**SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
D.C. 20549**
 
 
 **FORM
10-Q**
 
 **x**
    **QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934.**
 
 
 **For
the quarterly period ended March 31, 2005**
 
 ** ̈**
    **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**
    
    **11-2936371****(State
      or Other Jurisdiction of**
      **Incorporation
      or Organization)**
    
    **(I.R.S.
      Employer**
      **Identification
      No.)****600
      California Street, 9th Floor**
      **San
      Francisco, CA**
    
    **94108****(Address
      of Principal Executive Offices)**
    
    **(Zip
      Code)**
 
 
 **(415)
248-5600**
 **(Registrant’s
Telephone Number, Including Area Code)**
 
 
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x No  ̈
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2).  Yes x No  ̈
 
 The
number of shares of Registrant’s common stock outstanding as of May 5, 2005 was
70,572,207.
 
  
 
   **Form
10-Q**
 **For
the Three Months Ended March 31, 2005**
 
 **Page**
      **No.**PART
      I FINANCIAL INFORMATIONITEM
      1. Financial Statements (unaudited)Condensed
      Consolidated Statements of Operations For the Three Months Ended March 31,
      2005 and 2004
    
    2Condensed
      Consolidated Statements of Financial Condition as of March 31, 2005 and
      December 31, 20004
    
    3Condensed
      Consolidated Statements of Cash Flows For the Three Months Ended March 31,
      2005 and 2004
    
    4Notes
      to Condensed Consolidated Financial Statements
    
    5ITEM
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
    
    9ITEM
      3. Quantitative and Qualitative Disclosures About Market
    Risk
    
    21ITEM
      4. Controls and Procedures
    
    21PART
      II OTHER INFORMATIONITEM
      1. Legal Proceedings
    
    22ITEM
      2. Recent Sales of Unregistered Securities
    
    22ITEM
      6. Exhibits and Reports on Form 8-K
    
    22Signatures
    
    23Certifications
  1
  
  ****
 **PART
I. FINANCIAL INFORMATION**
 **Item
1. Financial Statements (unaudited)**
 
 **MCF
CORPORATION**
 **CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(unaudited)**
 
 **Three
      Months Ended March 31,****2005**
    
    **2004**Revenue:Commissions
    
    $
    6,021,963
    
    $
    5,906,064Principal
      transactions
    
    
    (373,142
    )
    
    624,478Investment
      banking
    
    
    6,758,810
    
    
    4,687,694Other
    
    
    65,485
    
    
    4,040Total
      revenue
    
    
    12,473,116
    
    
    11,222,276Operating
      expenses:Compensation
      and benefits
    
    
    9,201,965
    
    
    7,601,180Brokerage
      and clearing fees
    
    
    521,718
    
    
    717,549Professional
      services
    
    
    271,426
    
    
    254,498Occupancy
      and equipment
    
    
    349,959
    
    
    152,271Communications
      and technology
    
    
    423,424
    
    
    265,280Depreciation
      and amortization
    
    
    105,749
    
    
    23,940Other
    
    
    723,116
    
    
    518,035Total
      operating expenses
    
    
    11,597,357
    
    
    9,532,753Operating
      income
    
    
    875,759
    
    
    1,689,523Interest
      income
    
    
    74,827
    
    
    10,022Interest
      expense
    
    
    (17,187
    )
    
    (58,676
    )Income
      before income taxes
    
    
    933,399
    
    
    1,640,869Income
      tax expense
    
    
    (284,974
    )
    
    (396,448
    )Net
      income
    
    $
    648,425
    
    $
    1,244,421Earnings
      per share:Basic
    
    $
    0.01
    
    $
    0.02Diluted
    
    $
    0.01
    
    $
    0.02Weighted
      average common shares outstanding:Basic
    
    
    65,508,467
    
    
    54,758,184Diluted
    
    
    85,485,222
    
    
    79,879,489
 
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  2
  
 
 **MCF
CORPORATION**
 **CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**
 **(unaudited)**
 
 **March
      31,**
      **2005**
    
    **December
      31,**
      **2004**ASSETSCash
      and cash equivalents
    
    $
    17,450,276
    
    $
    17,459,113Securities
      owned:Marketable,
      at fair value
    
    
    3,778,321
    
    
    2,342,225Not
      readily marketable, at estimated fair value
    
    
    188,264
    
    
    259,340Restricted
      cash
    
    
    625,000
    
    
    625,000Due
      from clearing broker
    
    
    1,043,752
    
    
    787,862Accounts
      receivable, net
    
    
    1,533,946
    
    
    1,579,393Equipment
      and fixtures, net
    
    
    1,300,524
    
    
    1,032,797Intangible
      assets
    
    
    404,855
    
    
    —Prepaid
      expenses and other assets
    
    
    843,387
    
    
    922,094Total
      assets
    
    $
    27,168,325
    
    $
    25,007,824LIABILITIES
      AND STOCKHOLDERS’ EQUITYAccounts
      payable
    
    $
    592,576
    
    $
    431,656Commissions
      payable
    
    
    4,074,728
    
    
    2,840,239Accrued
      liabilities
    
    
    2,059,042
    
    
    2,962,660Due
      to clearing and other brokers
    
    
    110,638
    
    
    99,205Securities
      sold, not yet purchased
    
    
    10,278
    
    
    —Deferred
      revenue
    
    
    42,909
    
    
    —Capital
      lease obligation
    
    
    494,481
    
    
    452,486Convertible
      notes payable, net
    
    
    168,989
    
    
    166,404Notes
      payable
    
    
    1,299,270
    
    
    1,321,324Total
      liabilities
    
    
    8,852,911
    
    
    8,273,974Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, Series A—$0.0001 par value; 2,000,000 shares authorized; 0 shares
      issued and outstanding as of March 31, 2005 and December 31, 2004,
      respectively; aggregate liquidation preference of $0
    
    
    —
    
    
    —Preferred
      stock, Series B—$0.0001 par value; 12,500,000 shares authorized; 8,750,000
      shares issued and 0 shares outstanding as of March 31, 2005 and December
      31, 2004; aggregate liquidation preference of $0
    
    
    —
    
    
    —Preferred
      stock, Series C—$0.0001 par value; 14,200,000 shares authorized;
      11,800,000 shares issued and 0 shares outstanding as of March 31, 2005 and
      December 31, 2004; aggregate liquidation preference of $0
    
    
    —
    
    
    —Common
      stock, $0.0001 par value; 300,000,000 shares authorized; 70,513,618 and
      68,648,627 shares issued and outstanding as of March 31, 2005 and December
      31, 2004, respectively
    
    
    7,051
    
    
    6,865Additional
      paid-in capital
    
    
    111,215,427
    
    
    108,558,892Deferred
      compensation
    
    
    (4,887,458
    )
    
    (3,163,876
    )Accumulated
      deficit
    
    
    (88,019,606
    )
    
    (88,668,031
    )Total
      stockholders’ equity
    
    
    18,315,414
    
    
    16,733,850Total
      liabilities and stockholders’ equity
    
    $
    27,168,325
    
    $
    25,077,824
 
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  3
 
 **MCF
CORPORATION**
 **CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(unaudited)**
 **Three Months Ended March 31,****2005**
    
