
 
(408,002
)
Income (loss) from continuing operations before taxes
   
188,460
   
(5,038,385
)
 
2,633,089
   
(7,339,726
)
Income tax expense
   
   
   
(55,000
)
 
 
Income (loss) from continuing operations
   
188,460
   
(5,038,385
)
 
2,578,089
   
(7,339,726
)
Loss from discontinued operations
   
   
(70,666
)
 
   
(178,868
)
Net income (loss)
 
$
188,460
 
$
(5,109,051
)
$
2,578,089
 
$
(7,518,594
)
 
                         
Basic net income (loss) per share:
                         
Income (loss) from continuing operations
 
$
0.02
 
$
(0.50
)
$
0.23
 
$
(0.74
)
Loss from discontinued operations
 
$
 
$
(0.01
)
$
 
$
(0.02
)
Net income (loss)
 
$
0.02
 
$
(0.51
)
$
0.23
 
$
(0.76
)
 
                         
Diluted net income (loss) per share:
                         
Income (loss) from continuing operations
 
$
0.01
 
$
(0.05
)
$
0.21
 
$
(0.74
)
Loss from discontinued operations
 
$
 
$
(0.01
)
$
 
$
(0.02
)
Net income (loss)
 
$
0.01
 
$
(0.51
)
$
0.21
 
$
(0.76
)
 
                         
Weighted average common shares outstanding:
                         
Basic
   
11,999,656
   
10,151,922
   
11,337,346
   
9,906,672
 
Diluted
   
13,139,384
   
10,151,922
   
12,499,544
   
9,906,672
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
2

 
MCF CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
 
   
 September 30, 2007
 
 December 31, 2006
 
ASSETS
          
Cash and cash equivalents
 
$
12,470,717
 
$
13,746,590
 
Securities owned:
           
Marketable, at fair value
   
14,661,068
   
7,492,914
 
Not readily marketable, at estimated fair value
   
4,040,665
   
1,489,142
 
Restricted cash
   
688,011
   
629,427
 
Due from clearing broker
   
1,134,440
   
551,831
 
Accounts receivable, net
   
2,421,026
   
2,715,271
 
Equipment and fixtures, net
   
1,368,286
   
1,586,630
 
Intangible assets
   
2,214,586
   
314,963
 
Goodwill
   
3,153,219
   
 
Prepaid expenses and other assets
   
2,022,405
   
1,971,445
 
Total assets
 
$
44,174,423
 
$
30,498,213
 
LIABILITIES AND STOCKHOLDERS' EQUITY
           
Accounts payable
 
$
1,871,033
 
$
1,121,623
 
Commissions and bonus payable
   
7,900,581
   
7,711,805
 
Accrued expenses
   
3,469,821
   
2,285,670
 
Due to clearing and other brokers
   
16,733
   
11,114
 
Securities sold, not yet purchased
   
2,476,071
   
1,534,953
 
Capital lease obligation
   
850,034
   
1,292,378
 
Convertible notes payable, net
   
194,831
   
187,079
 
Notes payable
   
66,187
   
138,571
 
Total liabilities
   
16,845,291
   
14,283,193
 
Commitments and contingencies
           
Stockholders' equity:
           
Preferred stock, Series A--$0.0001 par value; 2,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2007 and December 31, 2006, respectively; aggregate liquidation preference of $0
   
   
 
Preferred stock, Series B--$0.0001 par value; 12,500,000 shares authorized; 1,250,000 shares issued and 0 shares outstanding as of September 30, 2007 and December 31, 2006; aggregate liquidation preference of $0
   
   
 
Preferred stock, Series C--$0.0001 par value; 14,200,000 shares authorized; 1,685,714 shares issued and 0 shares outstanding as of September 30, 2007 and December 31, 2006; aggregate liquidation preference of $0
   
   
 
Common stock, $0.0001 par value; 300,000,000 shares authorized; 12,249,520 and 10,602,720 shares issued and 12,223,082 and 10,602,720 shares outstanding as of September 30, 2007 and December 31, 2006, respectively
   
1,226
   
1,061
 
Additional paid-in capital
   
123,278,319
   
114,616,848
 
Treasury stock
   
(125,613
)
 
--
 
Accumulated deficit
   
(95,824,800
)
 
(98,402,889
)
Total stockholders' equity
   
27,329,132
   
16,215,020
 
Total liabilities and stockholders' equity
 
$
44,174,423
 
$
30,498,213
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
3

 
MCF CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
Nine Months Ended
September 30,
 
   
2007
 
2006
 
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
 
$
2,578,089
 
$
(7,518,594
)
Adjustments to reconcile net income (loss) to cash used in operating activities:
             
Depreciation and amortization
   
556,332
   
474,637
 
Amortization of intangible assets
   
485,414
   
34,214
 
Stock-based compensation
   
2,146,436
   
3,179,305
 
Amortization of discounts on convertible notes payable
   
7,749
   
326,383
 
Amortization of debt issuance costs
   
   
26,783
 
Unrealized (gain) loss on securities owned
   
(4,807,990
)
 
2,810,298
 
Bad debt write-off
   
368,272
   
 
Other
   
72,229
   
13,055
 
Changes in operating assets and liabilities:
             
Securities owned
   
(3,970,569
)
 
(3,421,329
)
Restricted cash
   
(58,584
)
 
(575
)
Due from clearing broker
   
(582,609
)
 
386,205
 
Accounts receivable
   
938,143
   
1,345,785
 
Prepaid expenses and other assets
   
99,178
   
(542,545
)
Accounts payable
   
172,239
   
279,879
 
Commissions and bonus payable
   
1,053
   
(1,714,895
)
Accrued expenses
   
1,022,867
   
(122,981
)
Due to clearing and other brokers
   
5,619
   
(99,530
)
Net cash used in operating activities
   
(966,132
)
 
(4,543,905
)
Cash flows from investing activities:
             
Cash restricted for fund investment
   
   
(6,300,944
)
Purchase of equipment and fixtures
   
(291,687
)
 
(353,623
)
MedPanel acquisition costs
   
(24,585
)
 
 
Catalyst acquisition costs
   
   
(58,558
)
Proceeds from the sale of Catalyst
   
163,219
   
 
Net cash used in investing activities
   
(153,053
)
 
(6,713,125
)
Cash flows from financing activities:
             
Proceeds from the exercise of stock options and warrants
   
172,996
   
301,799
 
Proceeds from the issuance of common stock
   
185,041
   
603,070
 
Proceeds from the issuance of note payable ($6,112,171) and stock warrant ($1,387,829)
   
   
7,500,000
 
Minority interest in fund
   
   
2,188,050
 
Debt service principal payments
   
(514,725
)
 
(345,271
)
Net cash provided by (used in) financing activities
   
(156,688
)
 
10,247,648
 
Decrease in cash and cash equivalents
   
(1,275,873
)
 
(1,009,382
)
Cash and cash equivalents at beginning of period
   
13,746,590
   
11,138,923
 
Cash and cash equivalents at end of period
 
$
12,470,717
 
$
10,129,541
 
 
             
Supplementary disclosure of cash flow information:
             
Cash paid during the period:
             
Interest
 
$
73,023
 
$
55,624
 
Income taxes
 
$
38,400
 
$
18,800
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
4

 
MCF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
1. Significant Accounting Policies
 
Basis of Presentation
 
The interim financial statements included herein for MCF Corporation, or the Company, have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the financial statements included in this report reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of the results of operations for the interim periods covered and the financial position of the Company at the date of the interim statement of financial condition. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to understand the information presented. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with the Company's 2006 audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006.

Reverse Stock Split
 
On August 4, 2006, the Company's Board of Directors approved a one-for-seven reverse stock split of the Company's common stock. The reverse stock split became effective at 11:59 pm, Eastern Time, on November 15, 2006. Pursuant to the reverse stock split, each seven shares of authorized and outstanding common stock was reclassified and combined into one share of new common stock. The reverse stock split did not change the number of authorized shares or the par value per share of common stock or preferred stock designated by the Company's Certificate of Incorporation. Currently, the Company has authorized 300,000,000 shares of common stock and 27,450,000 shares of preferred stock. All references to share and per share data for all periods presented have been retroactively adjusted to give effect to the one-for-seven reverse stock split.

Acquisition of MedPanel, Inc.

On April 17, 2007, MCF Corporation completed the acquisition of MedPanel, Inc., or MedPanel, a privately-held company based in Cambridge, Massachusetts, pursuant to the terms of the Agreement and Plan of Merger dated November 6, 2006, by and among MCF Corporation, MedPanel Acquisition I Corp., Panel Intelligence, LLC, MedPanel, Inc. and William J. Febbo. MedPanel is an online medical market intelligence firm that serves life sciences companies and health care investors through its proprietary methodologies and vast network of leading physicians, medical researchers, allied health professionals and other important healthcare constituencies.