    **2004**Cash
      flows from operating activities:Net
      income
    
    $
    648,425
    
    $
    1,244,421Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
    
    
    105,749
    
    
    23,940Stock-based
      compensation
    
    
    525,670
    
    
    159,166Stock
      warrants issued
    
    
    —
    
    
    9,849Tax
      benefits from employee stock options
    
    
    62,359
    
    
    —Amortization
      of discounts on convertible notes payable
    
    
    2,585
    
    
    26,016Amortization
      of debt issuance costs
    
    
    —
    
    
    23,340Unrealized
      (gain) loss on securities
    
    
    40,720
    
    
    (141,519
    )Common
      stock and stock warrants received for investment banking
      services
    
    
    —
    
    
    (456,683
    )Other
    
    
    —
    
    
    4,371Changes
      in operating assets and liabilities:Marketable
      securities owned
    
    
    (1,395,462
    )
    
    (452,507
    )Due
      from clearing broker
    
    
    (255,890
    )
    
    (485,458
    )Accounts
      receivable
    
    
    45,447
    
    
    (229,042
    )Prepaid
      expenses and other assets
    
    
    96,858
    
    
    51,744Accounts
      payable
    
    
    159,825
    
    
    126,199Commissions
      payable
    
    
    1,234,489
    
    
    1,367,912Accrued
      liabilities
    
    
    (924,639
    )
    
    864,607Deferred
      revenue
    
    
    (19,520
    )Due
      to clearing and other brokers
    
    
    11,433
    
    
    (8,466
    )Net
      cash provided by operating activities
    
    
    338,049
    
    
    2,127,890Cash
      flows from investing activities:Purchase
      of equipment and fixtures
    
    
    (282,886
    )
    
    (17,481
    )Investment
      in Catalyst
    
    
    (345,368
    )
    
    —Net
      cash used in investing activities
    
    
    (628,254
    )
    
    (17,481
    )Cash
      flows from financing activities:Proceeds
      from the exercise of stock options and warrants
    
    
    20,001
    
    
    629,760Proceeds
      from the issuance of common stock
    
    
    325,109
    
    
    455,789Debt
      service payments
    
    
    (63,742
    )
    
    (23,032
    )Net
      cash provided by financing activities
    
    
    281,368
    
    
    1,062,517Increase
      (decrease) in cash and cash equivalents
    
    
    (8,837
    )
    
    3,172,926Cash
      and cash equivalents at beginning of period
    
    
    17,459,113
    
    
    6,142,958Cash
      and cash equivalents at end of period
    
    $
    17,450,276
    
    $
    9,315,884Supplementary
      disclosure of cash flow information:Cash
      paid during the period:Interest
    
    $
    13,047
    
    $
    22,570Income
      taxes
    
    $
    49,000
    
    $
    120,800Non-cash
      investing and financing activities:Preferred
      stock dividends
    
    $
    —
    
    $
    10,985Issuance
      of restricted stock
    
    $
    2,249,252
    
    $
    294,294Issuance
      of stock options accounted for at intrinsic value
    
    $
    —
    
    $
    123,250Conversion
      of notes payable to common stock
    
    $
    —
    
    $
    150,000Purchase
      of equipment and fixtures on capital lease
    
    $
    80,168
    
    $
    90,890Acquisition
      of Catalyst
    
    $
    59,487
    
    $
    —
 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 2004 audited consolidated financial statements
and notes thereto included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2004.
 
 *Commission
and Principal Transaction Revenue*
 
 Commission
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. Revenue generated from trading
activities and related expenses are recorded on a trade
date basis.
 
 *Investment
Banking Revenue*
 
 Investment
banking revenue consists of fees earned from private placements, mergers and
acquisitions, management fees for underwritten offerings, financial
restructurings and other advisory services provided to clients. Investment
banking fees are recorded as revenue when the related service has been rendered,
the client is contractually obligated to pay, and its collection is probable.
Certain fees for services rendered are recognized as revenue over the service
period. 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.
 
 *Stock-Based
Compensation*
 
 The
Company uses the intrinsic value-based method in accordance with Accounting
Principles Board, or APB, Opinion No. 25, *Accounting for Stock Issued to Employees* , to
account for employee stock-based compensation. Accordingly, compensation cost is
recorded on the date of grant to the extent the fair value of the underlying
share of common stock exceeds the exercise price for a stock option or the
purchase price for a share of common stock. Such compensation cost is amortized
on a straight-line basis over the vesting period of the individual award.
Pursuant to Statement of Financial Accounting Standards, or SFAS, No.
123, *Accounting for Stock-Based Compensation* , the
Company discloses the pro forma effect of using the fair value method of
accounting for employee stock-based compensation. Stock-based awards granted to
nonemployees are accounted for pursuant to the fair value method in SFAS No. 123
and Issue No. 96-18 of the Emerging Issues Task Force. The associated expense is
measured and recognized by the Company over the period the services are
performed by the nonemployee.
 
 In
December 2004, the FASB issued its final standard on accounting for
share-based payments, SFAS 123R, *Share-Based
Payment* , which
addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for equity instruments of the
enterprise or liabilities that are based on the fair value of the enterprise’s
equity instruments or that may be settled by the issuance of such equity
instruments. The statement eliminates the ability to account for share-based
compensation transactions using APB Opinion No. 25 and requires instead
that such transactions be accounted for using a fair-value-based method. The
effective date of SFAS 123R is the beginning of the first annual reporting
period that begins after June 15, 2005. Early adoption of SFAS 123R is
allowed.
 
 The
Company has elected to continue to account for its stock-based compensation in
accordance with the provisions of APB Opinion No. 25 as interpreted by FASB
Interpretation No. 44, *Accounting
for Certain Transactions Involving Stock Compensation* , and
will implement SFAS 123R effective January 1, 2006. The Company expects the
adoption of SFAS123R will have a material impact on the Company's financial
position and results of operations.
  5
 
 
 **MCF
CORPORATION**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED**
 **(unaudited)**
 
 If the
Company was to recognize compensation expense over the relevant service period
under the fair value method with respect to stock options granted for the three
months ended March 31, 2005 and all prior periods, net income would have
changed, resulting in pro forma net income and pro forma net income per share as
presented below:
  **Three Months Ended March 31,****2005**
    
    
    **2004**Net
      income, as reported
    
    $
    648,425
    
    $
    1,244,421Add:
      Stock-based employee compensation expense included in the reported net
      income
    
    
    19,203
    
    
    36,849Less:
      Stock-based employee compensation expense determined under fair value
      method
    
    
    (330,844
    )
    
    (403,127
    )Pro
      forma net income
    
    $
    336,784
    
    $
    878,143Net
      income per share, as reported:Basic
    
    $
    0.01
    
    $
    0.02Diluted
    
    $
    0.01
    
    $
    0.02Net
      income per share, pro forma:Basic
    
    $
    0.01
    
    $
    0.02Diluted
    
    $
    0.00
    
    $
    0.01
 
 
 The above
pro forma disclosures are not necessarily representative of the effects on
reported net income or loss for future years.
 
 *Reclassification*
 
 Certain
prior year amounts have been reclassified to conform to current year
consolidated financial statement presentation.
  6
  
 **MCF
CORPORATION**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED**
 **(unaudited)**
 
 **2.
Net Income per Share**
 
 The
following is a reconciliation of the basic and diluted net income available to
common stockholders and the number of shares used in the basic and diluted net
income per common share computations for the periods presented:
  **Three Months Ended March
      31,****2005**
    
    
    **2004**Net
      income
    
    $
    648,425
    
    $
    1,244,421Preferred
      stock dividends
    
    
    —
    
    
    (10,985
    )Net
      income (loss) available to common stockholders - basic
    
    
    648,425
    
    
    1,233,436Interest
      and dividends on dilutive securities
    
    
    4,084
    
    
    10,211Net
      income (loss) available to common stockholders - diluted
    
    $
    652,509
    
    $
    1,243,647Weighted-average
      number of common shares - basic
    
    
    65,508,467
    
    
    54,758,184Exercise
      or conversion of all potentially dilutive common shares
      outstanding
    
    
    19,976,755
    
    
    25,121,305Weighted-average
      number of common shares - diluted
    
    
    85,485,222
    
    
    79,879,489Basic
      net income (loss) per share
    
    $
    0.01
    
    $
    0.02Diluted
      net income (loss) per share
    
    $
    0.01
    
    $
    0.02
 
 Basic
earnings per share is computed by dividing net income, less dividends on
preferred stock, by the weighted average number of common shares outstanding,
excluding unvested restricted stock. Diluted earnings per share is calculated by
dividing net income, less dividends on preferred stock 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 unvested restricted
stock.
 