Securities Owned

“Securities owned” and “Securities sold, but not yet purchased” in the consolidated statements of financial condition consist of financial instruments carried at fair value or amounts that approximate fair value, with related unrealized gains or losses recognized in the results of operations. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

Fair values of the financial instruments are generally obtained from quoted market prices in active markets, broker or dealer price quotations, or alternative pricing sources with reasonable levels of price transparency. To the extent certain financial instruments trade infrequently or are non-marketable securities and, therefore, have little or no price transparency, the Company values these instruments based on management's estimates. The fair value of these securities is subject to a high degree of volatility and may be susceptible to significant fluctuation in the near term. Securities that contain resale restrictions are stated at a discount to the value of readily marketable securities. Stock warrants are carried at a discount to fair value as determined by using the Black-Scholes Option Pricing model due to illiquidity.
 
5

 
MCF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
 
1. Significant Accounting Policies - Continued
 
Investment Banking Revenue
 
Investment banking revenue includes underwriting and private placement agency fees earned through the Company's participation in public offerings and private placements of equity and convertible debt securities and fees earned as financial advisor in mergers and acquisitions and similar transactions. Underwriting revenue is earned in securities offerings in which the Company acts as an underwriter and includes management fees, selling concessions and underwriting fees. Fee revenue relating to underwriting commitments is recorded when all significant items relating to the underwriting cycle have been completed and the amount of the underwriting revenue has been determined. This generally is the point at which all of the following have occurred: (i) the issuer's registration statement has become effective with the SEC, or other offering documents are finalized, (ii) the Company has made a firm commitment for the purchase of the shares or debt from the issuer, and (iii) the Company has been informed of the exact number of shares or the principal amount of debt that it has been allotted. Syndicate expenses related to securities offerings in which the Company acts as underwriter or agent are deferred until the related revenue is recognized or we determine that it is more likely than not that the securities offerings will not ultimately be completed. Merger and acquisition fees and other advisory service revenue are generally earned and recognized only upon successful completion of the engagement. Underwriting revenue is presented net of related expenses. Unreimbursed expenses associated with private placement and advisory transactions are recorded as expenses as incurred. As co-manager for registered equity underwriting transactions, management must estimate the Company's share of transaction related expenses incurred by the lead manager in order to recognize revenue. Transaction related expenses are deducted from the underwriting fee and therefore reduces the revenue that is recognized as co-manager. Such amounts are adjusted to reflect actual expenses in the period in which the Company receives the final settlement, typically 90 days following the closing of the transaction.

Commissions and Principal Transactions Revenue

Commissions revenue includes revenue resulting from executing stock exchange-listed securities, over-the counter securities and other transactions as agent for the Company's clients. Principal transactions consist of a portion of dealer spreads attributed to the Company's securities trading activities as principal in NASDAQ-listed and other securities, and include transactions derived from activities as a market-maker. Additionally, principal transactions include gains and losses resulting from market price fluctuations that occur while holding positions in trading security inventory. Commissions revenue and related clearing expenses are recorded on a trade-date basis as security transactions occur. Principal transactions in regular-way trades are recorded on the trade date, as if they had settled. Profit and loss arising from all securities and commodities transactions entered into for the account and risk of the Company are recorded on a trade-date basis. 

Primary Research Revenue

Revenue from primary research services is recognized on a proportional performance basis as services are provided.

Cost of Primary Research Services

Direct costs associated with generating primary research revenue principally consist of panelist honorarium and recruitment costs. Medical experts receive cash honoraria for participating in qualitative panels and quantitative surveys. The Company pays the honoraria to the panelists when the panel or survey has been completed and records this expense as incurred.

Share-Based Compensation Expense

The Company measures and recognizes compensation expense based on estimated fair values for all share-based awards made to employees and directors, including stock options, non-vested stock, and participation in the Company's employee stock purchase plan. The Company estimates fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company's consolidated statements of operations over the requisite service periods. Share-based compensation expense recognized in the Company's consolidated statement of operations includes compensation expense for share-based awards granted (i) prior to, but not yet vested as of December 31, 2005, based on the grant date fair value, and (ii) subsequent to December 31, 2005. Compensation expense for all share-based awards subsequent to December 31, 2005 is recognized using the straight-line single-option method. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense has been reduced to account for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
 
6

 
MCF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
 

1. Significant Accounting Policies - Continued
 
To calculate option-based compensation, the Company uses the Black-Scholes option pricing model, which is affected by the Company's stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to the Company's expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. No tax benefits were attributed to the share-based compensation expense because a valuation allowance was maintained for all net deferred tax assets.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce deferred tax assets to an amount whose realization is more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.

Segment Reporting

The Company organizes its operations into three operating segments for the purpose of making operating decisions and assessing performance. These operating segments are organized along operating subsidiaries, Merriman Curhan Ford & Co, MCF Asset Management, LLC and Panel Intelligence, LLC. Accordingly, the Company operates in Investment Banking and Asset Management operating segments in the United States during 2007 and 2006, and added a Primary Research operating segment in April 2007 with the acquisition of MedPanel (see Note No. 3). However, only the Investment Banking segment produced operating results that were material to the Company during the three months and nine months ended September 30, 2007. Total assets for Panel Intelligence were $7,093,000 as of September 30, 2007. Total assets for MCF Asset Management were $3,187,000 as of September 30, 2007. The MCF Asset Management segment had an operating loss for the three months and nine months ended September 30, 2007 in the amount of $253,000 and $302,000, respectively. The results of operations for the Company's Wealth Management segment for the three months and nine months ended September 30, 2006 have been treated as discontinued operations since this business was sold in January 2007 (see Note No. 4).

Concentrations

As of September 30, 2007, the Company owned 4,808,000 shares of Points International in its proprietary trading account with a fair market value of $8,711,000 or approximately 20% of total assets.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates. 

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities”, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 159 will have on its consolidated statements of financial condition, operations and cash flows.
 
7

 
MCF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
 
1. Significant Accounting Policies - Continued
 
In June 2007, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 07-1, “Clarification of the Scope of the Audit and Accounting Guide `Audits of Investment Companies' and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies.” SOP No. 07-1 clarifies when an entity may apply the provisions of the Audit and Accounting Guide for Investment Companies (the Guide). Investment companies that are within the scope of the Guide report investments at fair value; consolidation or use of the equity method for investments is generally not appropriate. SOP No. 07-1 also addresses the retention of specialized investment company accounting by a parent company in consolidation or by an equity method investor. In May 2007, the FASB issued FSP FIN No. 46-R-7, “Application of FIN 46-R to Investment Companies,” which amends FIN No. 46-R to make permanent the temporary deferral of the application of FIN No. 46-R to entities within the scope of the revised Guide under SOP No. 07-1. FSP FIN No. 46-R-7 is effective upon adoption of SOP No 07-1. In October 2007, the FASB indefinitely deferred the effective date for SOP No. 07-1. The firm is evaluating the impact of adopting SOP No. 07-1 and FSP FIN No. 46-R-7 on its financial condition, results of operations and cash flows.

2. Share-Based Compensation Expense

Stock Options

As of September 30, 2007, there were 5,591,430 shares authorized for issuance under the Option Plans, and 612,858 shares authorized for issuance outside of the Option Plans. As of September 30, 2007, 374,618 shares were available for future option grants under the Option Plans. There were no shares available for future option grants outside of the Options Plans. Compensation expense for stock options during the three months and nine months ended September 30, 2007 was $368,000 and $1,017,000, respectively. Compensation expense for stock options during the three months and nine months ended September 30, 2006 was $363,000 and $1,004,000, respectively.

The following table is a summary of the Company's stock option activity for the nine months ended September 30, 2007:
 
 
 
 
Options
Outstanding
 
 Weighted
 Average 
Exercise Price
 
Balance as of December 31, 2006
   
3,570,370
 
$
6.19
 
Granted
   
644,620
   
4.72
 
Exercised
   
(83,939
)
 
(2.06
)
Canceled
   
(107,994
)
 
(6.89
)
Balance as of September 30, 2007
   
4,023,057
 
$
6.02
 
Exercisable as of September 30, 2007
   
3,029,242
 
$
6.13
 

 The following table summarizes information with respect to stock options outstanding at September 30, 2007:
 
     
Options Outstanding  
   
Vested Options
 
Range of Exercise Price
    Number    
Weighted
Average
Remaining
Contractual
Life (Years)
   
Weighted
Average
Exercise
Price
   
Aggregate
Intrinsic
Value
   
Number
   
Weighted
Average Exercise
Price
    Aggregate
Intrinsic
Value
 
$ 0.00 -- $ 3.50
   
1,993,849
   
5.28
 
$
2.99
 
$
2,142,790
   
1,993,849
 
$
2.99
 
$
2,142,790
 
$ 3.51 -- $ 7.00
   
1,107,181
   
8.29
 
$
4.62
   
   
351,061
   
4.17
   
 
$ 7.01 -- $14.00
   
626,359
   
6.95
 
$
8.88
   
   
388,664
   
9.21
   
 
$14.01 -- $28.00
   
256,381
   
3.10
 
$
22.04
   
   
256,381
   
22.04
   
 
$28.01 -- $49.00
   
39,287
   
2.41
 
$
49.00
   
   
39,287
   
49.00
   
 
   
   
4,023,057
   
6.20
 
$
6.02
 
$
2,142,790
   
3,029,242
 
$
6.13
 
$
2,142,790
 
 
8

 
MCF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
 
2. Share-Based Compensation Expense - continued

As of September 30, 2007, total unrecognized compensation expense related to unvested stock options was $3,221,000. This amount is expected to be recognized as expense over a weighted-average period of 1.45 years.