 Shares
used in the diluted net income per share computation in the above table include
the dilutive impact of the Company’s stock options and warrants. The impact of
the Company’s stock options and warrants on shares used for the diluted earnings
per share computation is calculated based on the average share price of the
Company’s common stock for each period using the treasury stock method. Under
the treasury stock method, the tax-effected proceeds that would be
hypothetically received from the exercise of all stock options and warrants with
exercise prices below the average share price of the Company’s common stock are
assumed to be used to repurchase shares of the Company’s common stock. The
dilutive impact of the Company’s stock options was calculated using an average
price of the Company’s common stock of $1.61 and $1.74 per share for the three
months ended March 31, 2005 and 2004, respectively.
  7
 
 ****
 **MCF
CORPORATION**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED**
 **(unaudited)**
  The
Company excludes all potentially dilutive securities from its diluted net income
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 March 31,****2005**
    
    **2004**Stock
      options and warrants excluded due to the exercise price exceeding the
      average fair value of the Company’s common stock during the
      period
    
    
    6,083,359
    
    
    6,516,220Weighted
      average shares issuable upon conversion of the convertible notes
      payable
    
    
    —
    
    
    96,525Weighted
      average shares issuable upon conversion of the convertible preferred
      stock
    
    
    —
    
    
    141,565Total
      common stock equivalents excluded from diluted net income (loss) per
      share
    
    
    6,083,359
    
    
    6,754,310
 
 **3.
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 March 31, 2005, Merriman
Curhan Ford & Co. had regulatory net capital, as defined, of $12,087,000,
which exceeded the amount required by $11,542,000. 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.
 
 **4.
Acquisition of Catalyst Financial Planning and Investment Management,
Inc.**
 
 On
February 28, 2005, the Company acquired Catalyst Financial Planning &
Investment Management, Inc., or Catalyst, a registered investment advisor with
over $100 million in assets under management. This is the Company’s first
acquisition of a registered investment advisor as the Company executes on its
plan to build a fee-based, recurring revenue business to complement the cyclical
nature of the investment banking and institutional sales and trading businesses.
The Company creates liquidity for the founders and executives of its corporate
clients through open market sales, private placements and underwritings. The
Company intends of offer personalized financial planning and wealth management
to these clients. The Company plans to introduce new potential clients to
Catalyst from the corporate and venture services group as well as the investment
banking department.
 
 The
purchase consideration for Catalyst consists of both cash and common stock that
will be paid over a three year period. The Company paid to the sole shareholder
of Catalyst, or Catalyst Shareholder, $330,433 as initial consideration at the
closing. The Company has also agreed to issue to the Catalyst Shareholder up to
925,325 shares of common stock over three years based upon amount of revenue
growth for Catalyst. The payment of these shares is subject to specified
conditions. Such additional amounts will be recorded, if any, when such amounts
become due. The Company acquired 100% of the voting stock in Catalyst. The
results of operations for Catalyst are included in the Company’s consolidated
financial statements beginning March 1, 2005.
 
 **5.
Income Taxes**
 
 The
effective tax rate for the three months ended March 31, 2005 and 2004 was
approximately 31% and 24%. The effective tax rate for 2005 and 2004 reflects the
utilization of approximately $2,056,000 of the Company’s net operating loss
carryforwards.
 
 **6.
Subsequent Events**
 
 On May 4,
2005, MCF Corporation entered into a strategic alliance with Ascend Services
Ltd., or Ascend. In conjunction with this alliance, Ascend has entered into a
stock purchase agreement with the Company. Ascend has also engaged the Company
as an investment advisor for its short-term high credit-quality portfolio. The
Company issued 1,078,749 shares of its common stock and Ascend has issued an
unsecured promissory note payable to the Company in the amount of $1.5 million.
The shares will be held initially in escrow. Upon Ascend achieving specified
milestones, the 1,078,749 shares of common stock will be released from escrow in
three installments of 359,583 shares and provided to Ascend. Upon satisfaction
of the conditions specified in the escrow agreement and simultaneous with the
release of the related stock certificates, the related amount of the promissory
note shall become effective and start accruing interest. The promissory note
accrues interest at 10% per annum and matures on February 28 , 2006. The
securities described in this paragraph: (i) were issued to a private investor
without the involvement of underwriters; (ii) were issued in reliance on the
exemption from registration requirements contained in Section 4(2) of the
Securities Act of 1933; and (iii) carried certain registration
rights.
 8
 
 **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 under **“** Risk
Factors” beginning on Page 14 and elsewhere herein. We undertake no obligation
to revise or update publicly any forward-looking statements for any
reason.
 
 **Company
Overview**
 
 MCF
Corporation is a financial services holding company that provides investment
research, capital markets services, asset management, wealth management,
corporate and venture services, and investment banking through its operating
subsidiaries, Merriman Curhan Ford & Co., MCF Asset Management, LLC, and MCF
Wealth Management, LLC. MCF Asset Management, LLC and MCF Wealth Management, LLC
are two recently formed businesses that are predicated on fee-based, recurring
revenue models.
  Merriman
Curhan Ford & Co. is a securities broker-dealer and investment bank focused
on fast-growing companies and growth-oriented institutional investors. It
provides investment research, brokerage and trading services primarily to
institutions, as well as advisory and investment banking services to corporate
clients. Its mission is to become a leader in the researching, advising,
financing and trading of fast growing companies. Merriman Curhan Ford & Co.
is registered with the Securities and Exchange Commission as a broker-dealer and
is a member of the National Association of Securities Dealers, Inc. and Securities
Investors Protection Corporation .
  **Business
Environment**
 
 The first
quarter of 2005 was difficult for the equity markets. With the exception of
energy and commodity related industries, stocks struggled with most yielding
their gains of the fourth quarter 2004. Commodities as measured by the Commodity
Research Bureau index spiked up during the quarter rising more than 10%. The
Federal Open Market Committee, or FOMC, grew increasingly fixated on inflation
risk and continued to hike the Fed Funds target rate. There has been little in
the high frequency economic data points to suggest that the FOMC should be
prepared to stand down from their attack on higher inflationary expectations.
The futures market discounts another 100 basis points of tightening in the funds
rate by year end. With short term rates climbing steadily and energy prices
remaining stubbornly high, it has been a hard slog for equity bulls. The window
for companies to access the capital markets was open to most worthy borrowers in
the first quarter but it appears as though investor appetite for risk is waning.
The prospective downgrade of credit ratings for the major auto manufacturers is
putting unwanted additional stress on the system. In sum, the challenges for the
financial markets continue to mount as we enter the second quarter and rising
volatility and uncertainty seem to be part of the picture for the near
term.
 
 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.
 