Non-Vested Stock
 
At the date of grant, the recipients of non-vested stock have most of the rights of a stockholder other than voting rights, subject to certain restrictions on transferability and a risk of forfeiture. Non-vested shares typically vest over a two to four year period beginning on the date of grant. The fair value of non-vested stock is equal to the market value of the shares on the date of grant. The Company recognizes the compensation expense for non-vested stock on a straight-line basis over the requisite service period. Compensation expense for non-vested stock during the three months and nine months ended September 30, 2007 was $298,000 and $986,000, respectively. Compensation expense for non-vested stock during the three months and nine months ended September 30, 2006 was $463,000 and $1,481,000, respectively.

The following table is a summary of the Company's non-vested stock activity for the nine months ended September 30, 2007: 
 
 
 
Non-Vested
Stock
Outstanding
 
Weighted
Average
Grant Date
Fair Value
 
Intrinsic
Value at
September 30, 2007
 
Balance as of December 31, 2006
   
306,009
 
$
10.04
     
Granted
   
92,462
   
4.66
     
Vested
   
(231,933
)
 
(8.72
)
   
Canceled
   
(21,702
)
 
(9.49
)
 
 
 
Balance as of September 30, 2007
   
144,836
 
$
8.78
 
$
588,034
 
 
As of September 30, 2007, total unrecognized compensation expense related to non-vested stock was $933,000. This expense is expected to be recognized over a weighted-average period of 0.92 year.
 
2002 Employee Stock Purchase Plan

The Company issued all shares previously available under the Employee Stock Purchase Plan, or ESPP, to its employees through August 15, 2007. As of September 30, 2007, there are no shares available under the ESPP plan and the Company has no plan to request additional shares from the stockholders for this program. Compensation expense for ESPP during the three months and nine months ended September 30, 2007 was $28,000 and $143,000, respectively. Compensation expense for ESPP during the three months and nine months ended September 30, 2006 was $301,000 and $483,000, respectively.

Fair Value and Assumptions Used to Calculate Fair Value
 
The weighted average fair value of each stock option granted for the three months and nine months ended September 30, 2007 was $2.84 and $2.67, respectively. The weighted average fair value of each stock option granted for the three months and nine months ended September 30, 2006 was $3.33 and $3.72, respectively. The fair value of each option award is estimated on the date of grant using the Black-Scholes Option Pricing Model, with the following assumptions for the nine months ended September 30, 2007 and 2006: 
 
 
 
Nine months Ended
September 30, 
 
 
 
 2007
 
 2006
 
Expected volatility
   
63.81
%
 
82.71
%
Expected life (years)
   
4.20
   
4.50
 
Risk-free interest rate
   
4.66
%
 
4.79
%
Expected dividend yield
   
0
%
 
0
%

9

 
MCF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)

2. Share-Based Compensation Expense - continued

The weighted average fair value of the non-vested stock granted under the Company's stock option plans for the three months and nine months ended September 30, 2007 was $4.32 and $4.66 per share, respectively. The weighted average fair value of the non-vested stock granted under the Company's stock option plans for the three months and nine months ended September 30, 2006 was $5.25 and $7.56 per share, respectively. The fair value of the non-vested stock award is estimated on the date of grant using the intrinsic value method.

3. Acquisition of MedPanel, Inc.
 
On April 17, 2007, MCF Corporation acquired 100 percent of the outstanding common shares of MedPanel, Inc. The results of MedPanel's operations have been included in the consolidated financial statements since that date. MedPanel is an online medical market intelligence firm that serves life sciences companies and health care investors through its proprietary methodologies and vast network of leading physicians, medical researchers, allied health professionals and other important healthcare constituencies. As a result of the acquisition, the Company will provide independent market data and information to clients in the biotechnology, pharmaceutical, medical device, and financial industries by leveraging MedPanel's proprietary methodology and vast network of medical experts.

The Company paid $6.5 million in common stock for MedPanel. The value of the 1,547,743 shares of common shares issued was determined based on the average market price of MCF Corporation's common stock over the period including three days before and after the terms of the acquisition were agreed to and announced. The selling stockholders may also be entitled to additional consideration on the third anniversary from the closing which is based upon MedPanel achieving specific revenue and profitability milestones. The payment of the incentive consideration will be 50% in cash and 50% in the Company's common stock and may not exceed $11,455,000. The Company registered 1,548,119 shares of common stock with the Securities and Exchange Commission on Form S-4, file number 333-138870, originally filed November 21, 2006, as amended.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of obtaining third-party valuations of certain intangible assets; thus, the allocation of the purchase price is subject to refinement.
 
 
 
 As of
April 17, 2007
 
Cash and cash equivalents
 
$
670,028
 
Accounts receivable
   
1,023,325
 
Equipment and fixtures
   
86,088
 
Prepaid expenses and other assets
   
174,162
 
Intangible assets not subject to amortization:
     
Registered trademarks
   
710,000
 
Intangible assets subject to amortization:
     
Customer relationships (56 month weighted-average useful life)
   
990,000
 
Customer backlog (8 month weighted-average useful life)
   
420,000
 
Technology platform (30 month weighted-average useful life)
   
360,000
 
Database of registered panelists (24 weighted-average useful life)
   
220,000
 
Goodwill
   
3,153,219
 
Total assets acquired
   
7,806,822
 
 
     
Accounts payable
   
(577,171
)
Accrued expenses
   
(463,300
)
Total liabilities assumed
   
(1,040,471
)
Net assets acquired
 
$
6,766,351
 

The $3,153,000 of goodwill was assigned to our Primary Research segment.

10

 
MCF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
 
3. Acquisition of MedPanel, Inc. - continued

The following unaudited pro forma results of our operations for the three months and nine months ended September 30, 2007 and 2006 assume the MedPanel acquisition occurred as of January 1, 2006. The pro forma results give effect to certain adjustments, including depreciation, amortization of intangible assets and related income tax effects. The pro forma results have been prepared for comparative purposes only and do not purport to indicate the results of operations which would actually have occurred had the combinations been in effect on the dates indicated or which may occur in the future.
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September
30, 2007
 
September
30, 2006
 
September
30, 2007
 
September
30, 2006
 
Total revenue
 
$
17,660,194
 
$
8,671,790
 
$
54,484,089
 
$
37,864,977
 
Total operating expenses
   
17,588,823
   
14,283,459
   
52,525,765
   
45,710,959
 
Operating income (loss)
   
71,371
   
(5,611,669
)
 
1,958,324
   
(7,845,982
)
Net income (loss)
 
$
188,460
 
$
(5,434,415
)
$
2,171,308
 
$
(8,076,246
)
 
                         
Basic net income (loss) per share
 
$
0.02
 
$
(0.47
)
$
0.18
 
$
(0.71
)
Diluted net income (loss) per share
 
$
0.01
 
$
(0.47
)
$
0.17
 
$
(0.71
)
 
                         
Weighted average common shares outstanding:
                         
Basic
   
11,999,656
   
11,652,042
   
11,919,810
   
11,406,792
 
Diluted
   
12,996,526
   
11,652,042
   
13,114,384
   
11,406,792
 
 
4. Discontinued Operations
 
In December 2006, the Company decided to sell its Catalyst Financial Planning & Investment Management, Inc., or Catalyst, subsidiary and discontinue its wealth management activities. The sale of Catalyst closed in January 2007. As of December 31, 2006, Catalyst was accounted for as held for sale in accordance with SFAS 144. As a result, the revenue and expenses of Catalyst and MCF Wealth Management, LLC for 2006 have been reclassified and included in discontinued operations in the consolidated statements of operations.