 9
 ****
 ****
 **Executive
Overview**
 
 Revenue
recognized in the first quarter 2005 was $12,473,000, the highest quarterly
level in our history. We increased our revenue by 11% over the first quarter
2004, despite a difficult business environment for both the fast growing
companies that we serve and the institutions that invest in them. The increase
in our first quarter revenue over 2004 reflects continued growth in our core
businesses. We earned $0.01 per diluted share for the three months ended March
31, 2005, compared to $0.02 during the first quarter 2004. Our profitability was
negatively impacted during 2005 by losses incurred on security positions held in
connection with our proprietary trading and market making activities. Our
financial condition continued to strengthen during the first quarter 2005 with
stockholders’ equity exceeding $18,315,000 as of March 31, 2005.
 
 Also
during the first quarter 2005, we acquired Catalyst Financial Planning &
Investment Management, Inc., or Catalyst, a registered investment advisor with
over $100 million in assets under management. This is our first acquisition of a
registered investment advisor as we execute on our plan to build a fee-based,
recurring revenue business to complement the cyclical nature of the investment
banking and institutional sales and trading businesses.
 
 Though
our operating results were positive during the first quarter 2005, our business,
by its nature, does not produce predictable earnings. Our results in any given
period can be materially affected by conditions in global financial markets and
economic conditions generally.
 
 **Results
of Operations**
 
 The
following table sets forth a summary of financial highlights for the three
months ended March 31, 2005 and 2004:
  **Three
      Months Ended March 31,****2005**
    
    
    **2004**Total
      revenue
    
    $
    12,473,116
    
    $
    11,222,276Total
      operating expenses
    
    
    11,597,357
    
    
    9,532,753Operating
      income
    
    
    875,759
    
    
    1,689,523Net
      income
    
    
    648,425
    
    
    1,244,421EBITDA
    
    
    1,507,178
    
    
    1,882,478Adjustments:Interest
      income
    
    
    74,827
    
    
    10,022Interest
      expense
    
    
    (17,187
    )
    
    (58,676
    )Income
      tax expense
    
    
    (284,974
    )
    
    (396,448
    )Depreciation
      and amortization
    
    
    (105,749
    )
    
    (23,940
    )Amortization
      of stock-based compensation
    
    
    (525,670
    )
    
    (169,015
    )Net
      income
    
    $
    648,425
    
    $
    1,244,421
 
 Our
revenue during the first quarter 2005 increased $1,251,000, or 11%, from the
corresponding period in 2004 reflecting the overall growth of our investment
banking and broker-dealer activities. Net income, however, decreased by
$596,000, or 48%, during the first quarter 2005 as compared to the first quarter
2004. Our revenue and profitability in 2005 reflected $773,000 of losses
incurred on equity security positions held in connection with our proprietary
trading and market making activities. We recognized $165,000 in gains on
security positions held during the first quarter 2004. Earnings before interest,
taxes, depreciation and amortization, or EBITDA, for the first three months of
2005 were $1,507,000. The decline in EBITDA in first quarter 2005 as compared to
first quarter 2004 was limited to $375,000, or 20%, despite the $938,000 swing
in trading losses in 2005.
  EBITDA
(earnings before interest, taxes, depreciation and amortization) is a key metric
we use in evaluating our financial performance. EBITDA is considered a non-GAAP
financial measure as defined by Regulation G promulgated by the SEC pursuant to
the Securities Act of 1933, as amended. We consider EBITDA an important measure
of our ability to generate cash flows to service debt, fund capital expenditures
and fund other corporate investing and financing activities. EBITDA eliminates
the non-cash effect of tangible asset depreciation and intangible stock-based
amortization. EBITDA should be considered in addition to, rather than as a
substitute for, pre-tax income, net income and cash flows from operating
activities.
 
 10
 ******
 ******
 ***Commissions
and Principal Transactions Revenue***
 
 Our
broker-dealer activity includes the following:
 
 ·
    Agency
      Commissions - Agency 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 March 31,****2005**
    
    **2004****Revenue:**Commissions
    
    $
    6,021,963
    
    $
    5,906,064Principal
      transactions:Customer
      principal transactions, proprietary trading and market
    making
    
    
    (530,719
    )
    
    498,177Investment
      portfolio
    
    
    157,577
    
    
    126,301Total
      principal transactions revenue
    
    $
    (373,142
    )
    $
    624,478**Transaction
      Volumes:**Number
      of shares traded
    
    
    220,949,930
    
    
    209,726,680Number
      of active clients
    
    
    385
    
    
    337
  Agency
commissions amounted to $6,022,000, or 48%, of our revenue during the first
three months of 2005, representing a 2% increase over $5,906,000 recognized
during the first three months of 2004. The higher agency commissions were
primarily attributed to the hiring of additional sales and research
professionals and an increase in the number of active client accounts during
2005 as compared to 2004. During the first quarter of 2005 and 2004, no single
brokerage customer accounted for more than 10% of our revenue.
  Principal
transactions revenue, including market making and proprietary trading for our
own account, amounted to ($373,000), or (3%), of our revenue during the first
quarter 2005, representing a 160% decrease compared to $624,000 recognized
during the first quarter 2004. We incurred losses on equity security positions
held in connection with our proprietary trading and market making activities
during the period. These security positions result from proprietary trading
which is speculative in nature and market making activities to facilitate
customer order flow. Additionally, our investment portfolio, which primarily
consists of stock warrants and restricted common stock that we earn in
connection with our investment banking activity, increased in value during the
first quarter 2005.
  11
 ******
 ******
 ***Investment
Banking Revenue***
  Our
investment banking activity includes the following:
  ·
    Capital
      Raising - Capital raising includes private placements of equity and debt
      instruments and underwritten public
offerings.
  ·
    Financial
      Advisory. Financial advisory includes advisory assignments with respect to
      mergers and acquisitions, divestures, restructurings and
      spin-offs.
  The
following table sets forth our revenue and transaction volumes from our
investment banking activities during the three months ended March 31, 2005 and
2004:
  **Three
      Months Ended March 31,****2005**
    
    **2004****Revenue:**Capital
      raising
    
    $
    6,593,685
    
    $
    4,199,058Financial
      advisory
    
    
    165,125
    
    
    488,636Total
      investment banking revenue
    
    $
    6,758,810
    
    $
    4,687,694**Transaction
      Volumes:**Public
      offerings:Capital
      underwritten
    
    
    66,225,000
    
    
    43,010,000Number
      of transactions
    
    
    2
    
    
    1Private
      placements:Capital
      raised
    
    
    183,994,000
    
    
    74,400,000Number
      of transactions
    
    
    6
    
    
    5
 
 Our
investment banking revenue amounted to $6,759,000, or 54% of our revenue during
the first quarter 2005, representing a 44% increase compared to $4,688,000
recognized during the first quarter 2004. The growth in our investment banking
revenue during the first quarter 2005 reflected (i) the strong demand for
private placement transactions, (ii) the hiring of experienced investment
bankers during 2004 and 2005, and (iii) the increased awareness of our firm’s
ability to complete capital raising and financial advisory transactions for fast
growing companies. During the first quarter 2005, two investment banking
customers each accounted for more than 10% of our revenue, and combined
accounted for 34%. During the first quarter 2004, one investment banking
customer accounted for 11% of our revenue.
 
 ***Compensation
and Benefits Expenses***
 
 Compensation
and benefits expense represents the majority of our operating expenses and
includes base salaries and discretionary bonuses, as well as incentive
compensation paid to sales and trading, and investment banking professionals.
Incentive compensation varies primarily based on revenue production.
Discretionary bonuses paid to research analysts also vary with commission
revenue production but includes other qualitative factors as well. Salaries,
payroll taxes and employee benefits are relatively fixed in nature.
 
 12
 
 
 The
following table sets forth the major components of our compensation and benefits
for the three months ended March 31, 2005 and 2004:
  **Three
      Months Ended March 31,****2005**
    
    
    **2004**Incentive
      compensation and discretionary bonuses
    
    $
    5,820,297
    
    $
    5,629,860Salaries
      and wages
    
    
    1,989,976
    
    
    1,203,044Stock-based
      compensation
    
    
    525,670
    
    
    159,165Payroll
      taxes, benefits and other
    
    
    866,022
    
    
    609,111Total
      compensation and benefits
    
    $
    9,201,965
    
    $
    7,601,180
 
 The
increase in compensation and benefits expense of $1,601,000, or 21%, from the
first three months of 2004 to the corresponding period in 2005 was due primarily
to higher salaries and wages, non-cash stock-based compensation and incentive
compensation which is directly correlated to revenue production. We have grown
our headcount at a brisk but measured pace during 2004 and 2005. Our headcount
has increased from 93 at March 31, 2004 to 132 at March 31, 2005. The increase
in stock-based compensation during 2005 reflects our decision to grant
restricted stock to new and existing employees. The amount of compensation and
benefits that we incur during a given period is largely dependent upon the level
of revenue recognized during that period, since most of our employees are paid
based on a percentage of the revenue attributed to their efforts.
 
 ***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. Despite an increase in commission revenue, brokerage and clearing
fees decreased by $196,000, or 27% in the first quarter 2005 as compared to the
first quarter 2004. This reflected the cost savings that we achieved by
negotiating lower fees with our new clearing broker during the fourth quarter
2004.
 
 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 increase of $17,000 or 7%, from the first quarter 2004 to the
first quarter 2005 was primarily attributed to increased regulatory fees
assessed by the NASD.
 
 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 $198,000, or 130%, from the first
quarter 2004 to the first quarter 2005 resulted mostly from high office rents.
During 2004, we moved into larger office spaces in San Francisco, New York,
Boston, Los Angeles and Portland to accommodate our growth in business and
headcount .
 
 Communications
and technology expense includes voice, data and Internet service fees, and data
processing costs. While variable in nature, these do not tend to vary with
revenue. The increase of $158,000, or 60%, from the first quarter 2004 to the
first quarter 2005 was due to higher telephone and data service fees incurred in
our sales and trading operations. The higher telephone and data service charges
are the result of increased headcount and the expansion of our
offices.
 
 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 $82,000, or 342%, from the first quarter 2004
to the first quarter 2005 was due to increased capital expenditures, including
leasehold improvements, to facilitate our growth and expansion.
 
 Other
operating expense includes professional liability and property insurance, travel
and entertainment, printing and copying, business licenses and taxes, office
supplies and other miscellaneous office expenses. The increase of approximately
$205,000, or 40%, from the first quarter 2004 to the first quarter 2005 was
attributed to higher recruiting costs, travel expenses, and various business
taxes.
 
 ***Income
Tax Expense***
 
 The
effective tax rate for the three months ended March 31, 2005 and 2004 was
approximately 31% and 24%. The effective tax rate for 2005 and 2004 reflects the
utilization of some of the Company’s net operating loss carryforwards.
 
 **Off-Balance
Sheet Arrangements**
 
 We were
not a party to any off-balance sheet arrangements during the three years ended
December 31, 2004. In particular, we do not have any interest in so-called
limited purpose entities, which include special purpose entities and structured
finance entities.
  13
 
 **Critical
Accounting Policies and Estimates**
 
 The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to the valuation of securities owned and deferred tax assets. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ
from those estimates. We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements.
 
 *Valuation
of Securities Owned*
 
 Securities
owned that are not readily marketable are carried at fair value, with the
accompanying gains and losses reflected in our results of operations. The fair
value of securities, for which a quoted market or dealer price is not available,
is based on management’s estimates. Among the factors considered by management
in determining the fair value of securities are the cost of the securities,
terms and liquidity, developments since the acquisition of the securities, the
sales price of recently issued securities, the financial condition and operating
results of the issuer, earnings trends and consistency of operating cash flows,
the long-term business potential of the issuer, the quoted market price of
securities with similar quality and yield that are publicly traded, and other
factors generally pertinent to the valuation of securities. 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. Where available, we use
prices from independent sources such as listed market prices or dealer
quotations.
 
 *Revenue
Recognition*
 
 We
recognize brokerage revenue once the trade is consummated and the earnings
process is complete. Investment banking revenue consists of fees earned from
private placements, mergers and acquisitions, management fees for underwritten
offerings, financial restructurings and other advisory services provided to
clients. Investment banking fees are recorded as revenue when the related
service has been rendered, the client is contractually obligated to pay, and its
collection is probable. Certain fees received in advance of services rendered
are recognized as revenue over the service period. Transaction-related expenses
to date have been expensed as incurred. As co-manager for registered equity
underwriting transactions, we must estimate the 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 we will recognize 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.
  *Stock-Based
Compensation*
 
 As part
of our compensation of employees, we may use stock-based compensation, including
stock options, restricted stock and other stock-based awards. Compensation
related to restricted stock and other stock-based awards is amortized over the
vesting period of the award, which is generally three to four years, and is
included in our results of operations as compensation. Accounting principles
generally accepted in the United States allow alternative methods of accounting
for stock options, including an “intrinsic value” method and a “fair value”
method. The intrinsic value method is intended to reflect the impact of stock
options on stockholders based on the appreciation in the stock option over time,
generally driven by financial performance. The fair value method requires an
estimate of the value of stock options to be recognized as compensation over the
vesting period of the awards. Currently, we use the intrinsic value method and
do not recognize the impact of these awards as compensation expense.
Accordingly, we provide disclosure of the impact of the estimated fair value of
the stock options on our compensation and reported income in the notes to the
consolidated financial statements. In determining the estimated fair value of
stock options, we use the Black-Scholes option-pricing model, which requires
judgment regarding certain assumptions, including the expected life of the
options granted, dividend yields and stock volatility.
 
 *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 March 31, 2005 and
2004 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.
 
 14
 **Liquidity
and Capital Resources**
 
 Historically,
we have satisfied our liquidity and regulatory capital needs through the
issuance of equity and debt securities. During the three months ended March 31,
2005, we experienced positive cash flow provided by our operations and through
proceeds from the exercise of stock options and stock warrants and from the
issuance of common stock. This was partially offset by the proceeds used to
purchase Catalyst Financial Planning & Investment Management, Inc. As of
March 31, 2004, we had capital leases and long-term notes payable amounting to
$1,963,000, net of certain discounts.
 
 Our
principal assets consist of cash and cash equivalents, marketable securities
held for trading purposes, restricted cash, receivables and equipment and
fixtures. As of March 31, 2005, liquid assets consisted primarily of cash and
cash equivalents of $17,450,000 and marketable securities of $3,778,000, for a
total of $21,228,000.
 
 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 March 31, 2005, Merriman
Curhan Ford & Co. had regulatory net capital, as defined, of
$12,087,000 **,** which
exceeded the amount required by $11,542,000.
 