The following revenue and expenses have been reclassified as discontinued operations for the three months and nine months ended September 30, 2006: 
 
 
 
Three Months
 
Nine Months
 
Revenue
 
$
206,911
 
$
635,103
 
Operating expenses:
             
Compensation and benefits
   
182,615
   
555,677
 
Professional services
   
8,525
   
33,429
 
Occupancy and equipment
   
30,722
   
73,715
 
Communications and technology
   
2,716
   
13,929
 
Depreciation and amortization
   
15,156
   
40,981
 
Travel and entertainment
   
11,875
   
44,938
 
Other expenses
   
26,863
   
54,241
 
 
   
278,472
   
816,910
 
Operating loss
   
(71,561
)
 
(181,807
)
Interest income, net
   
895
   
2,939
 
Net loss
 
$
(70,666
)
$
(178,868
)
 
11

 
MCF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
 
 4. Discontinued Operations - Continued
 
The following assets and liabilities of operations held for sale have been included in the condensed consolidated statements of financial condition as of December 31, 2006:
 
Assets:
 
 
 
Cash and cash equivalents
 
$
68,503
 
Accounts receivable
   
11,155
 
Furniture and equipment
   
34,234
 
Intangible assets, net of accumulated amortization of $172,417
   
314,963
 
Prepaid expenses and other assets
   
24,024
 
 
 
$
452,879
 
Liabilities:
     
Accounts payable
   
--
 
Commissions and bonus payable
   
8,368
 
Accrued liabilities
   
87,176
 
Capital leases
   
--
 
 
 
$
95,544
 
 
5. Income Taxes

At the end of each interim reporting period the Company calculates an effective tax rate based on the Company's estimate of the tax provision (benefit) that will be provided for the full year, stated as a percentage of estimated annual pre-tax income (loss). The tax provision (benefit) for the interim period is determined using this estimated annual effective tax rate. For the nine months ended September 30, 2007 and 2006, the Company recorded $55,000 and $0 as income tax expense, respectively.

The effective tax rate differs from the statutory rate primarily due to the existence and utilization of net operating loss carryforwards which have been offset by a valuation allowance resulting in a tax provision equal to the companies expected current expense for the year. The Company historically has had current tax expense primarily related to alternative minimum, state and minimum tax liabilities.     
 
Historically and currently, the Company has recorded a valuation allowance on the deferred tax assets, the significant component of which relates to net operating loss tax carryforwards. Management continually evaluates the realizability of its deferred tax assets based upon negative and positive evidence available. Based on the evidence available at this time, the Company continues to conclude that it is not "more likely than not" that it will be able to realize the benefit of our deferred tax assets in the future.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109 (“FIN 48”). FIN 48 is effective for fiscal years beginning after December 15, 2006. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). Under FIN 48, the financial statements reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts, but without considering time values. MCF Corporation adopted Interpretation No. 48 on January 1, 2007.

As a result of the implementation of FIN 48, the Company recognized no adjustment in the liability for unrecognized income tax benefits and no corresponding change in retained earnings. The Company does not have any material accrued interest or penalties associated with any unrecognized tax benefits. The Company does not believe it is reasonably possible that the Company's unrecognized tax benefits will significantly change within the next twelve months. The Company's policy is to account for interest, if any, as interest expense and penalties as income tax expense.

There were no unrecognized tax benefits as of September 30, 2007. The Company is subject to taxation in the US and various state and foreign jurisdictions. The tax years 2002-2006 remain open to examination by the federal and most state tax authorities.
 
12

 
MCF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
 
6. Earnings (loss) per Share
 
The following is a reconciliation of the basic and diluted net income (loss) available to common stockholders and the number of shares used in the basic and diluted net income (loss) per common share computations for the periods presented:
 
     
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
     
2007
   
2006
   
2007
   
2006
 
Net income (loss) available to stockholders - basic
 
$
188,460
 
$
(5,109,051
)
$
2,578,089
 
$
(7,518,594
)
Interest on dilutive securities
   
4,084
   
   
12,252
   
 
Net income (loss) available to stockholders - diluted
 
$
192,544
 
$
(5,109,051
)
$
2,590,341
 
$
(7,518,594
)
 
                         
Weighted-average number of common shares - basic
   
11,999,656
   
10,151,922
   
11,337,346
   
9,906,672
 
Exercise or conversion of all potentially dilutive common shares outstanding
   
1,139,728
   
   
1,162,198
   
 
Weighted-average number of common shares - diluted
   
13,139,384
   
10,151,922
   
12,499,544
   
9,906,672
 
Basic net income (loss) per common share:
                         
Income (loss) from continuing operations
 
$
0.02
 
$
(0.50
)
$
0.23
 
$
(0.74
)
Loss from discontinued operations
 
$
 
$
(0.01
)
$
 
$
(0.02
)
Net income (loss)
 
$
0.02
 
$
(0.51
)
$
0.23
 
$
(0.76
)
Diluted net loss per common share:
                         
Income (loss) from continuing operations
 
$
0.01
 
$
(0.50
)
 
(0.21
)
 
(0.74
)
Loss from discontinued operations
 
$
 
$
(0.01
)
$
 
$
(0.02
)
Net income (loss)
 
$
0.01
 
$
(0.51
)
$
0.21
 
$
(0.76
)
 
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding, excluding shares of non-vested stock. Diluted earnings per share is calculated by dividing net income, plus interest and dividends on dilutive securities, by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding, including non-vested stock. Diluted loss per share is unchanged from basic loss per share for the three months and nine months ended September 30, 2006 because the addition of common shares that would be issued assuming exercise or conversion would be anti-dilutive.
  
Shares used in the diluted net income per share computation include the dilutive impact of the Company's stock options and warrants. The impact of the Company's stock options and warrants on shares used for the diluted earnings per share computation is calculated based on the average share price of the Company's common stock for each period using the treasury stock method. Under the treasury stock method, the tax-effected proceeds that would be hypothetically received from the exercise of all stock options and warrants with exercise prices below the average share price of the Company's common stock are assumed to be used to repurchase shares of the Company's common stock. Because the Company reported a net loss during the three months and nine months ended September 30, 2006, the Company excluded the impact of all stock options and warrants in the computation of dilutive earnings per share, as their effect would be anti-dilutive.
 
13

 
MCF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(unaudited)
 
6. Earnings (loss) per Share - continued

The Company excludes all potentially dilutive securities from its diluted net income (loss) per share computation when their effect would be anti-dilutive. The following common stock equivalents were excluded from the earnings per share computation, as their inclusion would have been anti-dilutive:
 
   
Three Months Ended 
September 30,
  Nine Months Ended
September 30, 
 
 
 
2007
 
2006
 
2007
 
2006
 
Stock options and warrants excluded due to the exercise price exceeding the average fair value of the Company's common stock during the period
   
2,093,089
   
1,519,107
   
1,756,224
   
1,335,327
 
Weighted average non-vested stock, stock options and stock warrants, calculated using the treasury stock method, that were excluded due to the Company reporting a net loss during the period
   
   
1,568,682
   
   
2,018,006
 
Weighted average shares issuable upon conversion of the convertible notes payable
   
   
902,736
   
   
721,812
 
Weighted average shares contingently issuable
   
   
52,876
   
   
80,320
 
Total common stock equivalents excluded from diluted net income (loss) per share
   
2,093,089
   
4,043,401
   
1,756,224
   
4,155,465
 

7. Other Operating Expenses
 
The following expenses are included in other operating expenses for the three months and nine months ended September 30, 2007:
 
     
Three Months Ended 
September 30,
   
Nine Months Ended
September 30,
 
     
2007
   
2006
   
2007
   
2006
 
Investor conferences
 
$
521,759
 
$
593,580
 
$
910,130
 
$
874,487
 
Recruiting
   
116,778
   
134,452
   
486,839
   
264,349
 
Bad debt expenses
   
140,105
   
   
368,271
   
(445,016
)
Public and investor relations
   
208,058
   
73,165
   
368,769
   
247,166
 
Supplies
   
65,954
   
58,887
   
233,661
   
213,450
 
Insurance
   
73,659
   
66,997
   
220,663
   
197,867
 
Other
   
151,206
   
115,657
   
405,545
   
225,721
 
 
 
$
1,277,519
 
$
1,042,738
 
$
2,993,878
 
$
1,578,024
 

8. Regulatory Requirements
 
Merriman Curhan Ford & Co. is a broker-dealer subject to Rule 15c3-1 of the Securities and Exchange Commission, which specifies uniform minimum net capital requirements, as defined, for their registrants. As of September 30, 2007, Merriman Curhan Ford & Co. had regulatory net capital, as defined, of $5,789,000, which exceeded the amount required by $4,789,000. Merriman Curhan Ford & Co. is exempt from Rules 15c3-3 and 17a-13 under the Securities Exchange Act of 1934 because it does not carry customer accounts, nor does it hold customer securities or cash.
 
14

 
ITEM 2  Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “may,” “will,” “should,” “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “predicts,” “potential” or “continue,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are referred to risks and uncertainties identified underRisk Factors” beginning on Page 24 and elsewhere herein. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
 
Overview
 
MCF Corporation (AMEX:MEM) is a financial services holding company that provides investment research, capital markets services, corporate and venture services, investment banking, asset management and primary research through its operating subsidiaries, Merriman Curhan Ford & Co., MCF Asset Management, LLC and Panel Intelligence, LLC.
 