 Cash and
cash equivalents decreased by $9,000 during the three months ended March 31,
2005. During the first quarter of 2005, cash provided by operating activities
was $338,000, primarily attributed to our net income adjusted for certain
non-cash expenses and gains, as well as increases and decreases in operating
assets and liabilities. Non-cash expenses included depreciation and
amortization, stock based compensation and amortization of discounts on
convertible notes payable. Cash used in investing activities during the first
quarter of 2005 was $628,000, reflecting the acquisition of Catalyst and the
purchase of equipment and fixtures. Cash provided by financing activities was
$281,000 during the first three months of 2005 due primarily to the proceeds
from the issuance of common stock for the Employee Stock Purchase Plan and
exercises of stock options and stock warrants.
 
 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 have mostly incurred operating
losses since inception and, to date, we have generated only limited revenue.
Furthermore, 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.
  **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.
 
 *It is
difficult to evaluate our business and prospects because we have a limited
operating history.*
  We began
actively engaging in providing securities brokerage and investment banking
services in January 2002. This was an entirely new business for us, and was a
complete break with our previous business, the bandwidth brokerage business.
Accordingly, we have a limited operating history on which to base an evaluation
of our business and prospects. Our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by fast growing
companies in their early stage of development. We cannot assure you that we will
be successful in addressing these risks and our failure to do so could have a
material adverse effect on our business and results of operations.
  *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.
 
 15
 
 
 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
markets for securities brokerage and investment banking services are highly
competitive. If we are not able to compete successfully against current and
future competitors, our business and results of operations will be adversely
affected.*




We are
engaged in the highly competitive financial services and investment industries.
We compete with large Wall Street securities firms, securities subsidiaries of
major commercial bank holding companies, U.S. subsidiaries of large foreign
institutions, major regional firms, smaller niche players, and those offering
competitive services via the Internet. Many competitors have greater personnel
and financial resources than we do. Larger competitors are able to advertise
their products and services on a national or regional basis and may have a
greater number and variety of distribution outlets for their products, including
retail distribution. Discount and Internet brokerage firms market their services
through aggressive pricing and promotional efforts. In addition, some
competitors have much more extensive investment banking activities than we do
and therefore, may possess a relative advantage with regard to access to deal
flow and capital.





Increased
pressure created by any current or future competitors, or by our competitors
collectively, could materially and adversely affect our business and results of
operations. Increased competition may result in reduced revenue and loss of
market share. Further, as a strategic response to changes in the competitive
environment, we may from time to time make certain pricing, service or marketing
decisions or acquisitions that also could materially and adversely affect our
business and results of operations. We cannot assure you that we will be able to
compete successfully against current and future competitors. In addition, new
technologies and the expansion of existing technologies may increase the
competitive pressures on us.





*We
may experience reduced revenue due to declining market volume, securities prices
and liquidity, which can also cause counterparties to fail to
perform.*





Our
revenue may decrease in the event of a decline in the market volume of
securities transactions, prices or liquidity. Declines in the volume of
securities transactions and in market liquidity generally result in lower
revenue from trading activities and commissions. Lower price levels of
securities may also result in a reduction in our revenue from corporate finance
fees, as well as losses from declines in the market value of securities held by
us in trading. Sudden sharp declines in market values of securities can result
in illiquid markets and the failure of counterparties to perform their
obligations, as well as increases in claims and litigation, including
arbitration claims from customers. In such markets, we may incur reduced revenue
or losses in our principal trading, market-making, investment banking, and
advisory services activities.


**


*We
may experience significant losses if the value of our marketable security
positions deteriorates.*





We
conduct securities trading, market-making and investment activities for our own
account, which subjects our capital to significant risks. These risks include
market, credit, counterparty and liquidity risks, which could result in losses
for us. These activities often involve the purchase, sale or short sale of
securities as principal in markets that may be characterized as relatively
illiquid or that may be particularly susceptible to rapid fluctuations in
liquidity and price. Trading losses resulting from such trading could have a
material adverse effect on our business and results of operations.





*We
may experience significant fluctuations in our quarterly operating results due
to the nature of our business and therefore may fail to meet profitability
expectations.*





Our
revenue and operating results may fluctuate from quarter to quarter and from
year to year due to a combination of factors, including:





·
    the
      level of institutional brokerage transactions and the level of commissions
      we receive from those transactions;




·
    the
      valuations of our principal investments;




·
    the
      number of capital markets transactions completed by our clients, and the
      level of fees we receive from those transactions;
and




·
    variations
      in expenditures for personnel, consulting and legal expenses, and expenses
      of establishing new business units, including marketing and technology
      expenses.








16


**


*We record
revenue from a capital markets advisory transaction only when we have rendered
the services, the client is contractually obligated to pay and collection is
probable; generally, most of the fee is earned only upon the closing of a
transaction. Accordingly, the timing of our recognition of revenue from a
significant transaction can materially affect our quarterly operating
results.*





*We
have registered one of our subsidiaries as a securities broker-dealer and, as
such, are subject to substantial regulations. If we fail to comply with these
regulations, our business will be adversely affected.*





Because
we have registered Merriman Curhan Ford & Co. with the Securities and
Exchange Commission, or SEC, and the National Association of Securities Dealers,
Inc., or NASD, as a securities broker-dealer, we are subject to extensive
regulation under federal and state laws, as well as self-regulatory
organizations. The principal purpose of regulation and discipline of
broker-dealers is the protection of customers and the securities markets rather
than protection of creditors and stockholders of broker-dealers. The Securities
and Exchange Commission is the federal agency charged with administration of the
federal securities laws. Much of the regulation of broker-dealers, however, has
been delegated to self-regulatory organizations, such as the NASD and national
securities exchanges. The NASD is our primary self-regulatory organization.
These self-regulatory organizations adopt rules, which are subject to SEC
approval, that govern the industry and conduct periodic examinations of member
broker-dealers. Broker-dealers are also subject to regulation by state
securities commissions in the states in which they are registered. The
regulations to which broker-dealers are subject cover all aspects of the
securities business, including net capital requirements, sales methods, trading
practices among broker-dealers, capital structure of securities firms, record
keeping and the conduct of directors, officers and employees. The SEC and the
self-regulatory bodies may conduct administrative proceedings, which can result
in censure, fine, suspension or expulsion of a broker-dealer, its officers or
employees. If we fail to comply with these rules and regulations, our business
may be materially and adversely affected.





The
regulatory environment in which we operate is also subject to change. Our
business may be adversely affected as a result of new or revised legislation or
regulations imposed by the SEC, other United States or foreign governmental
regulatory authorities or the NASD. We also may be adversely affected by changes
in the interpretation or enforcement of existing laws and rules by these
governmental authorities and the NASD.





*Our
business may suffer if we lose the services of our executive officers or
operating personnel.*





We depend
on the continued services and performance of D. Jonathan Merriman, our Chairman
and Chief Executive Officer, for our future success. We currently have an
employment agreement with Mr. Merriman, which ends on January 1, 2007, but
can be terminated by either party on 60 days’ notice. The agreement contains
provisions that obligate us to make certain payments to Mr. Merriman and
substantially reduce vesting periods of options granted to him if we should
terminate him without cause or certain events resulting in a change of control
of our Board were to occur.





In
addition to Mr. Merriman, we are currently managed by a small number of key
management and operating personnel. We do not maintain “key man” insurance on
any employee. Our future success depends, in part, on the continued service of
our key executive, management and technical personnel, and our ability to
attract highly skilled employees. Our business could be harmed if any key
officer or employee were unable or unwilling to continue in his or her current
position. From time to time we have experienced, and we expect to continue to
experience, difficulty in hiring and retaining highly skilled employees.
Competition for employees in our industry is significant. If we are unable to
retain our key employees or attract, integrate or retain other highly qualified
employees in the future, such failure may have a material adverse effect on our
business and results of operations.





*Our
business is dependent on the services of skilled professionals, and may suffer
if we can not recruit or retain such skilled professionals.*





During
the three months ended March 31, 2005, one sales professional accounted for 11%
of our revenue. We have a number of revenue producers employed by our securities
brokerage and investment banking subsidiary. We do not have employment contracts
with these employees. The loss of one or more of these employees could adversely
affect our business and results of operations.




17







*Our
compensation structure may negatively impact our financial condition if we are
not able to effectively manage our expenses and cash flows.*





We are
able to recruit and retain investment banking, research and sales and trading
professionals, in part because our business model provides that we pay our
revenue producing employees a percentage of their earned revenue. Compensation
and benefits is our largest expenditure and this variable compensation component
represents a significant proportion of this expense. Compensation for our
employees is derived as a percentage of our revenue regardless of the
profitability of the Company. Therefore, we may continue to pay individual
revenue producers a significant amount of cash compensation as the overall
business experiences negative cash flows and/or net losses. We may not be able
to recruit or retain revenue producing employees if we modify or eliminate the
variable compensation component from our business model.





*We
may be dependent on a limited number of customers for a significant portion of
our revenue.*





During
the three months ended March 31, 2005, two investment banking customers each
accounted for more than 10% of our revenue, and combined accounted for 34%. We
cannot assure you that we will not become dependent on one customer, or on a
small number of customers, for a large percentage of our revenue in the future.
If we do become dependent on a single customer or small group of customers, the
loss of one or more large customers could materially adversely affect our
business and results of operations.





*We
may suffer losses through our investments in securities purchased in secondary
market transactions or private placements.*





Occasionally,
our company, its officers and/or employees may make principal investments in
securities through secondary market transactions or through direct investment in
companies through private placements. In many cases, employees and officers with
investment discretion on behalf of our company decide whether to invest in our
company’s account or their personal account. It is possible that gains from
investing will accrue to these individuals because investments were made in
their personal accounts, and our company will not realize gains because it did
not make an investment. Conversely, it is possible that losses from investing
will accrue to our company, while these individuals do not experience losses in
their personal accounts because the individuals did not make investments in
their personal accounts.





*We
may be unable to successfully integrate acquired businesses into our existing
business and operations.*





On
February 28, 2005, the Company acquired Catalyst Financial Planning &
Investment Management, Inc., a registered investment advisor with over $100
million in assets under management. We may experience difficulty integrating the
operations of Catalyst into our existing business and operations including our
accounting, finance, compensation, information technology and management
systems. We may not be able to retain the services of Catalyst employees. These
factors could result in higher than anticipated costs associated with the
Catalyst acquisition. Additionally, they may cause revenue from the Catalyst
acquisition to be lower than forecast. If costs are higher or revenue lower than
we expect, our business and results of operations could be materially adversely
affected. Although we have no specific plans to do so at this time, we may buy
one or more other businesses in the future. If we are unable to successfully
integrate such businesses into our existing business and operations in the
future, our business and results of operations could be materially adversely
affected





*We
may be unable to effectively manage rapid growth that we may experience, which
could place a continuous strain on our resources and, accordingly, adversely
affect our business.*





We plan
to expand our operations. Our growth, if it occurs, will impose significant
demands on our management, financial, technical and other resources. We must
adapt to changing business conditions and improve existing systems or implement
new systems for our financial and management controls, reporting systems and
procedures and expand, train and manage a growing employee base in order to
manage our future growth. We may not be able to implement improvements to our
internal reporting systems in an efficient and timely manner and may discover
deficiencies in existing systems and controls. We believe that future growth
will require implementation of new and enhanced communications and information
systems and training of our personnel to operate such systems. Furthermore, we
may acquire existing companies or enter into strategic alliances with third
parties, in order to achieve rapid growth. For us to succeed, we must make our
existing business and systems work effectively with those of any strategic
partners without undue expense, management distraction or other disruptions to
our business. We may be unable to implement our business plan if we fail to
manage any of the above growth challenges successfully. Our financial results
may suffer and we could be materially and adversely affected if that
occurs.





18


**


**


*Our
business and operations would suffer in the event of system
failures.*





Our
success, in particular our ability to successfully facilitate securities
brokerage transactions and provide high-quality customer service, largely
depends on the efficient and uninterrupted operation of our computer and
communications systems. Our systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunication failures,
break-ins, earthquake and similar events. Despite the implementation of network
security measures, redundant network systems and a disaster recovery plan, our
servers are vulnerable to computer viruses, physical or electronic break-ins and
similar disruptions, which could lead to interruptions, delays, loss of data or
the inability to accept and fulfill customer orders. Additionally, computer
viruses may cause our systems to incur delays or other service interruptions,
which may cause us to incur additional operating expenses to correct problems we
may experience. Any of the foregoing problems could materially adversely affect
our business or future results of operations.





*We
are highly dependent on proprietary and third-party systems; therefore, system
failures could significantly disrupt our business.*





Our
business is highly dependent on communications and information systems,
including systems provided by our clearing brokers. Any failure or interruption
of our systems, the systems of our clearing broker or third party trading
systems could cause delays or other problems in our securities trading
activities, which could have a material adverse effect on our operating
results.





In
addition, our clearing brokers provide our principal disaster recovery system.
We cannot assure you that we or our clearing brokers will not suffer any systems
failure or interruption, including one caused by an earthquake, fire, other
natural disaster, power or telecommunications failure, act of God, act of war or
otherwise, or that our or our clearing brokers’ back-up procedures and
capabilities in the event of any such failure or interruption will be
adequate.


**


*Our
common stock price may be volatile, which could adversely affect the value of
your shares.*





The
market price of our common stock has in the past been, and may in the future
continue to be, volatile. A variety of events may cause the market price of our
common stock to fluctuate significantly, including:





·
    variations
      in quarterly operating results;




·
    our
      announcements of significant contracts, milestones,
      acquisitions;




·
    our
      relationships with other companies;




·
    our
      ability to obtain needed capital
commitments;




·
    additions
      or departures of key personnel;




·
    sales
      of common stock, conversion of securities convertible into common stock,
      exercise of options and warrants to purchase common stock or termination
      of stock transfer restrictions;




·
    general
      economic conditions, including conditions in the securities brokerage and
      investment banking markets;




·
    changes
      in financial estimates by securities analysts;
and




·
    fluctuation
      in stock market price and volume.





Many of
these factors are beyond our control. Any one of the factors noted herein could
have an adverse effect on the value of our common stock.





In
addition, the stock market in recent years has experienced significant price and
volume fluctuations that have particularly affected the market prices of equity
securities of many companies and that often have been unrelated to the operating
performance of such companies. These market fluctuations have adversely impacted
the price of our common stock in the past and may do so in the
future.





19
 **







*We
could be sued in a securities class action lawsuit.*





In the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation often has been instituted against
that company. Such litigation is expensive and diverts management’s attention
and resources. We can not assure you that we will not be subject to such
litigation. If we are subject to such litigation, even if we ultimately prevail,
our business and financial condition may be adversely affected.





*Your
ability to sell your shares may be restricted because there is a limited trading
market for our common stock.*





Although
our common stock is currently traded on the American Stock Exchange, a trading
market in our stock has been sporadic. Accordingly, you may not be able to sell
your shares when you want or at the price you want.