Merriman Curhan Ford & Co. is an investment bank and securities broker-dealer focused on fast growing companies and institutional investors. Our mission is to become a leader in the researching, advising, financing, trading and investing in fast growing companies under $2 billion in market capitalization. We provide equity research, brokerage and trading services primarily to institutions, as well as investment banking and advisory services to corporate clients. We are gaining market share by originating differentiated research for our institutional investor clients and providing specialized and integrated services for our fast-growing corporate clients.
 
In April 2007, we acquired MedPanel, Inc. and began offering primary research services to top biotechnology, pharmaceutical, medical device, and financial services companies through our newly formed subsidiary, Panel Intelligence, LLC. Clients pay subscription fees for access to our online research platform, providing them with greater strategic direction for investment decisions, product development, and marketing.

MCF Asset Management, LLC manages absolute return investment products for institutional and high-net worth clients. During 2006, we introduced the MCF Navigator fund and MCF Voyager fund. Additionally, we are the sub-advisor for the MCF Focus fund. As of September 30, 2007, assets under management across our three fund products exceeded $50 million.
 
In February 2005, we acquired Catalyst Financial Planning & Investment Management, Inc. Catalyst, a Registered Investment Advisor, provides investment advice to clients that have invested approximately $130 million of assets. In January 2007, we sold Catalyst in order to focus on other recurring-revenue businesses, such as primary research and asset management, which we believe are faster growing and more profitable opportunities. While we currently do not have any specific plans, we do intend to pursue a wealth management strategy at some future date. The results from this segment have been treated as discontinued operations in the condensed consolidated financial statements.
 
Executive Summary
 
Revenue for the third quarter 2007 exceeded $17.6 million, which represented an increase of more than $10 million, or 138%, over the third quarter 2006. Revenue growth during the latest quarter was led by investment banking and principal transactions, which were $3.7 million and $3.6 million higher in 2007 as compared to 2006, respectively. Commissions revenue was up $1.2 million, or 18%, from third quarter 2006 and we experienced continued growth for each of our recurring revenue activities, including asset management and primary research. Net income for the third quarter 2007 was $188,000, or $0.01 per diluted share, which represents the third consecutive quarter of profitability for our firm. Profitability during the latest quarter was partially attributable to net gains in our firm trading and market making accounts, including our proprietary trading activity which represents the company's highest margin business. Compensation and benefits expense as a percentage of revenue during the three months ended September 30, 2007 was 68%, which represents a significant improvement from third quarter 2006.

For the first three quarters of 2007, revenue was $18.5 million, or 55%, higher than the similar period in 2006. Net income for the nine months ended September 30, 2007 exceeded $2.5 million, or $0.21 per diluted share, as compared to a net loss of $7.5 million, or $0.76 per diluted share, for the nine months ended September 30, 2006.
 
15

 
Business Environment
 
Most categories of U.S. stocks finished the third quarter higher. The final results masked a significant spike in market volatility from mid-July through mid-August, however, as concerns about the subprime mortgage market intensified and evidence mounted that the damage could spread beyond subprime borrowers and lenders. The Federal Reserve took action in both July and August, cutting both the federal funds rate and discount rate. Investors welcomed these rate reductions, and most broad-based stock indexes were trading near their all-time highs at the end of the quarter.

Small-cap stocks struggled in this environment, with the Russell 2000® Index down 3.09% for the quarter. Growth topped value across all capitalization groups, with large caps leading the way. Among S&P 500 sectors, energy and information technology delivered strong gains, while consumer discretionary and financials ended the quarter with losses.

Our securities broker-dealer and investment banking activities are linked to the capital markets. In addition, our business activities are focused in the consumer growth, healthcare, specialty growth and technology sectors. By their nature, our business activities are highly competitive and are not only subject to general market conditions, volatile trading markets and fluctuations in the volume of market activity, but also to the conditions affecting the companies and markets in our areas of focus. Fluctuations in revenue also occur due to the overall level of market activity, which, among other things, affects the flow of investment dollars and the size, number and timing of investment banking transactions. In addition, a downturn in the level of market activity can lead to a decrease in brokerage commissions. Therefore, revenue in any particular period may vary significantly from year to year.

Results of Operations 

The following table sets forth the results of operations for the three months and nine months ended September 30, 2007 and 2006:
 
     
Three Months Ended
   
Nine Months Ended
 
     
September
30, 2007
   
September
30, 2006
   
September
30, 2007
   
September
30, 2006
 
Revenue:
                         
Commissions
 
$
7,923,963
 
$
6,700,416
 
$
22,807,243
 
$
23,344,124
 
Principal transactions
   
2,478,297
   
(1,148,313
)
 
10,804,073
   
(1,480,963
)
Investment banking
   
5,616,491
   
1,839,288
   
15,480,518
   
11,750,176
 
Primary research
   
1,165,428
   
   
2,116,490
   
 
Advisory and other fees
   
476,015
   
35,099
   
1,147,363
   
238,321
 
Total revenue
   
17,660,194
   
7,426,490
   
52,355,687
   
33,851,658
 
Operating expenses:
                         
Compensation and benefits
   
12,096,131
   
8,534,218
   
35,673,505
   
29,987,310
 
Brokerage and clearing fees
   
627,223
   
598,644
   
1,921,920
   
1,987,504
 
Cost of primary research services
   
555,185
   
   
950,403
   
 
Professional services
   
518,045
   
567,535
   
1,603,163
   
1,850,916
 
Occupancy and equipment
   
499,459
   
406,047
   
1,395,048
   
1,195,202
 
Communications and technology
   
921,853
   
800,061
   
2,618,799
   
2,123,963
 
Depreciation and amortization
   
193,284
   
156,760
   
556,332
   
467,870
 
Amortization of intangible assets
   
264,771
   
   
485,414
   
 
Travel and entertainment
   
635,353
   
611,712
   
1,789,971
   
1,960,304
 
Other
   
1,277,519
   
1,042,738
   
2,993,878
   
1,578,024
 
Total operating expenses
   
17,588,823
   
12,717,715
   
49,988,433
   
41,151,093
 
Operating income (loss)
   
71,371
   
(5,291,225
)
 
2,367,254
   
(7,299,435
)
Interest income
   
132,965
   
117,945
   
362,919
   
367,711
 
Interest expense
   
(15,876
)
 
134,895
   
(97,087
)
 
(408,002
)
Income (loss) from continuing operations before taxes
   
188,460
   
(5,038,385
)
 
2,633,087
   
(7,339,726
)
Income tax expense
   
   
   
(55,000
)
 
 
Income (loss) from continuing operations
   
188,460
   
(5,038,385
)
 
2,578,089
   
(7,339,726
)
Loss from discontinued operations
   
   
(70,666
)
 
   
(178,868
)
Net income (loss)
 
$
188,460
 
$
(5,109,051
)
$
2,578,089
 
$
(7,518,594
)
 
16

 
Our net income (loss) for the three months and nine months ended September 30, 2007 and 2006 included the following non-cash expenses:
 
     
Three Months Ended
   
Nine Months Ended
 
     
September
30, 2007
   
September
30, 2006
   
September
30, 2007
   
September
30, 2006
 
Stock-based compensation
 
$
694,574
 
$
1,197,256
 
$
2,146,436
 
$
3,179,305
 
Depreciation and amortization
   
193,284
   
137,702
   
556,332
   
474,637
 
Amortization of intangible assets
   
264,771
   
34,214
   
485,414
   
34,214
 
Write-off of uncollectible accounts receivable
   
140,105
   
   
368,272
   
 
Amortization of discounts on debt
   
2,583
   
175,543
   
7,749
   
326,383
 
Total
 
$
1,295,317
 
$
1,544,715
 
$
3,564,203
 
$
4,014,539
 
 
Investment Banking Revenue
 
Our investment banking activity includes the following:
 
 
·
Capital Raising - Capital raising includes private placements of equity and debt instruments and underwritten public offerings.
 
 
·
Financial Advisory - Financial advisory includes advisory assignments with respect to mergers and acquisitions, divestures, restructurings and spin-offs.
 
The following table sets forth our revenue and transaction volumes from our investment banking activities for the three months and nine months ended September 30, 2007 and 2006:
 
     
Three Months Ended
   
Nine Months Ended
 
     
September
30, 2007
   
September
30, 2006
   
September
30, 2007
   
September
30, 2006
 
Revenue:
                         
Capital raising
 
$
3,881,491
 
$
1,194,288
 
$
13,028,018
 
$
10,429,291
 
Financial advisory
   
1,735,000
   
645,000
   
2,452,500
   
1,320,885
 
Total investment banking revenue
 
$
5,616,491
 
$
1,839,288
 
$
15,480,518
 
$
11,750,176
 
 
                         
Transaction Volumes:
                         
Public offerings:
                         
Capital underwritten participations
 
$
8,505,000
 
$
 
$
113,744,000
 
$
104,151,000
 
Number of transactions
   
1
   
   
7
   
10
 
Private placements:
                         
Capital raised
 
$
101,210,000
 
$
19,385,000
 
$
187,795,000
 
$
107,385,000
 
Number of transactions
   
8
   
4
   
15
   
8
 
 
Our investment banking revenue was $5,616,000, or 32% of our revenue during third quarter 2007, representing a 205% increase from the similar quarter in 2006. We were placement agent for eight private transactions and a co-manager for one public offering during the three months ended September 30, 2007.
 