*Anti-takeover
provisions of the Delaware General Corporation Law could discourage a merger or
other type of corporate reorganization or a change in control even if it
could be favorable to the interests of our stockholders.*





The
Delaware General Corporation Law contains provisions that may enable our
management to retain control and resist our takeover. These provisions generally
prevent us from engaging in a broad range of business combinations with an owner
of 15% or more of our outstanding voting stock for a period of three years from
the date that such person acquires his or her stock. Accordingly, these
provisions could discourage or make more difficult a change in control or a
merger or other type of corporate reorganization even if it could be favorable
to the interests of our stockholders.





*Because
our Board of Directors can issue common stock without stockholder approval, you
could experience substantial dilution.*





Our Board
of Directors has the authority to issue up to 300,000,000 shares of common stock
and to issue options and warrants to purchase shares of our common stock without
stockholder approval in certain circumstances. Future issuance of additional
shares of our common stock could be at values substantially below the price at
which you may purchase our stock and, therefore, could represent substantial
dilution. In addition, our Board of Directors could issue large blocks of our
common stock to fend off unwanted tender offers or hostile takeovers without
further stockholder approval.




*Our
ability to issue additional preferred stock may adversely affect your rights as
a common stockholder and could be used as an anti take-over
device.*




Our
Articles of Incorporation authorize our Board of Directors to issue up to an
additional 37,293,000 shares of preferred stock, without approval from our
stockholders. If you hold our common stock, this means that our Board of
Directors has the right, without your approval as a common stockholder, to fix
the relative rights and preferences of the preferred stock. This would affect
your rights as a common stockholder regarding, among other things, dividends and
liquidation. We could also use the preferred stock to deter or delay a change in
control of our Company that may be opposed by our management even if the
transaction might be favorable to you as a common stockholder.


**


*Our
officers and directors exercise significant control over our affairs, which
could result in their taking actions of which other stockholders do not
approve.*




Our
executive officers and directors, and entities affiliated with them, currently
control approximately 23% of our outstanding common stock including exercise of
their options and warrants. These stockholders, if they act together, will be
able to exercise substantial influence over all matters requiring approval by
our stockholders, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing a change in control of us and might
affect the market price of our common stock.




*Any
exercise of outstanding stock options and warrants will dilute then-existing
stockholders’ percentage of ownership of our common stock.*




We have a
significant number of outstanding stock options and warrants. During the three
months ended March 31, 2005, shares issuable upon the exercise of these options
and warrants, at prices ranging currently from approximately $0.18 to $1.61 per
share, represent approximately 17% **** of our
total outstanding stock on a fully diluted basis using the treasury stock
method.





The
exercise of the outstanding options and warrants would dilute the then-existing
stockholders’ percentage ownership of our common stock. Any sales resulting from
the exercise of options and warrants in the public market could adversely affect
prevailing market prices for our common stock. Moreover, our ability to obtain
additional equity capital could be adversely affected since the holders of
outstanding options and warrants may exercise them at a time when we would also
wish to enter the market to obtain capital on terms more favorable than those
provided by such options and warrants. We lack control over the timing of any
exercise or the number of shares issued or sold if exercises occur.




20







**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. 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.





*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 March 31, 2005.





**Changes
in internal controls -** During
the first quarter 2005, the Company upgraded its accounting system from
QuickBooks to MAS 500, an enterprise management system. This
system represents the core accounting platform for the Company and integrates
with other business applications used by the Company. Appropriate testing of the
system was performed by the Company prior to adding MAS 500 into operation.
Aside from the change just described, there was n o other
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 March 31, 2005, that materially affected, or is reasonably likely
to materially affect, the Company’s internal control over financial
reporting.




21







**PART
II. OTHER INFORMATION**





**Item  1.**
    **Legal
      Proceedings**





**Merriman
Curhan Ford & Co. v. The Seidler Companies, Inc. — NASD
Arbitration**





During
2004, our broker-dealer subsidiary hired a research analyst. Prior to employment
with Merriman Curhan Ford & Co. the analyst was employed by The Seidler
Companies, Inc., or Seidler, in a similar capacity. The analyst was employed
under an employment contract that included terms which general counsel and
outside counsel believe unlawfully restrict the analyst’s employment
activities.





In March
2004, we acted as a co-agents for a small private placement for a client. The
client was introduced to one of our investment banking managing directors. At
the time of introduction, Seidler had been trying to win the investment banking
business, but had failed to obtain a signed engagement letter with the client.
We subsequently received a signed engagement letter from the client that named
Merriman Curhan Ford & Co. as co-placement agent. The investment banking
transaction was completed.





Thereafter,
in March 2004 we received a cease and desist letter from attorneys representing
Seidler. Seidler claims that our analyst used proprietary information in
violation of his employment agreement when introducing Merriman Curhan Ford
& Co. to the client. Seidler further claims that we used unfair business
tactics to win the business. In response to the claims, Merriman Curhan Ford
& Co. and our analyst filed a claim in arbitration with the NASD in June
2004. It is our belief that as members of the NASD, Merriman Curhan Ford &
Co. and Seidler must resolve their disputes before the NASD arbitration board.
We allege unfair business practice and seek a declaration that our analyst’s
prior employment contract is unenforceable.





On July
16, 2004, we were served with a complaint from Seidler filed in the Los Angeles
County Superior Court. Plaintiffs are seeking unspecified damages. We have
successfully moved to stay the legal action. The matter is in the preliminary
stages of discovery, an arbitration panel has been selected and a hearing is
scheduled for October 2005. Based upon the facts as we know them to date, we do
not believe that the outcome will have a material effect on the
Company.





Additionally,
from time to time, we are involved in ordinary routine litigation incidental to
our business.




**Item
2.** **Recent
Sales of Unregistered Securities**
 
 On
February 28, 2005, the Company acquired Catalyst Financial Planning &
Investment Management, Inc., or Catalyst, a registered investment advisor with
over $100 million in assets under management. The
purchase consideration for Catalyst consists of both cash and common stock that
will be paid over a three year period. The Company paid to the sole shareholder
of Catalyst, or Catalyst Shareholder, $330,433 as initial consideration at the
closing. The Company
has also agreed to issue to the Catalyst Shareholder up to 925,325 shares of
common stock over three years based upon amount of revenue growth for Catalyst.
The payment of these shares is subject to specified conditions. In exchange for
its cash and shares, the Company acquired 100% of the voting stock in Catalyst.
This transaction was exempt from the registration requirements of the
Securitites Act of 1933, as amended, pursuant to the exemption provided for in
Section 4(2) of such Act.


**Item  6.**
    **Exhibits
      and Reports on Form 8-K**





(a)
    Exhibits





10.43  
      Stock Purchase Agreement by and between MCF Corporation and Ascend
      Services Ltd., dated April 29, 2005; together with the following documents
      which form exhibits thereto: Escrow Agreement and Registration Rights
      Agreement.10.44  
      Promissory Note issued by Ascend Services Ltd dated April 29,
      2005.31.1    
      Certification of Principal Executive Officer Pursuant To Section 302 of
      the Sarbanes-Oxley Act of 2002.31.2    
      Certification of Chief Financial Officer Pursuant To Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1    
      Certification of Chief Executive Officer and Chief Financial Officer
      Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.





(b)
    Reports
      on Form 8-K





None.


22









**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





MCF
      CORPORATIONMay
      5, 2005
    
    
    
    By:
    
    /s/    D.
      JONATHAN
      MERRIMAND.
      Jonathan Merriman,
      Chairman
      of the Board and Chief Executive Officer
      (Principal
      Executive Officer)








May
      5, 2005
    
    
    
    By:
    
    /s/    JOHN
      D.
  HIESTANDJohn
      D. Hiestand
      Chief
      Financial Officer
      (Principal
      Financial Officer)






23