During the nine months ended September 30, 2007, no single investment banking client accounted for more than 10% of our revenue, while one investment banking client accounted for 11% of our revenue during the first nine months of 2006.
 
17

 
Commissions and Principal Transactions Revenue
 
Our broker-dealer activity includes the following:
 
 
·
Commissions - Commissions include revenue resulting from executing stock trades for exchange-listed securities, over-the-counter securities and other transactions as agent.
 
 
·
Principal Transactions - Principal transactions consist of a portion of dealer spreads attributed to our securities trading activities as principal in NASDAQ-listed and other securities, and include transactions derived from our activities as a market-maker. Additionally, principal transactions include gains and losses resulting from market price fluctuations that occur while holding positions in our trading security inventory.
 
The following table sets forth our revenue and several operating metrics which we utilize in measuring and evaluating performance and the results of our trading activity operations:
 
     
Three Months Ended
   
Nine Months Ended
 
     
September
30, 2007
   
September
30, 2006
   
September
30, 2007
   
September
30, 2006
 
Revenue:
                         
Commissions
 
$
7,923,963
 
$
6,700,416
 
$
22,807,243
 
$
23,344,124
 
Principal transactions:
                         
Customer principal transactions, proprietary trading and market making
 
$
1,888,770
 
$
(1,135,723
)
$
9,243,523
 
$
(1,263,456
)
Investment portfolio
   
589,527
   
(12,590
)
 
1,560,550
   
(217,507
)
Total principal transactions revenue
 
$
2,478,297
 
$
(1,148,313
)
$
10,804,073
 
$
(1,480,963
)
Transaction Volumes:
                         
Number of shares traded
   
315,936,384
   
193,666,883
   
793,084,262
   
701,398,931
 
Number of active clients
   
374
   
362
   
537
   
510
 

Commissions amounted to $7,924,000, or 45%, of our revenue during the third quarter 2007, representing a 18% increase from the similar period in 2006. Higher revenue for brokering institutional money funds by our Institutional Cash Distributors division was partially offset by lower brokerage commissions.
 
Principal transactions revenue swung from a $1,148,000 loss during the third quarter 2006 to a $2,478,000 gain during the third quarter of 2007. The 2007 gain included increases in the mark-to-market value of positions in our proprietary trading account, increased profitability in our market making activities, as well as realized and unrealized gains in our investment portfolio. As of September 30, 2007, we made markets in over 1,100 stocks, which has increased by more than 30% from September 30, 2006. We view “intelligent market making” as a key element to differentiating ourselves from our competition in small capitalization equities. Principal transactions revenue consists of four different activities - customer principal trades, market making, trading for our proprietary account, and realized and unrealized gains and losses in our investment portfolio. As a broker-dealer, we account for all of our marketable security positions on a trading basis and as a result, all security positions are marked to fair market value each day. Returns from market making and proprietary trading activities tend to be more volatile than acting as agent or principal for customers.
 
During 2007 and 2006, no single brokerage customer accounted for more than 10% of our revenue from continuing operations.

Primary Research Revenue
 
 Primary research revenue represents the operating results of Panel Intelligence from the date of the MedPanel acquisition, April 17, 2007, through September 30, 2007.  We are now offering independent market data and information to clients in the biotechnology, pharmaceutical, medical device, clean tech and financial industries.
 
18

 
Compensation and Benefits Expenses
 
Compensation and benefits expense represents the largest component of our operating expenses and includes incentive compensation paid to sales, trading, research and investment banking professionals, as well as discretionary bonuses, salaries and wages, and stock-based compensation. Incentive compensation varies primarily based on revenue production. Discretionary bonuses paid to research analysts also vary with commissions revenue production but includes other qualitative factors as well. Salaries, payroll taxes and employee benefits tend to vary based on overall headcount.

The following table sets forth the major components of our compensation and benefits for the three months and nine months ended September 30, 2007 and 2006:
 
     
Three Months Ended
   
Nine Months Ended
 
     
September
30, 2007
   
September
30, 2006
   
September
30, 2007
   
September
30, 2006
 
Incentive compensation and discretionary bonuses
 
$
6,566,759
 
$
4,169,791
 
$
19,950,445
 
$
17,422,932
 
Salaries and wages
   
3,928,087
   
2,402,530
   
10,527,878
   
6,737,427
 
Stock-based compensation
   
694,574
   
1,197,256
   
2,146,436
   
3,179,305
 
Payroll taxes, benefits and other
   
906,711
   
764,641
   
3,048,746
   
2,647,646
 
Total compensation and benefits
 
$
12,096,131
 
$
8,534,218
 
$
35,673,505
 
$
29,987,310
 
Total compensation and benefits expense as a percentage of revenue
   
68
%
 
115
%
 
68
%
 
89
%
Cash compensation and benefits expense as a percentage of revenue
   
65
%
 
99
%
 
64
%
 
79
%

The increase in compensation and benefits expense of $3,562,000, or 42%, from the third quarter 2006 to the third quarter 2007 was due primarily to higher incentive compensation which is directly correlated to revenue production. Cash compensation is equal to total compensation and benefits expense excluding stock-based compensation, which is a non-cash expense. Cash compensation and benefits expense as a percentage of revenue decreased to 65% during the three months ended September 30, 2007 as compared to 99% during the similar period in 2006. This improvement was largely attributed to higher investment banking and principal transactions revenue during 2007 as these activities represent our highest margin businesses.
 
During the three months ended September 30, 2007, one sales professional accounting for 12% of our revenue. No single sales professional accounted for more than 10% of our revenue during the three months ended September 30, 2006, and nine months ended September 30, 2007 and 2006.
 
Stock-based compensation expense decreased by $503,000, or 42%, during the third quarter 2007 as compared to the similar quarter in 2006. The decline in stock-based compensation expense was due mostly to fewer non-vested restricted shares outstanding in 2007.

Other Operating Expenses

Brokerage and clearing fees include trade processing expenses that we pay to our clearing broker and execution fees that we pay to floor brokers and electronic communication networks. Merriman Curhan Ford & Co. is a fully-disclosed broker-dealer, which has engaged a third party clearing broker to perform all of the clearance functions. The clearing broker-dealer processes and settles the customer transactions for Merriman Curhan Ford & Co. and maintains the detailed customer records. Additionally, security trades are executed by third-party broker-dealers and electronic trading systems. These expenses are almost entirely variable with commission revenue and the volume of brokerage transactions. Our brokerage and clearing fees increased by $29,000, or 5%, during the third quarter of 2007 as compared to the third quarter of 2006 and decreased by $66,000, or 3%, during the nine months ended September 30, 2007 as compared to the similar period in 2006. The third quarter increase reflected higher market making activities while the slight decrease for the first three quarters of 2007 resulted from lower overall commissions revenue during 2007, partially offset by increased market making activity as compared to 2006.

Costs of primary research revenue principally consist of panelist honorarium and recruitment costs. Medical experts receive cash honoraria for participating in qualitative panels and quantitative surveys. We pay the honoraria to the panelists when the panel or survey has been completed and record this expense as incurred. We closed the acquisition of MedPanel on April 17, 2007 and began recognizing primary research revenue and related expenses since that date.
 
19

 
Professional services expense includes legal fees, accounting fees, expenses related to investment banking transactions, consulting fees and recruiting fees. Many of these expenses, such as legal and accounting fees, are to a large extent fixed in nature. The decrease of $49,000, or 9%, during the third quarter of 2007 as compared to the third quarter of 2006 and decrease of $248,000, or 13%, during the nine months ended September 30, 2007 as compared to the similar period in 2006 was primarily attributed to lower attorney fees associated with business development activities and lower accounting and auditing expenses.

Occupancy and equipment includes rental costs for our office facilities and equipment, as well as equipment, software and leasehold improvement expenses. These expenses are largely fixed in nature. The increase of $93,000, or 23%, during the third quarter of 2007 as compared to the third quarter of 2006 and increase of $200,000, or 17%, during the nine months ended September 30, 2007 as compared to the similar period in 2006 resulted mostly from higher hardware and equipment expenses that were incurred in connection with various technology projects.

Communications and technology expense includes market data and quote services, voice, data and Internet service fees, and data processing costs. Historically, these costs have increased as we hire additional employees. The increase of $122,000, or 15%, during the third quarter of 2007 as compared to the third quarter of 2006 and increase of $495,000, or 23% during the nine months ended September 30, 2007 as compared to the similar period in 2006 was primarily due to upgrading our trading order management system, as well as the increase in market data and quote services as we continue to expand our market maker activities.
 
Depreciation and amortization expense primarily relate to the depreciation of our computer equipment and leasehold improvements. Depreciation and amortization is mostly fixed in nature. The increase of $37,000, or 23%, during the third quarter of 2007 as compared to the third quarter of 2006 and increase of $88,000, or 19% during the nine months ended September 30, 2007 as compared to the similar period in 2006 was due to increased capital expenditures during 2006, including leasehold improvements to our San Francisco office, to facilitate our growth and expansion.

Identifiable intangible assets capitalized in connection with the acquisition of MedPanel included customer relationships, customer backlog, technology platform and the database of registered panelists. The estimated fair market value of these amortizable intangible assets amounting to $1,990,000 will be amortized over periods ranging from 8 months to 56 months.

Travel and entertainment expense results from business development activities across our various businesses. The increase of $24,000, or 4%, during the third quarter of 2007 as compared to the third quarter of 2006 was attributed to higher investment banking business development spending while the decrease of $170,000, or 9% during the nine months ended September 30, 2007 as compared to the similar period in 2006 was due mostly to our focus to minimize discretionary spending in an effort to improve profitability.
 
The following expenses are included in other operating expenses for the three months and nine months ended September 30, 2007:

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
2007
 
2006
 
2007
 
2006
 
Investor conferences
 
$
521,759
 
$
593,580
 
$
910,130
 
$
874,487
 
Recruiting
   
116,778
   
134,452
   
486,839
   
264,349
 
Bad debt expenses
   
140,105
   
   
368,271
   
(445,016
)
Public and investor relations
   
208,058
   
73,165
   
368,769
   
247,166
 
Supplies
   
65,954
   
58,887
   
233,661
   
213,450
 
Insurance
   
73,659
   
66,997
   
220,663
   
197,867
 
Other
   
151,206
   
115,657
   
405,545
   
225,721
 
 
 
$
1,277,519
 
$
1,042,738
 
$
2,993,878
 
$
1,578,024
 

The increase in other operating expenses of $235,000, or 23%, during the third quarter of 2007 as compared to the third quarter of 2006 was primarily due to the write-off of $140,000 in uncollectible receivables related to investment banking transactions that will not be completed and $135,000 for services provided by an investor relations consulting firm. The increase of $1,416,000, or 90%, during the nine months ended September 30, 2007 as compared to the similar period in 2006 was due to (i) the recovery in April 2006 of the $500,000 note receivable from Ascend that had been previously written-off in 2005, (ii) higher recruiting costs for some senior investment bankers and institutional sales professionals and (iii) the write-off of uncollectible receivables related to investment banking activities.
 
20

 
Income Tax Expense

At the end of each interim reporting period we calculate an effective tax rate based on our best estimate of the tax provision (benefit) that will be provided for the full year, stated as a percentage of estimated annual pre-tax income (loss). The tax provision (benefit) for the interim period is determined using this estimated annual effective tax rate. For the nine months ended September 30, 2007 and 2006, we recorded $55,000 and $0 as income tax expense, respectively.

The effective tax rate differs from the statutory rate primarily due to the existence and utilization of net operating loss carryforwards which have been offset by a valuation allowance resulting in a tax provision equal to the companies expected current expense for the year. We historically have had current tax expense primarily related to alternative minimum, state and minimum tax liabilities.     

Historically and currently, we have recorded a valuation allowance on our deferred tax assets, the significant component of which relates to net operating loss tax carryforwards. Management continually evaluates the realizability of its deferred tax assets based upon negative and positive evidence available. Based on the evidence available at this time, we continue to conclude that it is not "more likely than not" that we will be able to realize the benefit of our deferred tax assets in the near future.

We adopted Interpretation No. 48 on January 1, 2007. As a result of the implementation of FIN 48, we recognized no adjustment in the liability for unrecognized income tax benefits and no corresponding change in retained earnings. We do not have any material accrued interest or penalties associated with any unrecognized tax benefits. We do not believe it is reasonably possible that our unrecognized tax benefits will significantly change within the next twelve months. There were no unrecognized tax benefits as of September 30, 2007. We are subject to taxation in the US and various state and foreign jurisdictions. The tax years 2002-2006 remain open to examination by the federal and most state tax authorities.

Loss from Discontinued Operations
 
In December 2006, we decided to sell our Catalyst subsidiary and discontinue our wealth management activities. The sale of Catalyst closed in January 2007. As of December 31, 2006, Catalyst was accounted for as held for sale in accordance with SFAS 144. As a result, the revenue and expenses of Catalyst and MCF Wealth Management, LLC for 2006 have been reclassified and included in discontinued operations in the condensed consolidated statements of operations.

Off-Balance Sheet Arrangements

We were not a party to any off-balance sheet arrangements during the nine months ended September 30, 2007 and 2006. In particular, we do not have any interest in so-called limited purpose entities, which include special purpose entities and structured finance entities.
 
Commitments

The following is a table summarizing our significant commitments as of September 30, 2007, consisting of debt payments related to convertible notes payable, non-convertible notes payable, capital leases and future minimum lease payments under all non-cancelable operating leases with initial or remaining terms in excess of one year.
 
 
 
Notes
Payable
 
Operating
Leases
 
Capital
Leases
 
Less than one year
 
$
26,694
 
$
545,011
 
$
149,307
 
One year to three years
   
243,990
   
3,179,296
   
769,607
 
Three years to five years
   
   
985,839
   
 
Total commitments
 
$
270,684
 
$
4,710,146
 
$
918,914
 
 
Critical Accounting Policies and Estimates
 
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to the valuation of securities owned and deferred tax assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
 
21

 
Revenue Recognition
 
Investment banking revenue includes underwriting and private placement agency fees earned through our participation in public offerings and private placements of equity and convertible debt securities and fees earned as financial advisor in mergers and acquisitions and similar transactions. Underwriting revenue is earned in securities offerings in which we act as an underwriter and includes management fees, selling concessions and underwriting fees. Fee revenue relating to underwriting commitments is recorded when all significant items relating to the underwriting cycle have been completed and the amount of the underwriting revenue has been determined. This generally is the point at which all of the following have occurred: (i) the issuer's registration statement has become effective with the SEC, or other offering documents are finalized, (ii) the Company has made a firm commitment for the purchase of the shares or debt from the issuer, and (iii) the Company has been informed of the exact number of shares or the principal amount of debt that it has been allotted. Syndicate expenses related to securities offerings in which we act as underwriter or agent are deferred until the related revenue is recognized or we determine that it is more likely than not that the securities offerings will not ultimately be completed. Merger and acquisition fees and other advisory service revenue are generally earned and recognized only upon successful completion of the engagement. Underwriting revenue is presented net of related expenses. Unreimbursed expenses associated with private placement and advisory transactions are recorded as expenses as incurred. As co-manager for registered equity underwriting transactions, management must estimate our share of transaction related expenses incurred by the lead manager in order to recognize revenue. Transaction related expenses are deducted from the underwriting fee and therefore reduces the revenue that is recognized as co-manager. Such amounts are adjusted to reflect actual expenses in the period in which we receive the final settlement, typically 90 days following the closing of the transaction.

Commissions revenue and related clearing expenses are recorded on a trade-date basis as security transactions occur. Principal transactions in regular-way trades are recorded on the trade date, as if they had settled. Profit and loss arising from all securities and commodities transactions entered into for the account and risk of our company are recorded on a trade-date basis.

Primary research revenue is recognized on a proportional performance basis as services are provided.

Valuation of Securities Owned
 
“Securities owned” and “Securities sold, but not yet purchased” in our consolidated statements of financial condition consist of financial instruments carried at fair value or amounts that approximate fair value, with related unrealized gains or losses recognized in our results of operations. The use of fair value to measure these financial instruments, with related unrealized gains and losses recognized immediately in our results of operations, is fundamental to our financial statements and is one of our most critical accounting policies. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

Fair values of our financial instruments are generally obtained from quoted market prices in active markets, broker or dealer price quotations, or alternative pricing sources with reasonable levels of price transparency. To the extent certain financial instruments trade infrequently or are non-marketable securities and, therefore, have little or no price transparency, we value these instruments based on management's estimates. The fair value of these securities is subject to a high degree of volatility and may be susceptible to significant fluctuation in the near term. Securities that contain restrictions are stated at a discount to the value of readily marketable securities. Stock warrants are carried at a discount to fair value as determined by using the Black-Scholes Option Pricing model.
 
Stock-Based Compensation
 
On January 1, 2006, we adopted SFAS 123(R), “Share-Based Payment,” which requires the measurement and recognition of compensation expense, based on estimated fair values, for all share-based awards, made to employees and directors, including stock options, non-vested stock, and participation in our employee stock purchase plan. Share-based compensation expense recognized in our consolidated statement of operations for the three months and nine months ended September 30, 2007 and 2006 includes compensation expense for share-based awards granted (i) prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123, and (ii) subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).
 
22

 
We estimate the fair value of stock options granted using the Black-Scholes option pricing method. This option pricing model requires the input of highly subjective assumptions, including the option's expected life and the price volatility of the underlying stock. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. The Company calculated the expected term using the lattice model with specific assumptions about the suboptimal exercise behavior, post-vesting termination rates and other relevant factors. The expected stock price volatility was determined using the historical volatility of our common stock. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

Because share-based compensation expense is based on awards that are ultimately expected to vest, it has been reduced to account for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation.
 
Deferred Tax Valuation Allowance
 
We account for income taxes in accordance with the provision of SFAS No. 109, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities at tax rates expected to be in effect when these balances reverse. Future tax benefits attributable to temporary differences are recognized to the extent that the realization of such benefits is more likely than not. We have concluded that it is more likely than not that our deferred tax assets as of September 30, 2007 and 2006 will not be realized based on the scheduling of deferred tax liabilities and projected taxable income. The amount of the deferred tax assets actually realized, however, could vary if there are differences in the timing or amount of future reversals of existing deferred tax liabilities or changes in the actual amounts of future taxable income. Should we determine that we will be able to realize all or part of the deferred tax asset in the future, an adjustment to the deferred tax asset will be recorded in the period such determination is made.

Liquidity and Capital Resources
 
Historically, we have satisfied our liquidity and regulatory capital needs through the issuance of equity and debt securities. As of September 30, 2007, liquid assets consisted primarily of cash and cash equivalents of $12,471,000 and marketable securities, net of securities sold not yet purchased, of $12,185,000, for a total of $24,656,000.
 
Cash and cash equivalents decreased by $1,276,000 during the nine months ended September 30, 2007. Cash used in operating activities for 2007 was $966,000 which consisted of our net income adjusted for non-cash expenses including stock-based compensation, depreciation and amortization, partially offset by unrealized gains related to securities owned and changes in operating asset and liability balances. Cash used in investing activities amounted to $153,000 during 2007 which consisted of purchases of equipment and fixtures, partially offset by proceeds from the sale of Catalyst. Cash used in financing activities was $157,000. Our financing activities included debt service payments, partially offset by proceeds from the issuance of common stock in connection with our employee stock purchase plan and employee stock option exercises.

Merriman Curhan Ford & Co., as a broker-dealer, is subject to Rule 15c3-1 of the Securities Exchange Act of 1934, which specifies uniform minimum net capital requirements, as defined, for their registrants. As of September 30, 2007, Merriman Curhan Ford & Co. had regulatory net capital of $5,789,000 which exceeded the required amount by $4,789,000.
 
We believe that our existing cash balances and investments will be sufficient to meet our liquidity and capital spending requirements, both for the next twelve months as well as for the long-term. However, we may require additional capital investment to fund our working capital if we incur future operating losses. We cannot be certain that additional debt or equity financing will be available when required or, if available, that we can secure it on terms satisfactory to us.
  
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Item  3.   Quantitative and Qualitative Disclosures About Market Risk
 
The following discussion about market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We may be exposed to market risks related to changes in equity prices, interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative, trading or any other purpose.
 
Equity Price Risk
 
The potential for changes in the market value of our trading positions is referred to as “market risk.” Our trading positions result from proprietary trading activities. These trading positions in individual equities and equity indices may be either long or short at any given time. Equity price risks result from exposures to changes in prices and volatilities of individual equities and equity indices. We seek to manage this risk exposure through diversification and limiting the size of individual positions within the portfolio. The effect on earnings and cash flows of an immediate 10% increase or decrease in equity prices generally is not ascertainable and could be positive or negative, depending on the positions we hold at the time. We do not establish hedges in related securities or derivatives. From time to time, we also hold equity securities received as compensation for our services in investment banking transactions. These equity positions are always long. However, as the prices of individual equity securities do not necessarily move in tandem with the direction of the general equity market, the effect on earnings and cash flows of an immediate 10% increase or decrease in equity prices generally is not ascertainable.
 
Interest Rate Risk
 
Our exposure to market risk resulting from changes in interest rates relates primarily to our investment portfolio and long term debt obligations. Our interest income and cash flows may be impacted by changes in the general level of U.S. interest rates. We do not hedge this exposure because we believe that we are not subject to any material market risk exposure due to the short-term nature of our investments. We would not expect an immediate 10% increase or decrease in current interest rates to have a material effect on the fair market value of our investment portfolio.
 
Our long term debt obligations bear interest at a fixed rate. Accordingly, an immediate 10% increase or decrease in current interest rates would not have an impact on our interest expense or cash flows. The fair market value of our long term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. We would not expect an immediate 10% increase or decrease in current interest rates to have a material impact on the fair market value of our long term debt obligations.
 
Foreign Currency Risk
 
We do not have any foreign currency denominated assets or liabilities or purchase commitments and have not entered into any foreign currency contracts. Accordingly, we are not exposed to fluctuations in foreign currency exchange rates.
 
Item  4.  Controls and Procedures 

Evaluation of Disclosure Controls and Procedures - We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company's financial reports and to other members of senior management and the Board of Directors.

Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the Principal Executive Officer and Principal Financial Officer of the Company have concluded that the disclosure controls and procedures are effective as of September 30, 2007.

Changes in internal controls -There was no change in the Company's internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) of the Exchange Act) that occurred during the quarter ended September 30, 2007, that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
 
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PART II.   OTHER INFORMATION
 
 Item  1. Legal Proceedings 
 
Thomas O'Shea v. Merriman Curhan Ford & Co.
 
In June 2006, our broker-dealer subsidiary Merriman Curhan Ford & Co. was served with a claim in NASD Arbitration by Mr. O'Shea. Mr. O'Shea is a former at-will employee of Merriman Curhan Ford & Co. and worked in the investment banking department. Mr. O'Shea resigned from Merriman Curhan Ford & Co. in July 2005. Mr. O'Shea alleges breach of an implied employment contract, quantum meruit, and unjust enrichment based on his allegations that he was to be paid more for his work. The matter is in the discovery stage and an arbitration hearing scheduled for June 2007 is being rescheduled between the parties and the Arbitration Panel. We believe that we have meritorious defenses and intend to contest these claims vigorously. However, in the event that we did not prevail, based upon the facts as we know them to date, we do not believe that the outcome will have a material effect on our financial position, financial results or cash flows.

S3 Investment Company, Inc. v. Merriman Curhan Ford & Co. and Qualico Capital, Inc.

In September 2007, Merriman Curhan Ford & Co. was served with a complaint filed by a former client S3 Investment Company, Inc. (“S3i”).The matter is pending before the Superior Count in the City and County of San Francisco. The plaintiff alleges theories of breach of contract, fraud, negligent misrepresentation, intentional and negligent interference with prospective economic relations. We believe that we have meritorious defenses and intend to contest these claims vigorously. However, in the event that we did not prevail, based upon the facts as we know them to date, we do not believe that the outcome will have a material effect on our financial position, financial results or cash flows.

Additionally, from time to time, we are involved in ordinary routine litigation incidental to our business.
 
Item 1A. Risk Factors
 
Investing in our securities involves a high degree of risk. In addition to the other information contained in this quarterly report, including reports we incorporate by reference, you should consider the following factors before investing in our securities.

 
We may not be able to maintain a positive cash flow and profitability.
 
Our ability to maintain a positive cash flow and profitability depends on our ability to generate and maintain greater revenue while incurring reasonable expenses. This, in turn, depends, among other things, on the development of our securities brokerage and investment banking business, and we may be unable to maintain profitability if we fail to do any of the following:
 
·
establish, maintain and increase our client base;

·
manage the quality of our services;

·
compete effectively with existing and potential competitors;

·
further develop our business activities;

·
manage expanding operations; and

·
attract and retain qualified personnel.
 
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We cannot be certain that we will be able to sustain or increase a positive cash flow and profitability on a quarterly or annual basis in the future. Our inability to maintain profitability or positive cash flow could result in disappointing financial results, impede implementation of our growth strategy or cause the market price of our common stock to decrease. Accordingly, we cannot assure you that we will be able to generate the cash flow and profits necessary to sustain our business expectations, which makes our ability to successfully implement our business plan uncertain.
 
The factors upon which we are able to base our estimates as to the gross revenue and the number of participating clients that will be required for us to maintain a positive cash flow and any additional financing that may be needed for this purpose are unpredictable. For these and other reasons, we cannot assure you that we will not require higher gross revenue, and an increased number of clients, securities brokerage and investment banking transactions, and/or more time in order for us to complete the development of our business that we believe we need to be able to cover our operating expenses, or obtain the funds necessary to finance this development. It is more likely than not that our estimates will prove to be inaccurate because actual events more often than not differ from anticipated events. Furthermore, in the event that financing is needed in addition to the amount that is required for this development, we cannot assure you that such financing will be available on acceptable terms, if at all.

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